Estate Planning for Second Marriages

Estate Planning for Second Marriages

Although second marriages are more common than ever, developing an estate plan for couples in second marriages can be complicated and challenging, especially when one or both spouses have children from prior relationships as well as an accumulation of wealth and assets that each spouse has brought to the marriage.  As an attorney who settles estates, I often find that spouses in second marriages have not done any planning to address how their assets should be allocated between their surviving spouse and their respective children.  This can lead to disagreement and litigation as the surviving spouse and children of the deceased each attempt to determine the deceased spouse’s intentions.

While there are a variety of reasons individuals and couples procrastinate in completing an estate plan, I have found that many times spouses in second marriages have simply made the incorrect assumption that if they keep the assets that they have each accumulated prior to the marriage in their separate names that they can easily and seamlessly leave assets to their respective children without involving their spouse. Unfortunately, this does not work under Wisconsin’s marital property laws.

Why does planning matter?

Under Wisconsin law, all property of spouses is presumed to be marital, regardless of whether spouses hold assets in their own names or keep their assets physically separate.  This means that spouses are only free to leave half of all marital property to their children, since their spouse is presumed to already own the other half.  This can have disastrous consequences to an intended distribution upon death, particularly when naming the spouse or children on a life insurance policy, retirement account, or other financial account as a direct beneficiary.  These designations do not take into account that both the children and the spouse are each entitled by law to a portion of the assets, regardless of the beneficiary designation.

Fortunately, spouses are free to opt out of marital property law by executing a marital property agreement.  While we often think of marital property agreements as a contract spouses enter into in case they divorce (also called prenuptial agreements), marital property agreements are widely used in estate planning to create a clear plan and obligations about the distribution of property upon death. A marital property agreement coupled with a Will or Trust that spells out the decedent’s intentions is important to make sure that both the surviving spouse and the children of the prior relationship receive those portions of the estate as intended by the decedent.

What if you are in a second marriage but do not have a marital property agreement?

If there is no marital property agreement and a spouse dies without a Will (called dying “intestate”), the assets automatically go to the living spouse. However, in second marriages where there are children from a prior relationship, the children from the prior relationship are entitled to one-half of the deceased spouse’s individual property and all of the deceased spouse’s interest in marital property.  Surviving spouses are often surprised to find that one-half of the property that they brought to the marriage is also a part of the deceased spouse’s estate, and that the children from the prior relationship may be entitled to half of the value.

This is where things can get complicated and why estate planning documents (like marital property agreements, wills and trusts) are so important in second marriages.  After death, disputes commonly arise about property division. This can lead to a lack of trust and damaged relationships among the survivors.  Furthermore, either the spouse or the children may be the only ones to have access to relevant financial information while others don’t. It is important to make sure you have Powers of Attorney for healthcare and finances in place so spouses can name who may make decisions on their behalf in order to avoid spouses and children battling for control through the courts.

While estate planning for couples in second marriages can be more complicated than for first marriages, advanced planning to make sure that your intentions are clear goes a long way to avoid litigation, financial and emotional fallout for all parties involved.

 

What Does “Sound Mind” Mean When Writing a Will?

What Does “Sound Mind” Mean When Writing a Will?

A last will and testament, along with other important estate planning documents, records a person’s decisions regarding the disposition of their property upon their death. Once you turn 18, you can write and amend your estate planning at any point during your life, so long as you have a “sound mind” at the time you execute the documents.

Like most states, Wisconsin’s laws on the mental capacity required to make and amend estate planning documents find their basis in the English common law. The exact language is found in Wisconsin Statute Section 853.01, which states that “Any person of sound mind 18 years of age or older may make and revoke a will.” While the age requirement is straightforward, the exact requirements of having a “sound mind” are less obvious.

To begin with, it should be noted that the capacity to make estate planning decisions, also known as “testamentary capacity,” is a distinct analysis from other types of capacity related questions. Someone may no longer be capable of living on their own due to mental decline but still may have the capacity to make or amend their estate planning. Even being under the legal guardianship of another does not itself prove the person lacked testamentary capacity.

Unfortunately, a clear and simple test is impossible because mental capacity exists on a multi-dimensional spectrum, while the legal analysis requires a “yes” or “no” answer. Borrowing from the common law tradition, Wisconsin cases have established a three-part test to determine on a case by case basis whether someone was of sound mind at the time of a document’s execution:

(1) The person executing the estate planning documents, also known as the “testator” must understand the nature and extent of his or her estate. This does not require an exact knowledge of investment allocation or dollar signs, but generally the testator should be able to roughly identify what assets they own and about how much they are worth.

(2) The testator must understand who the “natural objects of his or her bounty” are. Unlike some countries, in the United States adult children are not legally entitled to inherit anything from their parents, and subject to a number of limitations, spouses are not legally entitled to inherit from one another either. However, this test requires that at the time the testator made the estate planning decisions, they at least understood which individuals would be expected to receive their estate, usually this means the testator’s spouse or children.

(3) The testator must be able to form a rational conclusion on the selection of beneficiaries and the disposition of the estate. This requirement roughly translates to at least a basic understanding of the facts regarding their family situation and the effect of the estate planning documents. The testator is not required to have a detailed understanding of all of the exact workings of their estate planning documents so long as they basically understand the end-result.

In short, the requirements boil down to: you need to know roughly what you have, who would be expected to receive it and how the estate documents you are signing will affect where things go.

Because the bar for testamentary capacity is somewhat low, applying the three-part test sometimes leads to results where a court finds the testator had a sound mind but where the lay person would probably not think so. A good example of this is the rule for persons suffering from “insane delusions.” If a testator believes all manner of conspiracy theories and holds absurd opinions on matters, but understands their estate, the natural objects of their bounty, and the general effect of the plan they are signing, they likely have proper capacity and a sound mind for estate planning purposes. There is some room for challenge if the insane delusion “materially affected” the disposition because it can be argued the insane delusion impacted their ability to meet the prongs of the test, but even then, these challenges are difficult as courts are usually reluctant to weigh in on whether a belief is “insane” or not. The line between eccentricity and insanity is a difficult one to draw. A now infamous 1947 case is an often-cited cautionary tale of a court extending its analysis past strict legal questions as several male judges weighed in on whether a woman was “insane” for disliking men and giving her fortune to a women’s charity. Needless to say, the case has not aged well.

As an example of an insane delusion “materially affecting” the disposition, consider the following. If a parent disinherited you and also believes aliens have infiltrated our society, then the decision will likely stand if the three factors of the test are met. In contrast, if a parent disinherited you because they believe you are an alien who infiltrated our society, then you may have an argument to challenge the will because the insane delusion affected the ability of the parent to rationally select beneficiaries under the third factor of the test.

The three-factor test is analyzed at the time the document is executed, and it is possible that someone may lack capacity one day and have it the next. It is common for people suffering from certain types of cognitive decline to have good days and bad days. While this type of situation poses certain evidentiary hurdles if a challenge is brought, there is nothing inherently invalid about documents executed during a period where the signor temporarily has a sound mind. This is sometimes referred to as a “lucid period,” and in these situations it is usually wise to take extra care to record the evidence of capacity at the time of document execution. This is especially true if someone in the family is going to be upset with their treatment under the plan, as it increases the odds of a legal challenge.

Even if a testator has a “sound mind” as defined in the three-part test, a will, or portion of a will, may be challenged if an individual exercised “undue influence” over the testator to secure a benefit for themselves. Undue influence is beyond the scope of this article, but generally refers to a situation where someone has improperly applied their influence to get someone to change their estate planning to benefit themselves. One of the requirements for an undue influence claim is that the testator was “vulnerable” to undue influence, usually meaning some level of cognitive impairment, but not to the level of lacking a sound mind for estate planning purposes.

If a testator lacked a sound mind when they created or changed their estate planning directives, then those decisions, in theory, will not be valid or effective at their death. In practice, the technically invalid documents will be submitted to the court, and, if properly executed, will be presumed valid until an interested party to the estate proceedings formally challenges the documents within the required time frame. If no one raises the issue, the court overseeing the estate will have no way of knowing the validity of the presented documents is in question and will likely approve whatever distributions are called for in them. Claims not timely brought are forfeited, as courts have a legitimate interest in bringing all matters relating to an estate to rest within a reasonable amount of time following the death of the individual.

If you have questions or concerns about testamentary capacity or other estate planning topics, you should discuss them with an estate planning attorney.

 

So, You Want to Sell Your Life Estate?

So, You Want to Sell Your Life Estate?

Many people have established a life estate in their residence to protect it if they require Medicaid benefits to pay for their long-term care.  A person establishes a life estate in their residence by signing a deed which transfers ownership to their desired recipients, but also reserves them the legal right to use and benefit from the residence for their lifetime.  Under current Medicaid rules, a life estate is considered an unavailable asset and the underlying residence is not counted in determining the life estate holder’s eligibility for the program if more than five years have passed since its creation.  Life estates created prior to August 1, 2014 are also protected from the Estate Recovery program, which is designed to recover amounts paid for Medicaid benefits from recipients’ estates following their deaths.

A common question arises if the life estate holder no longer occupies the underlying residence: can the residence now be sold?  After all, there are many expenses associated with maintaining a residence, including property taxes, insurance, utilities and maintenance.  If the life estate holder left the residence to enter a long-term care facility, then the cost of such care often means there is little income available to pay for such expenses.

Once a life estate has been established, the underlying residence can only be sold if the life estate holder and all other owners agree to the sale.  However, prior to any sale, it is important to understand the ramifications for the life estate holder’s Medicaid eligibility.  While the life estate itself is considered an unavailable asset for Medicaid purposes, the proceeds from its sale are not.  Accordingly, if a life estate holder is receiving Medicaid benefits and sells his or her life estate, the resulting sale proceeds could cause him or her to have too many assets to continue to qualify for the program.  Alternatively, if the life estate holder does not receive his or her share of the sale proceeds, then under Medicaid rules he or she will be considered to have divested them and this may also disqualify him or her from the program for a period of time.

In light of these Medicaid eligibility issues, it is often beneficial to avoid selling the residence until after the death of the life estate holder.  The owners may consider renting the residence to help cover the costs of maintaining it during such time.  However, many people do not wish to become landlords and decide to sell the residence anyway while relying on other planning options to deal with the sale proceeds, such as using them to purchase assets that do not count for Medicaid eligibility or contributing the proceeds to a Wispact special needs trust.  If the underlying residence is sold and the life estate holder is concerned about his or her eligibility for the Medicaid program, it is important to correctly value the life estate for Medicaid purposes to ensure the life estate holder receives the correct share of the proceeds.

The Medicaid program uses a standard table to value life estates based on the life estate holder’s age at the time of sale.  The value of a life estate decreases as the life estate holder ages since statistically he or she has a shorter life expectancy during which to use the underlying residence.  Accordingly, the older the life estate holder, the less valuable his or her life estate.  For example, for Medicaid purposes, the life estate of a 70 year old is worth approximately 60% of the value of the underlying residence, while an 85 year old’s life estate is only worth approximately 35%.  In the event of a sale, the life estate holder should receive a percentage of the sale proceeds that corresponds to the value of his or her life estate.  If the life estate was established more than five years prior to such sale, then the remaining sale proceeds can be divided by the other owners without penalty.

Prior to selling a residence with an outstanding life estate, it is important to understand the Medicaid ramifications of such sale.  It is also important to discuss any potential income tax ramifications.  Taking the time to consult with a knowledgeable attorney and accountant prior to the sale can help you avoid many of these potential pitfalls.

 

Three Considerations for Estate Planning During a Pandemic

Three Considerations for Estate Planning During a Pandemic

The possibility of prolonged sickness or even death from COVID-19 has caused many individuals to feel more urgency to prepare advanced directives and undertake other estate planning.  In addition, the unknown final impact of the economic crisis may raise questions about how things might need to change in current plans that transfer wealth to children, charities or other beneficiaries upon death. With these factors present, there are three options to consider for estate planning.

 

  1. Advanced Directives. While planning for a health care emergency may be easier to complete before a crisis, it is not too late to get your advanced directives in place. Advanced directives are documents that express your wishes and authorize someone else (an agent) to make medical and financial decisions for you in the event you become so ill that you are unable to make your own decisions.  Typically, this involves creating both a Health Care Power of Attorney and a Durable General (Financial) Power of Attorney.  In addition to creating these documents, it is important to speak with your proposed agents about your intentions so that if they do have to make decisions, you know that they will carry out your wishes.  If you already have these documents, review them to ensure they accurately reflect your current wishes and choice of agent(s).  What do your current documents state regarding advanced life support (e.g. ventilators), and are there any changes you would like to make regarding end of life decisions?

 

  1. Make a Will or Trust. As the reality of the pandemic sinks in, people are reaching out to execute Wills or Trusts that they have put off finalizing, or to start estate plans that perhaps should have been put in place long ago. Estate planning is very easy to delay in the best of times, particularly when it involves finalizing some difficult decisions.  Or maybe it is simply a matter of not wanting to face your own mortality.  As the current health crisis reminds us, however, we never know exactly when our estate plans will be needed.  Even if you already have your documents in place, make sure you know where the originals are located, and review them to be sure they still accurately reflect your wishes.  For example, are the named executors in your Will and trustees in your trusts, as well as any successors, still suitable and willing to serve?  Consider whether there have been any major life changes with your beneficiaries or changes in your assets since you completed your plan that would necessitate updating your documents.  Focus on what makes sense to change right now and remember, you can always update your documents in the future.  Finally, make sure that your beneficiary designations on life insurance, retirement accounts and other assets are up to date.

 

  1. Ask Your Attorney for Help. Most legal offices are open, and attorneys are being creative in order to help you complete your estate planning.  We can assist you with getting your estate planning and advanced directives completed. Even if we do not meet in person, we can schedule consultations via telephone or video conference.  Documents are then emailed or mailed to you for your review.  Following your review, it is typical to have another video or phone conference to discuss any revisions or questions, and to discuss the logistics of getting your documents signed.  Wills, trusts and advanced directives all have very specific execution requirements in order to be legal.  Therefore, it is important to work with us to determine which documents in your plan can be signed remotely and which require in person witnessing and notarization.

 

We understand that completing your estate planning during a health crisis can be emotionally taxing; however, now may be the best time to take advantage of addressing your planning while these issues are on your mind.  Our estate planning attorneys are happy to guide you through the process.

 

What Happens If I Pass Without a Will?

What Happens If I Pass Without a Will?

“What will happen to my assets when I pass away?” This is the question that brings many clients into their attorney’s office for initial estate planning discussions. Typically, their estate planning attorney will ask questions to learn about their assets, family and wishes. From that information, the attorney will work to craft a plan that best achieves those goals. Many clients make that initial appointment intending only to create a Will, but soon learn that a comprehensive estate plan is about much more than the contents of a Last Will and Testament. In most cases, beneficiary designations, marital property agreements or trusts become important components for the plan. The purpose of this article is to examine what happens if that meeting never occurs and the individual passes without any estate planning done.

As a preliminary matter, it is important to note that most people have at least done some estate planning even if they have never written a Will or met with an attorney. Typically, this comes in the form of a beneficiary designation on financial accounts, life insurance or retirement assets like 401(k)s. Alternatively, some may own property in a form of title which creates rights of survivorship. While these choices may not have been a part of a comprehensive plan, they do represent decisions which have deviated from the “default.” This sort of uncoordinated and piece-meal planning can sometimes cause more harm than good, especially when beneficiary designations are not updated for many years or are not made consistent with other planning documents. For example, a decades old beneficiary designation on an account will control over a newly executed Will unless the designation is updated. For the purpose of this article’s examination of what happens without any estate planning, we assume these designations were left blank and assets are titled such that there are no survivorship rights.

For residents of the State of Wisconsin, the “default” is found in Wisconsin Statute Section 852.01. In a sense, this statute is the state legislature writing a Will for anyone who has not written their own. The distribution pattern written into this section attempts to grasp what most people would have selected in their Will had they written one, or in a beneficiary designation had they made one. As such, the more “traditional” your family structure is, the more likely the default will align with your actual desires as it is based on the “issue.” The term “issue” in this context of estate planning, refers to lineal descendants, typically children and grandchildren and will continue to refer to such throughout this article.

In the absence of any planning to the contrary, if you did not have any children with anyone other than your current spouse, everything will go to the spouse, if they survive you. However, if you have children from another relationship, then your surviving spouse or domestic partner will inherit one-half of your property other than your interest in marital property or property held as tenants in common with the survivor.

If there are issue, then they shall receive in equal shares any shares not inherited by the surviving spouse. If there is not a surviving spouse, then they shall receive the entire amount “per stirpes,” which is Latin for “by branch.” This means that your children each would receive an equal share, but if one of your children predeceased you, their share would instead pass to any children they had which remained alive, split by whatever number of grandchildren descended from that deceased child. If the deceased child left no issue of their own, that “branch” of the family tree has been extinguished, and the other branches assume their share.
If there is no surviving spouse or issue, then the assets pass to the deceased’s parents. If there are no surviving parents, then the shares pass equally to any siblings of the deceased, per stirpes. Here, per stirpes would again mean we would look down the family line of any predeceased siblings for a beneficiary. If no surviving beneficiaries are found at this point, then the assets pass to the grandparents per stirpes.

Any share that would go to a beneficiary under the age of 18 will be held in a custodial account for their benefit until they reach of the age of 18. This is because minor children are considered incapacitated under the law and cannot manage large sums of money on their own. When the child comes of age, whatever funds are left are turned over to their control.

Finally, if no heirs can be found as close to the deceased as any living descendant of the deceased grandparents, then the property “escheats,” or “goes to,” Wisconsin Statute § 852.01(3) to be added to the state’s school fund. Clients sometimes ask if their property will be taken by the state if they do not have a Will. This is usually what they are referring to and, as you can see, this will only happen if no family can be located out as far as the descendants of the grandparents.

In addition to the rules described above, there are a great number of exceptions and rules for special circumstances which are too numerous to discuss here. For example, someone who murders their spouse is effectively disinherited, and a parent who abandons their child can lose the rights to inherit from that child if they die. There are also rules for how domestic partners inherit from one another.

Those with children from multiple partners, who are in second or third marriages, who have the intent to treat their children differently, or want to provide for someone who is not legally their child, such as a stepchild, often find these default rules vary greatly from how they would want their assets divided. Unfortunately, the court will not hear arguments that the resulting distribution does not match what the deceased would have wanted. The only way to opt-out of the pattern established by the statute is to take affirmative steps during your lifetime.

Assets pass to the appropriate beneficiaries through probate, which is the court supervised process for distributing the assets of one’s estate upon their death and paying their final expenses. A common misconception is that a Will avoids the need for probate, but a Will merely provides alternate instructions for distribution of one’s assets in the probate process. If you have assets in multiple states, it may be necessary to have multiple probates. This is because Wisconsin courts have limited authority to dictate how property in other states transfers. Proper planning can avoid this expensive problem.

A Will also nominates a personal representative to oversee the probate process. In the absence of a nomination, the court will appoint someone to manage the probate process. Often, this is a surviving spouse or a relative who steps up to the responsibility and volunteers to take on the task. Unfortunately, the power the personal representative wields can sometimes attract those who are seeking to abuse the position for personal gain or to go on a power trip. In the absence of a clear direction by you, the court may not be able to tell the difference between these types of people.

Even if your intent matches the default distribution pattern, estate planning can still offer a number of benefits over dying intestate (without a Will). For example, certain types of estate planning can avoid the probate process entirely, saving time and money upon your death. Trust funds are commonly used to prevent beneficiaries under a certain age from gaining direct control of large sums of money. A trustee manages the funds and helps pay for expenses for the beneficiary until they reach the set age and get full rights to the property. Many prefer this option over the possibility that a grandchild would receive a sizeable inheritance upon turning 18, as statistically that money will probably be wasted and gone within a few years. Sometimes, when a beneficiary is known to be irresponsible with money and the problem does not seem likely to improve with age, trusts can hold onto the money for their entire lives.

Outside of what happens to your assets, dying without estate planning could affect who is given guardianship of your minor children. Typically, the Will is where a parent would nominate who would be charged with looking after their children were the parents to die while the children were still minors. In the absence of a nomination, the court system will decide who will take care of them. This likely will be a family member, but the court will have limited information about your child and your family dynamics. Nominating a guardian is often one of the most important reasons clients with minor children schedule an estate planning appointment.

This article only discusses what happens if you pass without an estate plan, but most estate plans will include power of attorney documents, which appoint trusted individuals to make decisions for you in the event you become incapacitated, but remain alive. These documents are critically important, and anyone over the age of 18 should have them in place. If you have questions about power of attorney, inheritance or wish to create an estate plan which distributes your assets on your terms, it may be time to speak with an attorney.

 

What Is Divestment Under Medicaid Law?

What Is Divestment Under Medicaid Law?

Divestment is when you or your spouse give away assets belonging to either or both of you and sell assets for less than fair market value. Avoiding or refusing to accept income or assets you are entitled to, such as a pension income or an inheritance would also be divestment.

While individuals and couples often want to get rid of assets so that they can qualify for Medicaid in the event they need long term care, divestment actually results in ineligibility if done within five years of applying for Medicaid. This is referred to as the five-year look-back rule.

If you have divested assets within five years of applying for Medicaid, you will be subject to a divestment penalty period. The penalty period is the amount of time that Medicaid will not cover your long-term care costs in an assisted living facility or nursing home. The length of the penalty period is determined by dividing the value of the assets divested by the average nursing home rate ($287.29 per day as of the writing of this article). The nursing home rate is updated annually. The divestment penalty period begins when you are first eligible to receive Medicaid benefits.

It is important not to confuse the annual tax-free gift exclusion with an exempt transaction for Medicaid purposes. The current annual gift tax exemption is $15,000, meaning an individual may make gifts in the amount of $15,000 to different individuals without having to file a federal gift tax return. Any annual exclusion gifts, however, would still be divestments for Medicaid purposes, and subject to the five-year look back.

Another common misconception regarding divestment is that there is some type of “claw-back” mechanism whereby the individuals who received the divested assets are made to give them back or turn them over to the nursing home. This is simply a myth. Divestment results in ineligibility for Medicaid if done within five years of applying, but no one is forced to give assets back. Ineligibility can have catastrophic results because without having the assets that have been divested, you or your spouse may have no way to pay for care during the penalty period. Proper planning is very important. The rules regarding divestment are complex and you should consult with an attorney familiar with the rules regarding Medicaid and divestment before any disqualifying divestments are made.

 

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