Transfer on Death Deeds

Transfer on Death Deeds

As you begin to think about the best structure for your estate plan, you are likely guided by one thought, which is how do I avoid probate? The consensus about probate is that it can be costly and time consuming. For that reason, many people structure their estate plan with the hope that probate can be avoided. One way to do this is to create a trust and place your assets, that would typically need to go through probate, into the trust. However, sometimes the cost of implementing a trust can be impractical for the size of your estate. Therefore, another solution for some estates is to utilize a transfer on death deed to avoid probate.

A transfer on death deed is a document that is recorded with the register of deeds in the county where the property is located and designates a beneficiary to take title to the property upon the death of the sole owner or the last to die of multiple owners. This document can be cancelled or changed at any time by the owners of the property simply by executing and recording another deed that designates a different beneficiary or no beneficiary. Moreover, the owner of the property does not need any consent or permission by the beneficiary in order to make these types of changes.

The clear advantage to using a transfer on death deed is that it will bypass probate and as a matter of law the property will pass to the designated beneficiary. Furthermore, there is the added benefit that the owner of the property maintains full and complete control in their interest in the property during their lifetime. This document does not grant any type of current interest in the property to the beneficiary. It is only upon the death of the owner(s) that the beneficiary obtains the interest in the property. Therefore, it allows for the owner of the property to continue to use their property as they see fit, with the benefit that upon their death the property shall avoid probate and pass directly to the beneficiary.

Despite the advantages to the transfer on death deed, there are still some disadvantages to executing this type of document. For example, the transfer on death deed must be publicly recorded in order to be effective. Therefore, the identity of the beneficiaries will be available in the public record during the property owner’s lifetime. This can be problematic if the beneficiary is not a family member or if there is tension among the beneficiaries of the owner’s estate. Depending on the individual and their circumstances, it may be preferable to keep this type of information private and thus utilize a different strategy to avoid probate.

In light of the possible advantages and disadvantages, it will be important to seek the advice of an estate planning attorney before executing a transfer on death deed. An estate planning attorney will be able to analyze your situation and advise you on the best course of action to take in structuring your estate plan to avoid probate, which may include executing a transfer on death deed.

 

What Happens if a Minor Inherits Money in Wisconsin?

What Happens if a Minor Inherits Money in Wisconsin?

When an individual dies, their assets are distributed to their beneficiaries through a variety of procedures depending on their estate planning choices. The most common beneficiaries of an estate are either a surviving spouse or the adult children of older parents. However, occasionally a minor becomes the beneficiary of some or all of the assets from a deceased individual. This typically happens if a grandparent dies and leaves assets to a minor grandchild or if the parents of young children both die before their children become adults. Because a minor lacks the legal authority to manage their own assets, they cannot take direct control of the inheritance. Instead, an adult or other third-party needs to take control of the assets until they are old enough to take over. There are three main ways a minor can inherit property: (1) directly, (2) by trust, or (3) under either a Uniform Transfers to Minors Act (UTMA) account or a Uniform Gift to Minors Act (UGMA) account. Each option creates different outcomes for how the assets are managed and when the beneficiary ultimately takes control.

Before exploring what happens to assets left to a minor, it makes sense to first define “minor.” Legally, a minor is an individual who, by reason of their age, is considered legally incapacitated and thus prevented from making certain decisions that someone with full legal capacity would be entitled to make for themselves. While sometimes restrictive, the laws are intended to be for the minor’s own good – to protect them from their own bad decisions or from third parties seeking to take advantage of their inexperience. For the same reason we would not allow a child to accrue credit card debt in their name or get a tattoo, we do not allow children to take full control over large sums of inherited money. Depending on the state, the “age of majority,” or the age where an individual ceases to be considered a minor, is between 18 and 21. Some states grant certain rights at 18 while reserving others until later ages. In Wisconsin, the age of majority is 18 for almost all purposes, but age 21 for purposes of UTMA and UGMA accounts.

Anyone 18 years of age or older who is a direct recipient of inherited property will receive it outright and have full control to spend, save, or invest it as they wish. Examples of direct bequests are being named in a will or beneficiary designation, or by the default inheritance rules created by Wisconsin law if the deceased died without a will. If the beneficiary is instead under 18 years old, they will not be entitled to take control over that property until they reach the age of majority. Instead, a guardian is appointed by a court to control that property on their behalf. This person is often the same as the guardian named to look after the minor, but the legal roles are distinct. The “guardian of the estate/property” looks after the money the minor is entitled to, and the “guardian of the person” is empowered to make the decisions relating more directly to the minor’s life, such as educational and healthcare choices. If the deceased had a will and the recipient is their minor child, they hopefully named the individual(s) they wanted to serve in these roles. If not, the court will appoint someone in its discretion. If the minor beneficiary is living with their parents, the parents will almost always be named as guardian unless the court has a good reason not to. If the parents are divorced, typically the parent with primary custody will be given the guardianship. The guardian of the estate has control of the money and can access it to use for the minor’s care until they turn 18. Once the beneficiary ceases to be a minor, they gain full control over the remaining funds – if any are left.

Certain reporting requirements and oversight procedures are in place, but this role is still rife with the opportunity for abuse. While some cases of guardians misusing the minor’s funds are clear, things are often more nuanced – especially if the guardian of the estate and the person are the same. It is important that the guardian appointed be an honest and competent individual who will carefully guard the minor’s assets against neglect, poor investment choices or abuse (from themselves or third-parties). For their own protection, guardians should carefully document their management of the money as lawsuits for mismanagement or misuse are not uncommon when a beneficiary turns 18 and discovers their inheritance has already been spent. In some cases, it may be beneficial to arrange for the guardian of the estate and of the person to be separate people. While this can complicate things and can lead to conflict between the two guardians, the extra level of oversight and separation often results in a more conservative use of the funds, making them more likely to be retained for the minor once they turn 18.

Many consider 18 too young to be given free reign over large amounts of assets. Even middle-class people can pass on substantial sums after life insurance policies are paid out and their material assets, like their home, are sold. Receiving several hundred thousand dollars, let alone millions, can provide benefits that last a lifetime if managed properly. Unfortunately, most inheritances are completely spent within a few years with minimal lasting benefit. Developmental and behavioral scientists largely agree that decision making abilities are not fully matured until at least age 25, a full seven years later than when a minor recipient of a direct bequest will receive and be able to spend an inheritance.

The solution to this problem lies in not making a “direct” bequest. Instead, a trust, created for the benefit of the individual, is named as the beneficiary. Trusts are extremely flexible tools that can be used to meet a variety of estate planning objectives, but among the most common use for them is to delay the time when a beneficiary will receive control over inherited assets. In short, a trust is a legal arrangement, made either during life or as part of a will, which creates a separate legal entity, the trust, to hold assets. The person in charge of managing the trust is the “trustee,” and the trustee manages the assets on behalf of the “beneficiary.”

Because trusts are so flexible, trying to answer: “What happens if a minor inherits money under trust?” can only really be answered with “Whatever the trust says happens.” However, in a typical trust for a young beneficiary, the trust will hold onto the money until a set age reached by the beneficiary, often 25 or 30 or pay out fractions of the trust funds every few years until all funds are paid out. At that age, the beneficiary is given the funds and the trust, now empty, terminates. However, many trusts also contain provisions that if the beneficiary is suffering from drug, alcohol or gambling addictions or if the money is likely to go to a creditor if distributed, the trustee can hold onto the funds until it is safe to distribute them.

During the term of the trust, the trustee is usually instructed to make the money available to take care of the beneficiary’s “health, education, maintenance and support.” Much like a guardianship or custodial account for a minor, these funds will be available to pay for medical bills, room and board, tuition etc. If drafted properly, keeping the money in trust can help keep the inheritance safe from the beneficiary’s own recklessness, as well as from creditors or divorcing spouses, until they are hopefully old and wise enough to avoid these mistakes and manage the money on their own. When large sums of money are at play, some people view the creditor protections offered by trusts as so beneficial that the payout age is either much later in life or write their trusts to exist for the entire length of the beneficiary’s life, with a variety of options for how the remainder is paid out after their death.

The final type of inheritance a minor may receive are funds under UTMA or UGMA designations. The two types of accounts have some differences, mainly relating to investment options and tax implications, but for the broad overview offered here, they can be used interchangeably. Under these Acts, someone writing a will can specify the minor as the beneficiary of the assets to be managed under UTMA and name a custodian to manage the inheritance up until a listed age or age 21 in Wisconsin, whichever is sooner. For example, a will might state “To my nephew John Doe, I leave a specific bequest of $10,000 to his mother, Jane Doe, as custodian for John Doe, under Wisconsin Uniform Transfers to Minors Act to age 21.” While not offering all of the flexibility and options for longer retention periods available using trust funds, using these types of accounts are a simple and cheap way to address the control of funds intended for minor beneficiaries. If assets are left to a minor and the deceased did not name a custodian in the estate plan, in Wisconsin, the person handling the estate (either the executor of the will or the trustee of the trust) can create a UTMA account but it must end at age 18 and if the assets exceed $10,000, then the supervising court must approve it.

When choosing which of these methods are appropriate for your estate planning, there are a number of factors to consider, including: the likelihood of assets passing to a minor, the amount of money involved, and the character and maturity of the potential beneficiary, as well as their parents or guardians who may take control over the money. An estate planning attorney can help you determine the best option for your situation and to correctly implement those choices as part of your estate plan.

 

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.

 

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