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Tuesday, October 12, 2010

Saying ‘I Do’ to Estate Planning for your Second Marriage

Emotions can run high for any family during the estate planning process, leading to complications and delays. These problems are amplified when a couple is separated – either by divorce or death – and one or both spouses plan to remarry. In blended families, where there are children from the first marriages and children that may have resulted from subsequent marriages, they are often left with unbalanced inheritances and ex-husbands and wives may have disagreements about alimony payments, child support, or property ownership.

As Harry Burns advises in When Harry Met Sally, proper planning can save everyone involved “thousands of dollars in phone calls to the legal firm of That’s Mine, This is Yours.”

Estate plans for individuals who’ve been in prior marriages can be confusing, especially if they ended in a messy divorce. Spurned ex-spouses can make brash decisions or demands motivated more by fear and anger than reason. Children from both prior marriages and the new marriage can be entitled to drastically different inheritances, leaving some children with a huge inheritance virtually tax-free and others with an enormous estate tax debt and little else. Disparities in wealth between the spouses in the second marriage, also called fiscal inequalities, can create large emotional and financial difficulties. And large age differences between the two new spouses can destroy any hope for negotiation.

All that being said, how can those problems be avoided?

If the first marriage ends because of the death of a spouse, a Will, Living Trust can pass assets on to the deceased’s heirs, usually his or her surviving spouse and children. If the plan stipulates that all assets be left to the surviving spouse and he or she remarries, the children of the first marriage may be disinherited altogether. In some cases, if the surviving spouse who has control over the entire estate remarries, his or her new spouse may stand to inherit part of the deceased spouse’s estate. If that happens, the children of the second spouse could become de facto beneficiaries.

This situation can become even more problematic if the new, second spouse is close in age to the children of the first marriage. If the last biological parent of those children passes away, his or her new husband or wife may inherit the entire estate, forcing the remaining heirs to wait until the new spouse passes away to collect.

Of course, proper planning can avoid many of these unexpected and nonsensical results.  For example, if Jack divorces Jane and marries Jill, his estate plan can specify that his assets be placed in a special trust for the benefit of Jill, his second spouse.  This trust can provide for Jill’s living expenses, but not allow invasion of principal.  After Jill’s passing, the remainder of the assets in that trust can go the Jack’s children from his prior marriage.  

There are a myriad of planning strategies available to address thorny family issues.  These complications are best addressed with the help of an estate planning attorney long before any of the original or new partners pass away. Everyone involved should establish a Will or Living Trust to clearly state what assets are to be inherited by whom. In some cases, where the partners in the first marriage were also business partners, a joint business succession plan should be put in place for a smoother transition.  We assist individuals and businesses in Nassau County and throughout New York City and Long Island with complicated estate and tax planning matters on a regular basis.  Contact us today for a complimentary consultation.

Monday, July 19, 2010

Putting the Price of Death on Layaway

In 2001, President George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act. Not only did the law restructure the income and capital gains tax systems, it also completely overhauled the existing legislation governing the federal estate tax.

Before the Bill was signed into law, the estate tax rate held steady at 55% for all assets over the $1 million threshold. That threshold was raised to $3.5 million with the passage of the new estate tax law and the rate was systematically lowered until it reached 45% by 2009.  In 2010 the law provided for a “repeal” of the estate tax, albeit for only one year, after which the 2001 law would sunset and the old estate tax regime with a $1M exemption would be revived.   So why the repeal for only one year?  This was largely a political maneuver to allow President Bush to make good on his campaign promise to repeal the estate tax.  Analysts have been speculating that the law would be amended prior to 2010 to prevent what has in fact occurred, a suspension of the estate tax.  Indeed, since January 1st of this year a number of billionaires have been able to virtually avoid the estate tax altogether.

Congress has had a very busy legislative schedule in the recent past (think healthcare and financial reform) but Capitol Hill is finally coming around to address this issue.  As lawmakers rush to reinstate the tax, new propositions have been made by both Republicans and Democrats. Though many on the right would like to see the tax abolished for good, progressives would like to raise the rate and lower the exemption threshold.  The most probable outcome will likely be a compromise.

One of the Senate’s most influential members, Minority Whip Jon Kyl, who is a Republican from Arizona, has proposed a lower rate with higher exemptions.  Though the details of the plan have not been officially released, it is believed by many that the proposed rate would be held at 45% for all estates worth more than $3.5 million. However, some observers have speculated that the plan may call for the threshold to be raised to $5 million with a lower rate of 35%.

One of the more innovative proposals is one which establishes a lifetime prepayment plan.  Since the estate tax’s inception in 1916, it has only been imposed after death. With this proposal, estimated estate taxes can be paid long before your last breath.  The rate would also decrease from 45% to 35% if it is paid in advance. This way, not only would one pay less in overall estate taxes, but the federal government would also receive revenue sooner.

The downside to paying in advance? First, the payment plan, no matter how flexible, would only be available to the privileged few who have liquid assets lying around. For most, the vast majority of their estate’s assets are held in homes, businesses or other assets with fluctuating market values, which are considered illiquid. Second, problems would arise if someone is able to put assets into a trust and over time it loses, rather than gains value. Lastly, since the payment plan would have to be based on the expected value of the estate at the time of death and not the actual value, unforeseen market fluctuations may either overcharge the individual or underpay the federal government.

Sunday, May 23, 2010

Estate Planning for Children

Many parents put off estate planning because they don’t think they have substantial assets to protect.  This viewpoint is especially common among young adults who think they have plenty of time to accumulate wealth and plan for it at a later date. However, in failing to establish a proper estate plan, many parents fail to adequately protect their children. All parents, with or without a great deal of assets should have an estate plan in place to set forth their wishes for their children which includes, among other things, nomination of a guardian in the event that they have an untimely passing while the child is still a minor. 

In New York, nomination of guardians must be in the Will, even if you have a living trust based estate plan.  If there is no designation in place, the court will appoint a guardian to raise your children based on what it deems to be in the best interest of your children. However, the court appointed guardian may not be your first choice and in some cases, he or she may actually be your last choice. From just a few brief hearings, it is often very difficult for the courts to determine who is best suited to care for your children in your absence.

In some cases, where no clear-cut guardian is named, children may be sent to Child Protective Services to remain with a foster family until the court decides on a suitable guardian to take on the responsibility. For many parents, this scenario is reason enough to create an estate plan to protect their children.

Nominating a guardian can be a very difficult decision and one that should not be made without serious consideration. The individual selected should provide stability for your children in the difficult transition and ultimately continue care in a fashion with which you are comfortable. You should consider the following traits and circumstances when determining who is best suited to raise your children:

  • Age: You will want to make sure they are old enough to provide proper care (at least 18 years of age in most states) but young enough to remain in good health until your children reach adulthood.
  • Commitment: Ensure that the guardian does in fact want to take on this responsibility.
  • Temperaments: Carefully consider what kind of person will mesh well with your children. If you have young or energetic children, you may want to make sure the guardian exhibits patience.
  • Religious and moral beliefs: Do they share the same values as you and your spouse? Would they instill these in your children?
  • Nature of existing relationship with children: You will want to make sure that this person has a good bond with your children and that there is a mutual comfort level.
  • Location: If you prefer that your children not move out of their current home and/or school district, you will want to make sure that the appointed guardian resides close to you and intends to stay there until your child reaches the age of majority.
  • Does proposed guardian have other children? If so, does the guardian have enough time and resources to devote to his/her own children in addition to yours?
  • Finances: Can the candidate financially provide for your child if there are not enough funds available from your estate?

In the event that the guardian you have selected in your estate plan is unable to raise your children upon your passing, you should have two alternates who also meet the aforementioned criteria. This will ensure that your children are left in the hands of trusted relatives or friends and not in the court system.

If you have multiple children and would like to appoint different guardians to raise them separately, you may also outline multiple guardian appointments in your estate plan, however, this situation is generally not regarded as ideal for close siblings.

All appointed guardians must ultimately be approved by the court at the time of the parents’ passing. If a biological parent is still living, they will usually be named the guardian of the children unless evidence is presented that this individual is unfit to provide care to the children in question.

Trusts for Minors

In general, if an individual dies without an estate plan, his or her assets are distributed according to a formula determined by the state. In most instances, these laws pass wealth to both the surviving spouse and children. A properly crafted estate plan gives you control over this distribution allowing you to provide for specific people you designate and at the right time. It is recommended that all parents of minor children create a trust that is designed to safeguard the inheritance for their children. Such a trust gives you the ability to outline how much money your children will receive, the age at which they will receive the inheritance and to an extent how they are to spend this money. This allows you to designate funds for their college educations and give them their inheritance at a certain age, ensuring that they don’t waste their inheritance on fancy cars as soon as they turn eighteen years old.  The trust can also protect against potential creditors or even divorce.

Trust funds can also be used to provide support to your children until they reach the age at which they may receive their inheritance. In your estate plan, you must also name a trustee who can ensure this money is handled properly. It is important to note that the trustee may be different from the guardian selected in your estate plan. This is recommended if the guardian is good with children but not with money.

Trusts are important in that they ensure you still retain control over your wealth after your death in effect giving you greater control of your children’s futures. Trusts allow you to set aside funds for a surviving spouse ensuring that your children will be provided for even if your partner is not wise with money or remarries. Furthermore, a trust allows you to outline how the trustee is to budget funds for each child. If you have one child who has a special need or requires additional training to develop a talent, your trust may outline these appropriations. This is particularly important if you have a child with physical or mental disabilities who may require significant care beyond his or her 18th birthday.

Children are often the greatest assets that parents have and an integral part of the estate planning process. Your children’s well-being is only ensured with proper planning and while most parents hate to think about leaving their children before they are adults, it is essential that this possibility be considered and an effective plan formulated.  If you have not yet created a plan that adequately provides for your children, we encourage you to contact our knowledgeable estate planning attorneys today.

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