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Inheritance and the Great Estate Dealing With The Issues in Stepparent Households

Inheritance and the Great Estate Dealing With The Issues in Stepparent Households

Inheritance and the Great Estate Dealing With The Issues in Stepparent Households

Adapted for Flying Solo by
Margorie Engel, 1994

I. Cash Crisis
A. Bank Accounts
B. Beneficiaries

II. The Great Estate Plan
A. Who Inherits?
B. What is Inherited?
C When is Inheritance Received?

III. Assets and Liabilities Inventory

IV. Wills
A. Household Inventory
B. Dependent Children
C Intestacy and Inheritance for Stepfamilies
D Proposal for Stepfamily Inheritance
E. Adoption of Stepchildren
F. Express Gifts
G Drafting a Will

V. Trusts
A. Living Trust
B. QTIP Trust

VI. Medical Directives
A. Living Will
B. Durable Power of Attorney for Health Care
C Funeral Arrangements

VII. Keeping Decisions and Documents Current

VIII. Location of Paperwork

INHERITANCE and REMARRIAGE
Adapted for Flying Solo by
Margorie Engel 1994
Before you saw them—Now you don't

Real life is what happens while you're making other plans. I know because Steve and I have been part of a stepfamily for 7 years—he has 3 daughters, I have two daughters (current ages 23-31), with 3 weddings, 2 college degrees, and parents who have moved into retirement communities in that time span.

College expenses and inheritance. Predictable issues that arise without regard to the length of marriage, extent of finances, or stage in stepfamily development. Both issues are fraught with emotional overtones in addition to practical realities.

You won't be the first stepfamily to initially split along biological lines during the search for solutions to these financial strains. It may help to remember that you've already solved problems together and, while a thorny path, couples before you have survived a walk through the same rose garden.

Couples have dealt with grandparents or trust funds that covered most of the costs for one set of children in the family while the other set of children don't have the same financial reservoir. They've struggled to reach agreement about taking on debt for his and her child—one of whom pulls all-nighters in the library and the other in pubs. They've looked at the surface inequity of a child who was sent to an Ivy League school many years ago and what the same dollars will cover for today's college student. In round numbers, you can expect to pay $6-8,000 per year at a public university and more than $20,000 per year at many private schools.

Before struggling to reach a family agreement about what is "fair," take a look at how the real world views stepfamilies with regard to college expenses and inheritance.

The subject may come up in a moment of shared intimacy, during quiet time before bed, or perhaps while you're discussing a family event. Your spouse may ask. Or you may bring it up. But what exactly do you say? Not knowing what to say can lead to saying nothing at all—passive neglect. That's why I've prepared "Couple Talk about Inheritance in a Stepfamily."

Splintered loyalties, additional responsibilities, and changing needs of two or more families exist in every stepfamily. In situations where relationships between adults and stepchildren are strained, planning may be difficult to achieve. However, when decisions must be made in times of crisis, those tenuous relationships hold even more potential for family conflict and stress.

Many individuals prefer to believe that the extended family will "do the right thing" by each other. That inheritance decisions, if left alone, will take care of themselves. Now, there's a MYTH spelled M-E-S-S ! Some really exciting soap opera plots have developed in the absence of clear communication.

This essay is about making integrated plans for living arrangements, financial management, health care decisions, funeral plans, and appointing individuals to act for you.

You begin this process by thinking about your values and how they will affect your choices. For instance:

• How much do you value the ability to pass on an inheritance?

• How much responsibility do you feel your spouse, children, and stepchildren have to care for you—and you for them?

• Where do you draw the line between sustaining life and postponing death?

After these basic decisions, you can begin the steps necessary to ensure that your wishes will be carried out.

CASH CRISIS

Information gathering, decision making, and production of legal papers (wills, trusts, health directives) take time. In the interim, take steps to assure that your family has the funds to pay necessary bills immediately following a crisis—on a continuum from illness to death. Arrange access to an emergency fund of ready cash to pay for basic expenses and cover lost income if you have an accident or become ill.

Bank Accounts

One obvious way is to make sure that each spouse has emergency funds in his/her own named account. Another option is for the primary wage earner (or more "monied" spouse) to make an existing or new bank account into an informal trust with you as depositor and as "trustee for the benefit of (your beneficiary)." This account (known by a variety of names: "informal trust," "pay-on-death account," "bank trust account," "Totten trust") allows you complete control over the money for as long as you live. After you die, all the beneficiary needs to do to get the money is present the bank with proof of identity and a certified copy of your death certificate. (This trust avoids probate but is still part of the taxable estate.)

Beneficiaries

Immediate access to funds after your death can be accomplished in a number of ways. Insurance is a quiet way of leaving cash money to heirs. These proceeds are not subject to probate so only the executor needs to know about the money when filing the federal estate-tax return. Life insurance proceeds go directly to the beneficiary named in the policy. In remarriages, this may be especially helpful if there is resentment among children of a prior marriage about what their biological parent is leaving to the stepparent and to stepchildren. By the way, if the spouse or stepchildren are the owners of the life insurance policy (you can give them the money to pay the premiums), the proceeds won't even be in the taxable estate. You can also name someone as the beneficiary on a pension fund.

THE GREAT ESTATE PLAN

According to financial columnist Jane Bryant Quinn:

"You own stuff.
You will die.
Someone will get your stuff."

An estate plan is not optional—it is essential for a stepfamily! You must decide who inherits which assets and when they should receive them.

Who would you like to inherit your assets?

• What do you want to provide for your spouse? (beyond statutory limits)

• One man had generous ideas about what he would like to provide for his second spouse until a financial advisor told him the cost of premiums for the necessary amount of life insurance. He didn't want to spend that kind of money and said,

"She'll have to worry about money when the time comes." One woman thought way ahead and announced, "All financial deals are off— if you remarry."

• Are there financial compensations for status changes in remarriage?

• Did a stepparent leave work to care for stepchildren and lost retirement benefits? ...give up rights to future social security through earnings of a former, high-income, spouse?

• Does it make sense for your children from first and subsequent marriages inherit equally?

• Did you put the first set through college and children of this marriage are quite young—with hefty expenses ahead?

• Do you wish to include stepchildren, grandchildren, step-grandchildren, extended family members, friends?

• Would you like to eliminate potential heirs from receiving any property or money?

• Would you like to give any assets to charity?

Which Assets Will Be Inherited?

• If you own a business, who will take over?

• Will stock and management pass to those children active in the business?

• Will a second spouse and children from a first marriage run the business together?

• Do you compensate others with assets of comparable value?

• Is there a buy-sell agreement with business partners?

• Do you have rental income property?

• What are the cash needs and ability to manage property of your various heirs?

• Have you already made legal commitments or promises?

• Does your insurance policy name your former spouse as the irrevocable beneficiary?

• Have you and your siblings agreed to send your mother support money each month?

• Have you told your son he will inherit your art collection?

• Does your stepdaughter expect that the car loan will be forgiven if it has not been repaid by the time of your death?

• Have you promised children in your second marriage that they, too, will be able to attend Harvard/Radcliffe just as your children from the first marriage?

When is the Best Time to Receive an Inheritance?

• Age and maturity are important aspects to consider for children. Some distributions can be made immediately and others over a period of years through trusts.

• What about providing for a second spouse throughout his/her lifetime and having property and remaining assets go to biological children upon the death of this spouse?

ASSETS AND LIABILITIES — You Can't Give Away What You Don't Own

Ownership of assets in a second family is usually complicated. There's legal ownership and emotional ownership. Inventory your assets with both thoughts in mind.

Legal ownership deals with titles, deeds, and whether you live in a community property state. This affects investments, real estate, retirement benefits, and expensive personal property (most people underestimate the value of their estate) all offset by outstanding debts, including funeral expenses and other costs associated with settling your estate. Emotional ownership refers to things in a stepfamily such as household furnishings that are considered "ours" for years and years—until it comes time to decide who inherits the antique desk or persian rug that has been in one of your families for generations.

Totaling up your estate value isn't completed until you factor in the effect of taxes. Don't be embarrassed if you forgot this item. An MIT professor and Guggenheim scholar—worth $2.2 million—didn't realize he had estate taxes to consider. There are estate taxes, state taxes, taxes on retirement plan distributions, excise taxes on pension accumulations, and general transfer taxes. This is another reason for talking about the future NOW. Careful planning can significantly reduce the tax consequences so there is more of your estate to distribute to your heirs.

WILLS

Inheritance between husband and wife, whether of a first or subsequent marriage, is guided by personal choice and state spousal inheritance rulings. Along with various personal financial strategies, community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) have a system wherein a spouse usually has a one-half interest in property acquired during a marriage.

If you think wills are only for the rich, you are wrong. The complications if one or both spouses in a subsequent marriage die without a will are great. You can take the extra steps necessary to minimize friction.

Household Inventory

Sometimes it is not the will itself that presents problems, rather it is the things not mentioned. Many a family battle has raged over mother's pearls, the antique dining room table, or a hand-made lace tablecloth. On your household inventory sheets, put the initials of the person you know or think would like to have potentially controversial items.

Clearly, you want your money and property to get into the hands of those you feel need and deserve it—and you'd like to keep fees and taxes as low as possible. A will is particularly helpful in a stepfamily because it will save your extended, and sometimes complicated, family from having to organize your estate at the same time they're dealing with your death.


Dependent Children

Dependent children are a primary reason to have a will. As a parent, you will want to have a say about who is going to rear them and look after the property you're leaving to them. And yet, between 80% and 90% of parents with young children have no formal instructions specifying who will care for the children in the event of a parent's death!

Wills should not violate anything you've already agreed to in a divorce or prenuptial agreement. On the other hand, if circumstances have changed dramatically, such as a very close relationship with a stepparent and negligible contact with the other biological parent, please document this as carefully as possible. Include this information with your revised will.

Intestacy and Inheritance for Stepfamilies

As you heard in the section on stepfamilies and college expenses, there is a Congressional policy of recognition for the stepparent-stepchild relationship in federal programs. According to Professor Margaret Mahoney, University of Pittsburgh (specializing in Stepfamilies in the Law of Intestate Succession and Wills), under existing inheritance law, the automatic rights of stepfamily members are clearly delineated—there are no rights (except in California). Intestate (without a will) succession statutes fail to recognize family relationships that are not based on blood. The narrow exceptions operate only when no "real" heirs survive. In these cases, individuals related by virtue of marriage are allowed to inherit.

Even when there is strong evidence of loving family relationships, the blood relationship is the sole consideration under the intestacy statutes. This philosophy is so strong that in one case, even with a will—the stepchildren shared the decedent's last name and were called "his children" in earlier provisions in the will—when the stepchildren were not referred to specifically, by name, the court disallowed their right to inheritance.

Proposal for Stepfamily Inheritance

This kind of situation has led to debates about the development of stepfamily inheritance rights when there is no will or trust making specific bequests. Stepmarriage alone creating inheritance rights between stepparents and stepchildren would be too sweeping. Proposals for stepfamily inheritance include certain requirements:

• Stepmarriage begins before the child reaches majority.

• Stepparent assumes parenting responsibilities "in the place of a parent"—in loco parentis doctrine—during the child's minority.

• Existence of continuing family ties between adult stepchildren and stepparents.

Even with judicial discretion, by using these standards it would be possible to predict rights in most cases.

Such a proposal for stepfamily inheritance would defy traditional inheritance patterns. A child in a qualifying stepfamily could inherit from both biological parents as well as from the stepparent. Conversely, upon a child's death (without a will), the estate would be divided among three "parents."

The California Probate Code is unique in including stepchildren in the category of children who can inherit. California led us in the concept of no-fault divorce; perhaps they will be leaders in developing inheritance rights between stepfamily members through recognition of modern family life. In the interim, make the contract in your lifetime. Clearly state in your will the name of each survivor who will inherit from your estate.

Adoption of Stepchildren

As a general rule, the formal adoption of a stepchild enables that child to gain the legal status of an heir. Typically, this adopted child loses all inheritance rights vis a vis biological relatives upon adoption into another family. The statutory exception allows inheritance by the adoptee "in distributing the estate of a natural kin, other than the natural parent, who has maintained a family relationship with the adopted person."

This does not acknowledge the reality and complexity of family life today in which we are encouraging a sense of caring and responsibility by both biological and stepparents for the health, education, and welfare of our children. There is a growing recognition of the need for new forms of adoption for stepchildren in which the step relationship is formalized without the need for legally terminating the noncustodial parent's rights.

Express Gifts to Stepfamily Members

Specifically naming a stepchild as a beneficiary in your will usually means that the named child will receive his/her inheritance. While it may be your intention to have a stepchild's share go to that child's children (i.e., your step-grandchildren) if the stepchild predeceases you, the courts have generally refused to apply antilapse statutes (which save the bequest for the predeceased beneficiary's children) to gifts to stepchildren. The automatic exclusion of stepfamily members in the current law is a harsh rule where steprelationships are important for so many people. Some changes are in the pipeline. In the meantime, expressly name any and all steprelatives in your will if you wish them to receive a bequest from you.

I suggest that you speak with a local attorney about how your state recognizes inheritance and stepfamily members. Request that this lawyer keep you up-to-date about proposed or actual changes in the law.

Drafting a Will

When you are ready to outline the terms of your will, gather together the following information:

• A list of family members, friends, and charities for whom you would like to provide a remembrance

• Assorted Assets, Liabilities, Insurance, and Business FORM-ulas

• Household Inventory

• Copies of previous wills

• Divorce and prenuptial agreements

• Tax returns for the past three years

In the will, you name an executor as your personal representative after your death. The executor is responsible for all of the paper work involved in ensuring that your wishes are carried out, taxes are paid, and state/federal tax returns are filed.

To accomplish longer term goals, such as funding a child's education, providing for an elderly parent, or providing life-time security for a second spouse, you will need to create specific types of trusts.

TRUSTS

Two kinds of trusts have been particularly useful for stepfamilies.

Living Trust (also known as "Self-declaration Trust")

This document resembles a will—with a twist. A living trust—valid in all states—contains your instructions for management of assets if you become disabled—as well as directions for the distribution of assets upon your death. Stepfamilies often prefer a living trust, instead of a will, because of this added feature and because it does not go through probate—your assets and bequests are not exposed to public record. We're a mobile society and a living trust can also direct the transfer of out-of-state property to beneficiaries anywhere, while helping you avoid the expense of multiple probate proceedings.

You'll need legal assistance in creating a living trust and changing title of your assets from your name to the name of the trust. During your lifetime, assuming no disability, you control the assets in the same way you did before the trust was established. Even if you place your assets in a living trust, it's a good idea to draft a "pour-over" will. This document gives instructions for the disposition of assets that miss being put in the trust.

QTIP Trust

You can provide security and income for a surviving spouse with QTIP protection. A Qualified Terminable Interest Property (QTIP) trust is a marital deduction trust that allows a spouse (at his or her death) to transfer property and an income interest for the life of the surviving spouse, yet still specify what happens to these assets at that spouse's death! It allows you to make certain your spouse has the full or partial use of your property and income for as long as he or she lives, but permits you to name the ultimate beneficiary, typically biological children, when your spouse dies.

This is a very popular piece of estate planning for stepfamilies. Couples in second or third marriages come into the offices of lawyers and financial planners with these kinds of thoughts:

• "I want to be sure that she is taken care of..."

• "I want his health, maintenance, and welfare to be reasonably consistent with our lifestyle together."

• "We're in the autumn of our lives. I've already provided for my stepchildren. I want him to be able to continue in our current lifestyle. Then I want the house and remaining assets to go to my children."

• "She can stay in our home and have enough money to rent a place in Florida for three months but cannot invade the trust principal to buy a secondary residence."

• "My wife can live in our house (originally my father's house) until she dies—BUT she can't change anything. Or, she can move into another house I own and let my son and daughter-in-law move into the big house right after my death."

For administering a QTIP trust, it is helpful to have a non-partisan trustee—someone who will not have a conflict of interest in making discretionary decisions. I found that the trustee is traditionally a biological child from the first marriage. This person has a financial interest in accumulating the monetary interest because he or she is the ultimate beneficiary. It raises the question of what is "reasonable" income and what constitutes an extenuating circumstance for invading trust principle for the surviving spouse's (stepparent's) health and welfare. Again, more problems and "bad blood" occur with issues that are not clearly spelled out than with the concept of the documents themselves.

MEDICAL DIRECTIVES

There's an old Irish blessing that says:
"May your relatives stay well and die quickly."

That is not usually the case. And, all of the financial plans in the world won't help if you have not protected your property from medical or nursing home costs and find yourself with an expensive, lingering illness that compromises quality of life for you and your family. Along with financial management, seriously consider creating medical directives.

In stepfamilies, it is more important than ever to express your wishes about treatment you would want—or not want—if you become incapacitated. Written instructions will relieve family members of much of the burden of making difficult decisions at a time when they may be under considerable stress. You can also dispel confusion and conflict among close relatives (especially biological children and stepparents) who may have differing views as to what you would want.

Living Will

A living will gives directions about your medical care to your health providers in the event you are terminally ill and unable to communicate your wishes—that is, legally incompetent.

Durable Power of Attorney for Health Care

With this document, you can appoint someone to be your "attorney-in-fact," with the power to make medical treatment decisions for you in the event you cannot do so yourself, even when you are not terminally ill. Almost all states now have specific laws governing health care powers of attorney.

This document is different from and more flexible than the Living Will in three important ways:

• A Health Care Power of Attorney establishes a person to act as your agent (according to your wishes) if you cannot act.

• A Health Care Power of Attorney applies to all medical decisions, unless you decide to include limitations. The Living Will normally applies only to particular decisions near the end of your life and cannot address such circumstances as Alzheimer's disease, strokes, degenerative diseases, or comas.

• A Health Care Power of Attorney can include specific instructions to your agent about any treatment you want done or want to avoid or about whatever issues you care most about.

In theory, it makes sense to prepare a Living Will and a Health Care Power of Attorney. Make sure to follow state laws regarding contents and formalities for signing the two documents. Those loved ones who have not been named as agents should understand that decision-making authority has been delegated to a particular individual, as well as the practical implications of this delegation decision. And, yes, you can put an end to your Health Care Power of Attorney AT ANY TIME by notifying your agent and health care provider of your decision to terminate it. It is best to do this in writing (as well as verbally) and destroy the original document.


Funeral Arrangements

What kind of funeral arrangements do you want? Are you donating your body to science? If not, where do you want your body or ashes to be buried?

Children of a first marriage may express strong feelings about having their parents buried near each other, especially if the marriage was ended by death instead of divorce. If you have a long and happy remarriage, you can certainly be pulled in two directions.

I heard a story about one woman who was vacillating between being buried near her first husband and being buried near her current spouse. She's now thinking about cremation and having half of the ashes buried with each husband. My husband quipped, "That's a half-ash idea!"

KEEPING DECISIONS AND DOCUMENTS CURRENT

Estate planning is not a one-time process. Time has a way of altering earlier decisions. Periodic reviews are important when any of the following events occur:

• Family changes—births of children, grandchildren, change in custody of stepchildren

• Change in financial circumstances

• Geographic move—state laws differ

• Change in tax law

• Special circumstances—child develops special needs or talents, surviving spouse's ability to earn a living changes due to a disability, a child who loves antiques now may be into Danish Modern later

If you want to be exceptionally helpful to your family, leave information for your own obituary, to ensure it's accuracy when they have to write it during the stressful time after your death. If you are a prominent personality, this won't be necessary. The obit departments of major newspapers already have it prepared and in one of their own files!

Location of Paperwork

As you are putting your estate in order, develop a filing system so that your important papers are clearly labeled and located in one place. Don't make your heirs go on a document hunt after you die. Use a notebook and the FAMILY DATA FORM road map to write where the items are and how to obtain them.

Make three copies of your notes and pertinent documents. One copy goes in a packet for the executor of your estate, one goes to the family member who is your primary beneficiary, and keep a third packet in a desk or file drawer at home.

"When I first talked with my daughters about making my plans, they said, 'Oh, Mother!" But now I feel secure because they know where everything is and what my decisions are, so they won't be confused when they are carried out. I also consider this type of work a gift of love. Do you?"

© 1997 Flying Solo™. All rights reserved. Legal Notices



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Today, more than 36 million Americans are age 65 or over. There are more than 22 million family-member caregivers. Then there are the Baby Boomers. All are grappling with the major decisions that accompany the latter stages of life. This book is for them. Written by two experts with decades of experience between them, it is a comprehensive guide that instructs readers about how to create a plan to deal with all aspects of aging, helps maximize options and ensure wishes are carried out.

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