Estate Planning for Blended Families

When a couple in a blended family fails to address what will happen after the first spouse dies, families often find themselves embroiled in disputes.  According to the article “In blended families, estate planning can have unintended issues” from The News-Enterprise, this is more likely to occur when spouses marry after their separate children are already adults, don’t live in the parent’s home and have their own lives and families.

In this case, the spouse is seen as the parent’s spouse, rather than the child’s parent. There may be love and respect. However, it’s a different relationship from long-term blended families where the stepparent was actively engaged with all of the children’s upbringing and parents consider all of the children as their own.

For the long-term blended family, the planning must be intentional. However, there may be less concern about the surviving spouse changing beneficiaries and depriving the other spouse’s children of their inheritance. The estate planning attorney will still raise this issue, and the family can decide how important it is to them.

When relationships between spouses and stepchildren are not as close, or are rocky, estate planning must proceed as if the relationship between stepparents and stepsiblings will evaporate on the death of the natural parent. If one spouse’s intention is to leave all of their wealth to the surviving spouse, the plan must anticipate trouble.

One very common approach to this issue is to set up a trust for the surviving spouse, which is often called a marital trust.  This establishes a trust for the benefit of the spouse, but whatever remains in the trust will go to the deceased spouse’s beneficiaries.  So, you can have your spouse benefit from your money, but make sure what’s left goes to your kids.

In some families, there is no intent to deprive anyone of an inheritance. However, failing to plan appropriately—having a will, setting up trusts, etc.—is not done and the estate plan disinherits children.

It’s important for the will, trusts and any other estate planning documents to define the term “children” and in some cases, use the specific names of the children. This is especially important when there are other family members with the same or similar names or perhaps a lack of clarity as to who the children are.

In Texas, this issue is even bigger when you don’t have an estate plan for a blended family.  If the decedent raised a stepchild in their home, they could potentially be considered a child of the decedent through adoption by estoppel.  If that’s true, then they are a child as far as the estate is concerned.

As long as the parents are well and healthy, estate plans can be amended. If one of the parents becomes incapacitated, changes cannot be legally made to their wills. If one spouse dies and the survivor remarries and names a new spouse as their beneficiary, it’s possible for all of the children to lose their inheritances.

Most people don’t intend to disinherit their own children or their stepchildren when estate planning for blended families. However, this occurs often when the spouses neglect to revise their estate plan when they marry again, or if there is no estate plan at all. An estate planning attorney has seen many different versions of this and can create a plan to achieve your wishes and protect your children.

It also makes sense to consider the children’s role in your finances as you age as the blended family situation may complicate the matter.  See this article where I addressed that more specifically.  https://galligan-law.com/the-blended-family-and-issues-with-finances-and-estate-planning/  

A final note: be realistic about what may occur when you pass. While your spouse may fully intend to maintain relationships with your children, lives and relationships change. Clients often struggle to confront this or admit it to themselves, but I assure you it comes out later, and we can plan better when all of the issues are addressed.  With an intentional estate plan, parents can take comfort in knowing their property will be passed to the next generation—or two—as they wish.

Reference: The News-Enterprise (Dec. 7, 2021) “In blended families, estate planning can have unintended issues”

 

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Can You Refuse an Inheritance?

It’s a bit of a strange thought, but occasionally there are reasons for people not to want their inheritance.  They may have expected the money to go to someone else and want to facilitate that, they may feel they have enough money and want it to pass to someone else, or perhaps they are concerned about taxes.  Whatever, the reason, no one can be forced to accept an inheritance they don’t want. However, what happens to the inheritance after they reject, or “disclaim” the inheritance depends on a number of things, says the recent article “Estate Planning: Disclaimers” from NWI Times.

A disclaimer is a legal document used to disclaim the property. To be valid for at least most tax purposes, the disclaimer must be irrevocable, in writing and executed within nine months of the death of the decedent. You can’t have accepted any of the assets or received any of the benefits of the assets and then change your mind later on.  Basically, you can’t receive the assets, and then decide to give them back as though you didn’t want them in the first place.

Once you accept an inheritance, it’s yours. If you know you intend to disclaim the inheritance, have an estate planning attorney create the disclaimer to protect yourself.

If the disclaimer is valid and properly prepared, you simply won’t receive the inheritance. Instead, the property will go to whomever would have received had you predeceased the decedent.  That might be many individuals, so it is important to understand to whom the property will go if you disclaim.  It might be based upon the trust or will that named you originally, a beneficiary designation on a financial asset or the intestate laws of the state where the decedent lived.

Once you disclaim an inheritance, it’s permanent and you can’t ask for it to be given to you. If you fail to execute the disclaimer after the nine-month period, the disclaimed property might then be treated as a gift, not an inheritance, which could have an impact on your tax liability.

Persons with disabilities who receive means-tested government benefits should never accept an inheritance, since they can lose eligibility for benefits.  Now, some states will consider a disclaimer a transfer for government benefits, meaning you may lose the benefits anyway.  So, the best solution is to consult with a lawyer as soon as possible how to handle such an inheritance.

A supplemental needs trusts may be a good solution so the beneficiary with a disability can receive the inheritance without loss of benefits.  You can see more on SNTs here.  https://galligan-law.com/how-do-special-needs-trusts-work/  

The high level of federal exemption for estates has led to fewer disclaimers than in the past, but in a few short years—January 1, 2026—the exemption will drop down to a much lower level, and it’s likely inheritance disclaimers will return.  So, if you want to consider a disclaimer, definitely speak to a qualified attorney who can assist you with the process.

Reference: NWI Times (Nov. 14, 2021) “Estate Planning: Disclaimers”

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Gifting for Estate Taxes

In honor of this festive season, I wanted to talk about gifting.  If you’ve read my blogs in the past you probably aware that there may be tax consequences to gifts, and that there have been many discussed changes to the estate and gift tax in this past year.  However, clients frequently ask questions about it, especially at the end of the year, so I wanted to address gifting and potential estate planning considerations.  You can also see the recent article “Gift money now, before estate tax laws sunset in 2025” from The Press-Enterprise for a bit more detail and some additional considerations.

Gifts may be used to decrease the taxes due on an estate, but require thoughtful planning with an eye to avoiding any unintended consequences.

The first gift tax exemption is the annual exemption. Basically, anyone can give anyone else a gift of up to $15,000 every year. If giving together, spouses may gift $30,000 a year.  Couples often make gifts to children and include their child’s spouse as a recipient, which effectively means you can gift $60,000 (two donors giving $15,000 a piece to two people) within the annual gift tax exemption.  After these amounts, the gift is subject to gift tax. However, there’s another exemption: the lifetime exemption.

For now, the estate and gift tax exemption is $11.7 million per person.  Many legislative proposals this year considered reducing that exemption substantially, but currently anyone can gift up to that amount during life or at death, or some combination, tax-free. The exemption amount is adjusted every year. If no changes to the law are made, this will increase to roughly $12,060,000 in 2022.

However, the current estate and gift tax exemption law sunsets in 2025, if not earlier as many are predicting.  This will bring the exemption down from historically high levels to the prior level of $5 million. Even with an adjustment for inflation, this would make the exemption about $6.2 million in 2025.

For households with net worth below $6 million for an individual and $12 million for a married couple, federal estate taxes may be less of a worry. However, there are state estate taxes, and some are tied to federal estate tax rates. Planning is necessary, especially as some in Congress would like to see those levels set even lower.

Let’s look at a fictional couple with a combined net worth of $30 million. Without any estate planning or gifting, if they live past 2025, they may have a taxable estate of $18 million: $30 million minus $12 million. At a taxable rate of 40%, their tax bill will be $7.2 million.

If the couple had gifted the maximum $23.4 million now under the current exemption, their taxable estate would be reduced to $6.6 million, with a tax bill of $2,520,000. Even if they were to die in a year when the exemption is lower than it was at the time of their gift, they’d save nearly $5 million in taxes.

Now, I want to stress because gifting is often abused, that this analysis affects individuals who may become estate taxable.  If you are a married couple with $2,000,000 in total assets, gifting doesn’t make tax sense, and may have adverse consequences elsewhere.

For example, gifting affects Medicaid eligibility, which is relevant to far more people than federal gift and estate tax.  Medicaid penalizes transfers made for less than full value (so gifts as well as transfers made at a discount such as sales for a $1, sales at cost and so on), so gifting the $15,000 isn’t prudent.  Beside that point, sometimes clients simply need the money later in life for their own use to enjoy retirement, which is the best plan of all.

There are also other taxes to consider in making gifts where estate taxes aren’t concerning, such as capital gains tax.  See this article for more information on those topics.  https://galligan-law.com/is-it-better-to-give-or-let-kids-inherit/ 

That said, there are a number of estate planning gifting techniques used to leverage giving, including some which provide income streams to the donor, while allowing the donor to maintain control of assets. These include:

Grantor Retained Annuity Trusts. The donor transfers assets to the trust and retains right to a payment over a period of time. At the end of that period, beneficiaries receive the assets and all of the appreciation. The donor pays income tax on the earnings of the assets in the trust, permitting another tax-free transfer of assets.

Intentionally Defective Grantor Trusts. A donor sets up a trust, makes a gift of assets and then sells other assets to the trust in exchange for a promissory note. If this is done correctly, there is a minimal gift, no gain on the sale for tax purposes, the donor pays the income tax and appreciation is moved to the next generation.  Congress has definitely considered shutting this down, but hasn’t to date.

These strategies may continue to be scrutinized as Congress searches for funding sources so they may not be perfect strategies or available in the future, but in the meantime, they are still available and may be appropriate for your estate. Speak with an experienced estate planning attorney to see if these or other strategies should be put into place.

Reference: The Press-Enterprise (Nov. 7, 2021) “Gift money now, before estate tax laws sunset in 2025”

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