By Ken Bloom, J.D., LLM
The purpose of an estate plan is to ensure that your assets are distributed to your beneficiaries per your wishes after you die. Unfortunately, when establishing a will or trust many people don’t factor in certain issues that could lead to their assets going to individuals not in accordance with your wishes.
All you need to do is look at some famous people who had relatives or ex-spouses challenging a will or trust and suing to receive assets to see the impact of poor estate planning. Singers James Brown, Michael Jackson and Davy Jones all have family members squabbling over the deceased singers’ estates. Famous American artist Thomas Kincaide’s estate is being challenged by both his ex-wife and his former girlfriend. Even civil rights legend Rosa Parks wishes that her modest estate go to a charity was challenged in court by her nieces and nephews in an attempt to get their fair share.
But there are ways to protect your estate from being the subject of litigation. The key is to have a well-thought out estate plan, and to review that plan on an annual basis to make sure the way you want your assets distributed to your beneficiaries hasn’t changed.
Most people want to pass on their assets to their surviving spouse or their children when they die. But even if those are your wishes, there are circumstances that can arise where family members aren’t always in agreement with your desires. Conversely, not adding certain stipulations in your estate plan regarding who receives (or shouldn’t receive) part or all of your estate could lead to legal battles between your children and beneficiaries after your death.
Situations that require special care
Here are some situations that require special consideration to protect your beneficiaries:
-Child with Substance Abuse– While not always common, we have run across a few clients who have a child with a drug or alcohol problem. In these cases, we have set up a trust that stipulated the child had to undergo regular drug or alcohol testing in order to receive a distribution from the trust after their parent was deceased.
-Beneficiary is Spendthrift or Has Gambling Problem- Distributing a huge sum of money in an inheritance can lead to disaster if it goes to a surviving spouse or a child who spends money extravagantly or has a gambling problem.. In these cases, it is best to establish a trust that distributes money only for health, support and maintenance. Another safeguard that can be built in to your estate plan is to assign a third-party to handle all the distributions to the spouse or child and make sure the money goes to pay these expenses rather than giving it to the beneficiary directly.
-Second Husband/Wife – When someone remarries after a divorce or the death of a spouse, it is often their intention to distribute their assets to their children from the first marriage after death. Unfortunately, if you name your new spouse as the sole beneficiary of your assets, including life insurance, investment and bank accounts or an IRA, your new spouse can then designate that his or her children receive these assets upon their death, and not your children.
To ensure this doesn’t happen, and to allow you to provide your second spouse with the means to live comfortably after your death, you can establish a trust that will limit how the assets are used for the benefit of the second spouse. For instance, you could stipulate that the trust distributes income (and/or principal) of the trust for “health, support and maintenance.” The remaining assets can then be distributed to your children upon your death or upon the death of the second spouse.
It is important to remember that an IRA account has a beneficiary designation, and if you have designated your new spouse as the beneficiary, he or she will get all of the IRA assets. In those cases, I recommend that the client establish two IRAS—one with the beneficiary designation for the new spouse, and the other establishing the children from the first marriage as the beneficiaries.
The Imperfect Son-or Daughter–in-Law- In some instances, you may not want your son- or daughter-in law to receive any of your assets, even if you pass them on to your son or daughter upon your death. In those instances, we recommend establishing a trust that would provide assets to be used for your child and upon that child’s death the remaining assets, if any, would then be distributed to your grandchildren, not the son- or daughter-in-law.
Other Special Situations-There may also be other unique situations that you need to stipulate in your estate plan to ensure that your assets are distributed to your beneficiaries based on your wishes. For example, if you have a son or daughter who is a permanent college student, you may want to stipulate that they will only receive money from your trust upon graduation from a four-year college.
In another situation, you may want to divide your assets equally to some of your children, but leave one of them without any distributions (i.e., disinherit). However, just because one of your children is not named in the will or trust or designated to receive a portion of your assets upon your death, they could still file a lawsuit and may eventually receive assets from the court or your estate. In this type of situation, it is best to have a directive in your estate plan that you are disinheriting a particular child, using the proper legal language that will make it difficult for them to win a lawsuit.
Obviously, thinking about any of these scenarios can be difficult. But it is better to plan ahead in these uncomfortable situations before you die, so the heirs and beneficiaries you truly want to receive your assets won’t have to deal with squabbling and lawsuits after your death.
And remember, things do change, so it is best to review your estate plan annually and update it to reflect any “wayward heirs” you want to keep away from your assets.
Ken Bloom of West Bloomfield is an attorney, tax expert and finanancial advisor and a partner in Bloom Asset Management and Bloom, Bloom & Associates in Farmington Hills. He can be reached via email at firstname.lastname@example.org or visit his firm's website at www.bloomlawfirm.com for more information on estate planning.