One common estate planning tool for people entering retirement is the use of an annuity for their retirement funds; however, recently a product has emerged on the scene. A retirement spending account has now become an alternative to an annuity by controlling the amount of distributions and simultaneously providing a degree of control over the retirement funds. It is a new way for people to continue to save in retirement while also controlling the amount that they spend.

What is a Retirement Spending Account?

The purpose of a retirement spending account is to combine the benefits of both an annuity and savings account while also minimizing the disadvantages of both. It seeks to resolve the issue of not outliving your retirement savings while not constricting a person’s power over their own money like in an annuity. A retirement spending account is a fund that is managed by an asset management firm. The firm invests the retirement money, manages the account, and provides the retiree with a monthly distribution.

A retirement spending account can eliminate some of the guesswork involved in retirement spending. It also places these funds in the hands of professionals that can best manage your investment over a long period of time. It can provide some protection to retirees regarding their spending and saving for the future when there is no steady stream of income.

Benefits of Retirement Spending Accounts

There are many benefits to using a retirement spending account in an overall estate plan. Typically, a person can choose how much they wish to receive in distributions every year, and the average amount is between four and five percent of the total account value. The asset firm manages the investment so that the retiree does not outlive the money invested and adjusts the investments as necessary to fit their client’s needs.

A retirement spending account also provides more flexibility than an annuity because the funds can be easily liquidated if the need arises, such as for a medical emergency or long-term care costs. In addition, other aspects of estate planning can be incorporated like naming beneficiaries to the account if the person passes away before exhausting the account’s funds. That way, the funds pass directly to heirs instead of first passing through the probate process.

Potential Drawbacks to Retirement Spending Accounts

Similar to any other investment vehicle, there are inherent risks to a retirement spending account. While an asset firm will try to invest to avoid such pitfalls, drops in the market can affect the amount of your spending account. In addition, if a retiree opts to withdraw a larger amount every year, then they may outlive their savings. It is also important to note that the asset management firms will take a fee annually for the management of these accounts. Typically, these firms will charge up to one percent of the fund’s value for its management, but depending on the value of the account the management fee can be less.

The Supreme Court of Connecticut recently ruled on a case involving a statutory share of an estate. Every state has laws regarding how much of an estate must be given to close family members, which is known as the statutory share. A person must petition for a statutory share of an estate when their spouse, child, parent, or other loved one leaves them nothing in the estate either through the will or by dying intestate.

Facts of the Case

In the case of Dinan v. Patten, et al, Althea Dinan was married to Albert Garofalo. He passed away in 2000 and left behind a will for his estate. The will left everything to his daughter, Anne Patten, and her three children Nicole, Aaron, and Alexis while leaving nothing for Ms. Dinan. After his death, Ms. Dinan petitioned the court for her statutory share of the estate pursuant to Connecticut law. In 2008, after years of being unable to agree upon the proper amount of her share, the executor of the estate asked the court to render a ruling on the issue.

In Probate Court, the judge ruled that the statutory share should be calculated based on the value of the estate after state and federal taxes. The court also ruled that for her distributions, Ms. Dinan should receive income based on the average yield of the estate between the date of death and the date of distribution. Finally, the judge ruled that the statutory share should be valued at the time that the final account is presented.

Ms. Dinan appealed to the trial level that then ruled that her share should be calculated before state and federal taxes while agreeing on all other points. In addition, it struck down Ms. Patten’s arguments that waiver, estoppel, and election of remedies barred Ms. Dinan from collecting her statutory share. Ms. Dinan and Ms. Patten appealed and cross-appealed the trial court’s ruling up to the state Supreme Court.

Ruling of the Court

The state Supreme Court affirmed the ruling of the trial court in all parts. First, it held that the doctrines of waiver, estoppel, and election of remedies do not bar Ms. Dinan from her statutory share. Then, the Supreme Court turned to the statutory share laws for Connecticut. The law states that a statutory share is “a life estate of one-third in value of all the property passing under the will, real and personal, legally or equitably owned by the deceased spouse at the time of his or her death.”

The judges ruled that because state and federal taxes are not considered “debts and charges against the estate” under the law, the statutory share should be calculated before taxes. Furthermore, the value of the statutory share should be calculated based on the value of the estate on the day of the final accounting and not on the date of the estate holder’s death. Therefore, the trial court was affirmed and Ms. Dinan was awarded her statutory share.

The Supreme Court of Virginia recently ruled on a case involving the question of whether a copy of a will passed muster for probate. Typically, the law provides that the original will must be submitted in order to probate an estate, but exceptions to the rule do exist. The case highlights the importance of keeping an original will as well as what must be proven in order to have a copy allowed for probate.

Facts of the Case

In the case of Edmonds v. Edmonds, et al, James Edmonds passed away in 2013 and left behind his wife, Elizabeth Edmonds, daughter Kelly, and Christopher, a son from a previous relationship. It is undisputed that in 2002, Mr. Edmonds executed a will that left all of his personal property to his wife and the remainder to a revocable living trust. The will stated that if Elizabeth passed away first, the property would go to Kelly and specifically stated that Christopher was omitted from the estate.

At the same time, Elizabeth filed her own will that was a mirror image of James’ will, providing that if he would inherit her personal property unless he predeceased her, then it would all go to Kelly. After his death, Mr. Edmond’s original will could not be found but a copy was found in a binder in his filing cabinet.

Mrs. Edmonds filed a complaint with the court and asked that the photocopy of the will be allowed to probate. Christopher countersued and claimed that his father died intestate, thereby making him an heir to the estate. He claimed that his father must have destroyed the original will with the intent to revoke it. Kelly also responded and sided with her mother, stating that there was no evidence of Mr. Edmonds’ intention to destroy the original will.

At trial, multiple witnesses testified that there was no evidence of any intention to destroy the original will. Furthermore, previous versions of the will explicitly excluded Christopher from the estate. Christopher himself testified that he had never even spoken to Mr. Edmonds or met him prior to his death. The trial court ruled that Mrs. Edmonds proved by clear and convincing evidence that James had not destroyed the will with an intention to revoke it. As a result, the copy of the will was allowed into probate. Christopher appealed the decision to the Virginia Supreme Court.

Ruling of the Court

The Virginia Supreme Court agreed with the trial court’s decision that James had not destroyed his original will with the intent of revoking it and allowed a copy of the original will into probate. First, the judges looked to the state law regarding missing wills, noting that “where an executed will . . . cannot be found after his death there is a presumption that it was destroyed by the testator . . . this presumption may be rebutted . . . by clear and convincing evidence.”

The judges ruled that Elizabeth did not need to show some other cause for the disappearance of the will. They ruled that it was clear from the transcript of the trial and the final order that the proper legal standard was applied to this case. Furthermore, Mrs. Edmonds had proved in the trial by clear and convincing evidence that her late husband had no intention of destroying the will to revoke it.

A few decades ago, one of the most popular estate planning tools was the irrevocable trust. The assets in this type of trust pass along to the beneficiaries free from estate taxes; however, once the trust is created the settlor of the trust no longer has control. As such, the trust is considered irrevocable even if life changes and other events make the initial purposes of the trust less effective. Thankfully, there are now options available for the creator of an irrevocable trust to amend the provisions without the need for court involvement.

Reasons for Amending an Irrevocable Trust

There are many reasons why the creator of an irrevocable trust would want to amend the initial provisions of the instrument. The settlor may wish to amend the beneficiaries if death, divorce, or other situations arise that would affect who would inherit the assets. In addition, state laws may change over time that would make the trust more effective if it was administered in a different state. Finally, some settlors simply do not like the original provisions of the trust because it does not suit the purposes of the settlor any longer or the trustee is no longer fulfilling the responsibilities of the role.

Options for Amending the Trust

A number of states now allow for the settlor of an irrevocable trust to amend the original instrument through means that do not involve the courts. One option available to change the provisions of an irrevocable trust is through “decanting.” This process refers to the act of distributing assets from an existing irrevocable trust into a new trust that is designed by the initial trust settlor.

By moving the assets of the irrevocable trust into a new trust, the trust creator can establish updated, better terms for the trust. Decanting typically occurs when the original irrevocable trust does not meet the settlor’s intent, fails to provide for the beneficiaries, fails to provide the optimal tax strategy due to changing laws, or some combination of these reasons.

Another option for amending an irrevocable trust is through “non-judicial reformation.” While the specifics of non-judicial reformation differ slightly from state to state, the typical rules for altering an irrevocable trust in this matter require that the trust settlor no longer be alive, the trust was created by a certain date, all of the beneficial interests of the trust must vest in a certain time period, and unanimous consent from all interested parties in the irrevocable trust including the beneficiaries, trustee, and any possible beneficiaries to the trust.

One final option for amending an irrevocable trust is to go through the probate system. It requires a petition, multiple court appearances, and a very good argument for amending the terms of the irrevocable trust. The process is often expensive and time consuming, which is why many in the industry highly recommend the use of decanting a trust or non-judicial reformation as easier means for amending the irrevocable trust terms.

Many people in the United States can expect to get some type of inheritance during their lifetime, and some of those inheritances will be substantial. It is projected that over the next thirty years, many trillions of dollars will be passed to the next generation through inheritance. If you are one of the lucky people who inherit such wealth, it is definitely cause to celebrate; however, once that is over it is time to consider what should be the best way to handle the assets that you have inherited.

Initiate a Cooling Down Period

If you have inherited significant wealth, by all means treat yourself to something nice, but before you start to seriously spend your inheritance you should consider instituting a cooling-down period to consider your options. You should assess your retirement goals, short and long-term financial planning, and figure out how to maximize the wealth that you have inherited. One of the biggest pieces of advice given to people who inherit wealth is to not react emotionally and develop a financial plan of attack.

How to Develop an Inheritance Plan

Developing an inheritance plan is the best way to ensure that the money that you have inherited is being used in the best way possible. The plan can outline your financial objectives, potential pitfalls, and set you up financially in both the short and long-term.

Create a list of financial goals
You should sit down and really think about what short and long-term financial goals you have for yourself and your family members. In addition, consider any bad financial habits that you have had in the past that you should be aware of going forward.

Fund an emergency account
One of your top priorities for your inheritance plan should be to fund an emergency account with cash. Typically, it is recommended that you have an account with three to six months of living expenses in an emergency fund that you can tap into at any time. It can cover an unexpected loss of employment, medical expenses, and more.

Pay down existing debt
The next priority in your inheritance plan should be to pay down any existing debts. This can include education loans, mortgages, credit card statements, car payments, and any personal debts to others. By paying off your debts, you eliminate the interest that comes with the principal payments that can add on a significant amount to the original debt.

Save for retirement
Inheritance money is a great asset to use for retirement savings. You can use the assets to contribute the maximum to your 401(k) or IRA. Think about setting enough aside so that you can continue to maximize your retirement accounts until the time when you retire.

Have some fun
Finally, remember to save some of the money for yourself and fun purchases. Many estate planning attorneys and financial advisers recommend keeping five to ten percent of the inheritance for discretionary purchases. Like someone on a crash diet, it can be so much harder to accomplish your goals if you are giving yourself no leeway. Remember to treat yourself once in a while and enjoy what you have inherited.

While it has fallen out of favor in the last few years, the “Qualified Personal Residence Trust” (QPRT) is gaining traction once again as an estate planning option for people who wish to transfer their home to the next generation when they pass away. The QPRT allows for a parent to transfer their home to their children with the minimum amount of taxes while the parent continues to live in the home.

Reasons for Establishing a QPRT

The main purpose of establishing a QPRT is the state and federal tax benefits. If the family home is a significant asset, or the most significant asset, in the estate and the family believes that it will appreciate in value then a QPRT might be a viable option for tax savings. This is also incredibly important if you believe that the value of the home would exceed the estate’s value above the federal tax exemption limit of $5.43 million for 2015. Placing the home inside of a trust will shield it from the estate taxes by effectively removing the residence from the estate.

Another reason why people prefer the use of a QPRT is that it gives the children control over the home, its expenses, and other maintenance while their parent still resides in the house. It eliminates the need for the parent to manage all of the daily tasks that are associated with home ownership and transfers that responsibility to the child. The parent gets the peace of mind that they can remain in their home for as long as they wish, and the child is also relived knowing that their parent cannot be forced out of the home for financial reasons.

Specifics of a QPRT

When a QPRT is created, the creators of the trust must pick a term of years that the trust is enacted. The current owner of the home receives a lifetime interest in the property through the term of years attached to the QPRT, and after that period of time the ownership of the home is transferred to the beneficiaries of the property that are usually the children or grandchildren of the homeowner. After the transfer, the Internal Revenue Service (IRS) determines the value of the lifetime and remainder interests in the home and apportions that for gift tax purposes.

In order for a QPRT to be successful the homeowner needs to outlive the term of years placed on the trust. If the homeowner passes away before the trust ends, then the home is transferred back into their estate for tax purposes. Determining the term of years in a QPRT is a balancing act: the longer the term, the more estate tax benefits but the shorter the term, the less risk is involved of the grantor passing away. Typically, the common QPRT terms are five, ten, and sometimes fifteen years.

If the QPRT is successful and the child wishes for their parent to remain living in the home, then the parent would need to pay an arm’s length rent to the trust. While some families balk at the idea, in the end it is actually beneficial because it allows your parent to remove additional funds from the taxable estate.

More and more people are taking it upon themselves to prepare for the future with an estate plan. While some take it upon themselves to craft an estate and succession plan for their family, it is always a good idea to work with an estate planning attorney to ensure that there are no holes in what you have created. This case illustrates how even the best intentioned estate plans can still have issues that could cause a lot of unintended problems if not corrected now.

Discovering Errors in the Plan

For example, one doctor had built a small specialized practice over the last fifteen years that grossed $1.7 million annually. He had crafted a will and trust for his family that included a wife and children in addition to the creation of a succession plan for his thriving medical practice. However, when the doctor reviewed his plan with an estate planning attorney, a large hole was discovered in his succession plan.

In its current state, the will left the doctor’s practice and assets to his wife in the event that he passed away or was incapacitated. Unfortunately, under the law his wife is not allowed to own the practice because she is not a licensed medical professional. Using this plan, the medical practice would have no owner after his passing, his patients would be without a doctor, and his employees would have no employer. His wife would be forced to sell the practice as quickly as possible, and without any real leverage she would most likely not get the true value for what he has built.

Suggestions to Amend the Plan

When a hole has been discovered in an estate plan, the most important thing to do first is discuss the possible options. In this case, does the doctor plan on retiring early or working for most of his life? Does he plan to pass his practice to his children, a competitor, or liquidating it entirely? These types of questions can help to structure a plan that can be utilized in short-term emergencies as well as in long-term planning.

In this case, the doctor’s children were too young to pass along the business, and he had three other doctors that he worked with at the office. By offering the other doctors partnerships in the practice, he could incentivize them to continue to grow the business while simultaneously provide a mechanism for succession. By selling small shares to the other doctors over time, he could maintain the majority share until he retires or dies. At that time, the remaining doctors at the practice could buy out his shares.

In addition, it was suggested that the partners all purchase life insurance policies. This way, if a partner in the medical office passes away, the insurance can provide the others with the assets necessary to fund the buyout of that share of the practice. Now, the doctor does not need to worry about his family or his practice because both are being taken care of in his estate plan.

If you are granted a durable power of attorney over another person, it means that you have the right to make financial and legal decisions on their behalf. However, the power of attorney does have its limits, and a recent case that went to the Supreme Court in South Dakota illustrates the importance of clarifying what the capabilities of the power of attorney entail.

Facts of the Case

In the case of Studt v. Black Hills Fed. Credit Union, Dorothy McLean invested a certificate of deposit (CD) with the credit union in 2008. Then in 2012, she moved in with her son, Ronald Studt, and also named him as her attorney-in-fact with a durable power of attorney form. In his role, Mr. Studt would be allowed to transfer and gift property to persons or organizations as long as Ms. McLean’s financial needs could still be met and that the transfers were for estate planning purposes.

Mr. Studt then informed the credit union that they should close all of Ms. McLean’s accounts and transfer them to a bank in their hometown. In addition, the credit union should forward the funds of the CD when it matured. The credit union accepted the power of attorney and did as was asked, but left the CD until it matured.

Ms. McLean became terminally ill in May 2013, and at that time Mr. Studt asked about who was the beneficiary on the CD. The beneficiary was David Sholes, and Mr. Studt requested that the beneficiary be changed to him. He was told that only the CD’s owner could change the beneficiary, so when Ms. McLean passed away later that month the funds were to go to Mr. Sholes.

Mr. Studt submitted a declaratory motion to the court to determine the rightful beneficiary to the CD. The credit union and Mr. Sholes argued that Mr. Studt does not have the right to self-deal as well as the fact that he did not have the right to change the beneficiary on the CD. The circuit court agreed that the language in the power of attorney was too broad and did not specifically authorize self-dealing, and Mr. Studt appealed.

Ruling of the Court

The case was appealed up to the South Dakota Supreme Court, where it agreed with the ruling by the circuit court. Under the law, a power of attorney agreement must be strictly construed and pursued and only the powers that are explicitly stated in the agreement are allowed. In order to allow someone named as the power of attorney to self-deal, the document must provide “clear and unmistakable language” to that effect.

Mr. Studt argued that the agreement allowed him to make transfers to “any person,” which should include himself. The court disagreed and stated that the language was too broad and did not state with specificity that he was allowed to self-deal. Because a power of attorney document must be strictly construed and Mr. Studt’s lacked the specific language, his argument was struck down by the court and the justices ruled in favor of the opposing parties.

A contentious case for estate planners has been reversed, allowing attorneys and clients both to breathe a sigh of relief. The case revolved around whether creditors could go after assets left to a beneficiary in a spendthrift trust. The issue arose in Bankruptcy Court and was recently reversed in the Northern District of Illinois federal court.

Facts of the Case

In the case of Safanda v. Castellano, Faith Campbell created a living trust in 1997 for the benefit of her four children. The trust provided that at her death the assets of the trust would be divided equally among her four children. In addition, the document provided a spendthrift clause that was meant to shield the assets of the trust from any creditors. She passed away in 2007 and one of her children, Linda Castellano, along with her husband filed for bankruptcy in 2011.

The Chapter 7 Bankruptcy trustee sued the Castellanos for fraudulent transfers under U.S.C. §548(e)(1) of the bankruptcy code and demanded that Linda turn over her share of the trust assets. This section of law pertains to the transfer of trust funds in order to hinder, delay, or defraud any creditors as to the debtor’s assets. The Bankruptcy Court agreed that Ms. Castellano’s trust assets belonged as part of the bankruptcy estate and were accessible to the Chapter 7 trustee. The Castellanos then appealed to the federal district court.

Ruling of the Court

The U.S. District Court reversed the ruling of the Bankruptcy Court and found in favor of the Castellanos. It found that the largest question of the case was whether Ms. Castellano’s share in the spendthrift trust was in her bankruptcy estate or not. It found that the trust did not terminate upon the mother’s death but continued to exist during the time that Ms. Castellano filed for bankruptcy.

Next, the court looked at whether Ms. Castellano had any rights to her portion of the trust assets on the day that she filed for bankruptcy. The terms of the spendthrift trust prevented her from selling or encumbering her interests in the trust, thereby protecting them from creditors on the day that she filed for bankruptcy.

In terms of the Bankruptcy Court’s application of U.S.C. §548(e)(1), the district court quickly overruled the lower court’s application of the law. It stated that “At all times, Castellano’s potential share remained the property of the Living Trust . . . Although [the Trustee of Faith’s Trust] segregated a portion of the Living Trust into a second account at Merrill Lynch earmarked for potential discretionary distributions to Castellano, that act did not end the Living Trust’s ownership of those funds, constitute a distribution to Castellano, or create a new trust . . . Accordingly, because there was no transfer of an interest of the debtor, sec. 548(e) does not apply.”

Therefore, the Chapter 7 bankruptcy trustee was not allowed to access the funds in the spendthrift trust. The Bankruptcy Court was overruled and the court found in favor of the Castellanos. This is an important case for estate planners everywhere because it ensures the protection of assets when they are placed into a spendthrift vehicle for future heirs and protects them from the reach of creditors.

Like something out of a made for television movie, last week a woman was sentenced to 23 years in prison for the murder of her eighty year old mother-in-law for the inheritance. It is one of the rare times that a set of laws known as the “slayer statutes” has been applied to a criminal case but serves to highlight the importance of these laws. These statutes prevent a person who has murdered another from inheriting from their victim’s estate.

Facts of the Case

In this case, Diana Nadell was arrested and convicted of the murder of her mother-in-law, Peggy Nadell. The reason behind the killing was that Diana wished to obtain the inheritance from Peggy’s estate, which was worth a little over $4 million. Diana and her husband were expected to inherit half of the estate, but Diana could not wait for her mother-in-law to pass away naturally.

According to the trial, Diana attempted to recruit a number of co-conspirators to help her with the crime before Andrea Benson agreed to help establish her alibi and perpetrate the crime. Under the guise of traveling to Peggy’s hometown for a wedding, the two women convinced Peggy to allow them into the home before beating and stabbing her to death. For her role in the crime, Ms. Benson was sentenced to twenty years in prison.

Slayer Statutes and Estates

Known colloquially as “slayer statutes,” these laws were enacted to prevent heirs from killing those they were set to inherit from in order to obtain the inheritance earlier. The slayer statutes vary from state to state, but the common theme is that a person cannot inherit from someone that they murder specifically to inherit early. The laws are meant to prevent a wrongdoer from profiting from their crime. In addition, slayer statutes also apply to other types of inheritance outside of a will, such as pensions, employee benefits, life insurance policies, and the like.

In this case, New York’s slayer statutes applied to the case, and their laws are based on common law rulings instead of black and white statutes. Under New York law, the equitable concept is that “no one should be able to profit by his own fraud, take advantage of his own wrong or found any claim upon his own iniquity, or acquire property by his own crime.” Applied to Diana’s case, she is now not allowed to inherit any money from Peggy’s estate.

Diana undermined her own ability to inherit by perpetrating the killing of the person that she was set to inherit from. Because her husband is the biological son of Peggy and was not implicated in the crime, he can still inherit normally from his mother’s estate. However, New York law prevents a person convicted under the slayer statute from indirectly inheriting the money from anyone else. Therefore, Diana is also prevented from inheriting any of the money from Peggy’s estate that was passed down to her husband.

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