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Divorce Can Create Problems with Inheritance Plans

Family Studies recently discussed the different feelings that may surface during estate planning about daughters-in-law and sons-in-law in "Inheritance and Divorce."

Some people want to make sure that if their child ever gets divorced, the ex-spouse does not receive any portion of the inheritance. Other folks do not mind if the ex-spouse gets some of the inheritance.

The article discusses a specific case where soon after getting married a man's father created a trust for the man's benefit. About 10 years later the man filed for divorce. One issue in the divorce was how to treat the trust and whether it should be considered marital property.

The court determined that the man's interest in the trust was worth $2 million and decided that it should be marital property. The man's wife was given 60% of the trust's value when the divorce was finalized.

The man appealed and won. The higher court declared the trust was not marital property.

The higher court's decision is the normal outcome. Inheritances are usually excluded from divorce settlements in most states.

Nevertheless, it is best when estate planning to think about what you want and to state specifically in the estate plan what you want to happen in case an heir gets divorced.

An estate planning attorney can guide you in your options about your particular circumstances in estate planning.

Reference: Family Studies (Sept. 6, 2016) "Inheritance and Divorce."

Gifting Provides Lifetime Experience

As recently discussed by Merrill Lynch in “Why Make Your Heirs Wait?” many people prefer to see results and the subject of gifting to heirs rather than leaving to descendants as a way of passing from one generation to the next.

The key points are:

• If you give to one heir now, other family members might wonder what is going on and might want a gift as well, even if they do not have a pressing need for it. You should talk to your family and make sure everyone knows that a gift now might make their eventual inheritances smaller.
• Do not give to your family for selfish reasons. Consider whether the receiver actually needs and wants the gift. Giving someone a responsibility they do not want or are not ready for could be a burden to them.
• Do not give away so much that you neglect your own needs. Before giving to anyone take stock of how much money you need for your own retirement and the effect the gift may have on your comprehensive estate plan.

An estate planning attorney can guide you on the best way to pass on your wealth to the next generation and help you develop a plan for gifting.

Reference: Merrill Lynch (Aug. 2016) “Why Make Your Heirs Wait?”

Leaving the Vacation Home to the Next Generation

Children who receive a vacation home as an inheritance are not always happy about it, according to the Wills, Trusts & Estates Prof Blog article “Inheriting Vacation Homes.”

The idea behind buying a vacation home may be to enjoy the getaway, build fond memories and to pass it on to the next generation. However, the problem for many children when inheriting a vacation home is that the property requires maintenance. Many children are not willing to pay the upkeep on a property they only visit a couple of times a year.

One way around this problem is to put the vacation home in a trust and provide funds for its upkeep, but that might not be the best solution for every family.

An estate planning attorney can guide you through the process of passing on the vacation home in the best way to benefit your children.

Reference: Wills, Trusts & Estates Prof Blog (Aug. 26, 2016) “Inheriting Vacation Homes.”

Despite False DNA Report ‘Daughter’ Receives Millions

The estate of casino owner Kirk Kerkorian has faced some difficult issues and will pay millions to Kira Kerkorian, who is not his daughter, according to the Daily Mail article “Daughter of casino billionaire Kirk Kerkorian whose mother faked a DNA test showing he was her real father in messy paternity battle will get $8.5m from his will.”

Kerkorian, who was married to Kira’s mother for one month in 1999, faced claims that he was the girl’s father. To prove it in a paternity case, Kira's mother submitted the DNA of another daughter of Kerkorian’s instead of Kira’s, which she later admitted.

Kerkorian, for his part, raised Kira as his child until she was 10 years old at which point Kerkorian hired a private investigator who was able to prove that another man was actually the father. Kerkorian then cut off all contact with Kira who is now 18.

Despite not actually being Kerkorian’s biological daughter, Kira is still going to inherit $8.5 million from him. That is a much smaller amount than his other two children have likely received, which has not been disclosed.

Reference: Daily Mail (Aug. 23, 2016) “Daughter of casino billionaire Kirk Kerkorian whose mother faked a DNA test showing he was her real father in messy paternity battle will get $8.5m from his will.”

Lump Sum Payments Can Cost Heirs of Retirement Accounts

Market Watch recently discussed some typical options that are important to spouses that inherit retirement accounts in “Inheriting a retirement account? Lump sum payouts can be costly.”

They include:

• Lump Sum Cash Payment – The surviving spouse has the option of cashing out the account with a single lump sum payment. This is the most costly option in terms of taxation.
• Monthly Benefits – Most plans allow a surviving spouse to receive a monthly benefit for life. Whether this is a better option than taking a lump sum depends on the life expectancy of the surviving spouse. It is also a good choice if the surviving spouse does not want to invest the money.
• IRA – A surviving spouse can normally transfer the account assets into an IRA. The assets will then be treated as if they were always the property of the surviving spouse.
• Inherited IRA – Transferring into an inherited IRA is another option available to a surviving spouse. This is can be very beneficial if the surviving spouse is much younger than the pensioner.

An estate planning attorney can guide you in your options.

Reference: Market Watch (July 25, 2016) “Inheriting a retirement account? Lump sum payouts can be costly.”

Treating Your Children Fairly through Your Estate

Sometimes parents treat children differently because one child may have more needs than another but adult children may not think the same way as discussed in The New York Times in “How a Will Treating Children Differently Can Still Be Fair.”

Children often view their parents’ final bequests as a proxy for favor and love. Their initial reaction to a parent leaving more for one child than another is that the parents love one child more than the other.

For parents, however, that is not normally the case.

Instead, the parents view it as an extension of what they have always done and just giving more to the child who needs it more. This difference of opinion about the meaning of unequal inheritances can lead to sibling fights over their parents’ estates.

There is often a very simple way such fights can be avoided.

Before passing away the parents can talk to their children about what they are thinking of doing in their estate plans and why.

An estate planning attorney can guide you in taking care of the needs of your children as well as treating them fairly.

Reference: New York Times (July 29, 2016) “How a Will Treating Children Differently Can Still Be Fair.”

What Is the Best Way to Pass on Assets to Your Family?

Every family is unique when it comes to passing on assets from one generation to the next, but there are also some generalizations, according to an Investopedia article “Estate Planning: Which Assets Are Best to Leave Your Family.”

The three most important considerations are:

• Liquidity – Generally speaking, the more liquid your assets are, the better they are for heirs to inherit. Liquid assets can be easily converted and used by heirs, and the assets do not take up physical space.
• Sentiment – Assets that might have sentimental value to your heirs should be handled carefully. If more than one person may want them after you pass away, it is often best to discuss how the assets will be handled with those people because later surprises could lead to acrimony.
• Taxes – It is important to plan how different assets will be taxed after you pass away. You will need to account for both the capital gains tax and the estate tax; thus, it is best to seek the advice of a professional about how to handle taxable assets.

Consult with an estate planning attorney for the best options for your family.

Reference: Investopedia (June 27, 2016) “Estate Planning: Which Assets Are Best to Leave Your Family”

Sudden Wealth Syndrome

As Private Wealth points out in "The Downside Of Sudden Wealth," the syndrome is not just due to quickly becoming wealthy. The syndrome refers to the common problem of people who become rich suddenly ending up with less wealth than they previously had.

There are several reasons for this phenomenon. The biggest, however, is that people who become suddenly wealthy do not always have the knowledge to handle their finances in a way that ensures there is always enough money coming in to cover obligations. For example, they might overextend on credit card or mortgage debt and not have the resources to service the debts when they have spent all of the money they received.

Knowing about sudden wealth syndrome is important if you are planning to leave a large inheritance to someone who has never before been wealthy. An estate planning attorney can help you to structure the inheritance in a way that makes the problems with sudden wealth less likely to occur.

Reference: Private Wealth (June 16, 2016) "The Downside Of Sudden Wealth"

Your Children Could End Up Paying for Your Retirement

Most of those people who are not saving might think it will only be a problem for them as they might have to work longer than they expected, but that is not the case as Motley Fool explains in "If You Don't Save for Retirement, Your Kids Might Suffer."

The people who often end up being hurt by those who do not save for retirement are their children as those children end up supporting their elderly parents. This can be a huge burden for the children because those who support their parents often have debts of their own they have not paid off. It makes it less likely those children will be able to save for their own retirements, which will have later repercussions for their children.

Another way your children can be harmed by you not saving money for retirement is they will not receive an inheritance from you. Inheriting from parents can be a beneficial way for adult children to pay off their debts and save for themselves. Even a small inheritance is helpful.

An estate planning attorney can guide you in planning for the future.

Reference: Motley Fool (May 15, 2016) "If You Don't Save for Retirement, Your Kids Might Suffer."

What to Do When You Inherit an IRA

The options are not the same for those who inherit IRAs compared to those who initiate IRAs as the American Legion published in "Five things to know about inheriting an IRA."

The list includes:

• People who create their own Roth IRAs are not required to take minimum distributions. However, those who inherit them are required to do so.
• All of the money in an IRA does not need to be taken out at once. Those who inherit can elect to take required minimum distributions based on their own life expectancy. This option must be initiated by December 31 of the year following the death of the original account holder.
• People who choose not to take out required minimum distributions must withdraw the full amount of the IRA within five years of the account owner's death. This option is available when the account originator passed away before reaching the age of 70½.
• Spouses can choose to treat the IRA as their own or as an inherited IRA. The rules must then be followed for whichever option the surviving spouse elects.
• Transferring an inherited IRA can only be done by moving it directly from one custodian to another. The funds cannot be withdrawn by the inheritor and later moved into a new IRA.

The rules and options can be confusing and an estate planning attorney could be helpful in meeting the challenges.

Reference: American Legion (March 16, 2016) "Five things to know about inheriting an IRA."