Aging Parents & Estate Planning

The parent-child relationship is pretty well defined. Children generally don’t advise their parents. It’s the other way around. However, this dynamic can shift as parents get older and children become adults. This becomes especially prevalent when considering estate planning and elder law issues.

As parents grow older, adult children may start to have certain questions about the way mom and dad have planned ahead for the eventualities of aging. Being aware of what plans have been made opens the door for a conversation about what planning is left to be considered to make sure their wishes are carried out as they’d like them to be.

What’s Next?

Once an adult child comes to the conclusion that a discussion is needed with aging parents, determining how to proceed can be difficult. It’s not easy to reverse roles and ask parents to provide their children with sensitive financial information. One way for a child to approach the subject would be to explain their own estate planning efforts. By telling parents what you have done and why, you can then ask them what they have done. The question would arise naturally and organically. You have just explained your estate plan to your parents, so they may feel compelled to explain their plan to you.

This interaction is in their best interests, and it’s not just a conversation about the eventual transfer of financial assets. There is the matter of long-term care to take into consideration. Most Americans will need assistance with their day-to-day needs at some point in time. You may in fact notice that your parents are starting to have trouble getting around. This is something that impacts the entire family because most of the living assistance received by senior citizens comes from family members, friends and neighbors. When this is not possible, seniors often enter assisted-living facilities. Medicare does not pay for an extended stay in an assisted-living community or nursing home. These facilities are extremely expensive, and many seniors may not understand the extent of the financial burden.

Sense of Relief

Once you have expressed an interest in the planning efforts of your parents they may actually be quite relieved. You are demonstrating a high level of maturity as you tackle a difficult subject as a caring family member. As you gain an understanding of their existing plan you can make suggestions. Assisting them in finding a qualified estate planning attorney may be an integral part of this process.

When your parents are aware of the fact that you want to be of assistance as they enter into the later stages of their lives, a new type of relationship may develop. They will know they can count on you as their own capabilities wane, and this can strengthen the parent-child bond.

How Do I Title . . . Part I

It’s impossible to fully understand Estate Planning without considering the goals of the clients, along with their underlying assets. After all, many of the more advanced Estate Planning techniques depend upon obtaining discounts for assets and considering which technique to recommend based on a client’s assets. Some clients lack specific knowledge regarding not only the assets that they own but also the title to such assets, both of which shape the Estate Plan. Inexperienced attorneys may fail to use precise words when describing title and refer to property owned with another individual simply as “joint property.” Such individuals may fail to understand the difference between property held as joint tenants with rights of survivorship, tenants by the entirety, or as tenants in common.

If an individual owns the complete undivided interest in the property, that’s separate property, unless the individual resides in a community property state, as explained later. Generally, an individual may dispose of separate property freely. An owner may transfer separate property during life and bestow separate property upon death. Of course, a few exceptions to that general rule exist. For example, separate property states require a spouse to leave a minimum amount called the elective share to their surviving spouse upon death. If the decedent spouse fails to leave the appropriate amount, state statutes contain provisions that allow the surviving spouse to elect against the decedent’s elective estate to prevent the impoverishment of the survivor.

If a property has more than one owner, each of whom can transfer their interest in the property freely, then those individuals own the property as tenants in common. An interest held as a tenant in common works much the same as separate property. The owner has no restrictions on the disposition of the property either during life or at death. Many states use this type of ownership as a default when more than one owner exists on the title to an asset without specific reservation of rights of survivorship.

In contrast to ownership as tenants in common, if the co-owners reserve a right of survivorship in the property, then the owners hold the title as joint tenants with rights of survivorship. Property titled as joint tenants with rights of survivorship passes title to the survivors upon the death of one of the joint tenants automatically by operation of law. The other owners need not do anything to protect their ownership interest, although they may need to produce a death certificate to clear the title. While many individuals attempt to create a property that will pass in this manner, it often fails. To create joint tenants with rights of survivorship, the joint owners need the following unities upon acquisition of the property: interest, possession, time, title, and survivorship. If the owners lack any one of those unities, then the owners have created tenants in common property, rather than joint tenants with rights of survivorship. Every state recognizes this type of property ownership.

Some states recognize a special form of joint tenants with rights of survivorship called tenants by the entireties, available only for spouses. In addition to the unities described above, the parties need to have the additional unity of marriage at the time they acquire title to the property. Interestingly, not all states that recognize joint tenants with rights of survivorship recognize tenants by the entireties as a form of ownership. Even more interesting, in those states that recognize this form of ownership, some states allow it only for real property, while others recognize it for any type of property. The states that recognize the tenants by the entireties form of ownership afford property titled in this manner asset protection, meaning that only a creditor of both spouses can attach the property.

In contrast to property titled as tenants by the entireties, about fourteen states recognize another form of ownership available only to spouses known as community property. Community property means that each spouse owns one-half of any property acquired by either spouse during the marriage with two notable exceptions. First, if one spouse receives an inheritance that will remain the separate property of that spouse. Second, any earnings on separate property remain separate property. Community property provides various benefits, most importantly a step up in basis of the entire community property interest upon the death of one spouse, rather than just the decedent spouse’s portion, as would be the case for property held as tenants by the entirety, joint tenancy, or separate property. Community property states allow each spouse to dispose of their one-half of the community property without restriction. In pure community property states, no elective share rights exist, which allows for more flexibility in estate planning while guaranteeing that one spouse will keep at least their one-half share of the community property upon the death of the first spouse.

Unlike separate property or common law states, how clients hold title to property does not matter in a community property state. In determining whether property qualifies as community property one looks to the domicile at the time of acquisition of the property. Interestingly, California recognizes community property with rights of survivorship. In that situation, the title will pass automatically to the surviving spouse upon the death of the first spouse as it would with property held as joint tenancy or tenants by the entireties but with the added benefit of the double step-up in basis.

What Makes A Will or Trust Invalid?

I often answer questions relating to the validity of Estate Planning documents. Sometimes, the testator or grantor simply wants to ensure that the documents carry out their last wishes. Other times, a beneficiary questions the terms or amount of their inheritance. Finally, loved ones have concerns that the Estate Plan does not accurately reflect the true intent of the testator. Let’s look at what could invalidate a Will or Trust. 

If a beneficiary, loved one, or other trusted source exerts undue influence on the testator, that might invalidate the Will. Simple enough to explain but understanding what constitutes undue influence requires a closer look at the behavior. The American Bar Association indicates that undue influence occurs when an individual in a fiduciary capacity or other confidential relationship substitutes their own desires for that of the influenced person’s desires. Put another way, a person influenced the testator in such a way that convinced the testator to alter their estate plan, usually in favor of the individual exerting the undue influence and to the detriment of the testator’s other beneficiaries. Each state lists certain factors that indicate the presence of undue influence, such as intimidation, physical threat, or coercion. Perpetrators of undue influence use subtle tactics and are often close to the testator. For example, the influencer may stop providing transportation to the testator or otherwise cause the testator to fear for their health and well-being. The emergence of elder abuse and mandatory reporting thereof has helped shine a light on the existence of undue influence and gives families a way to protect against it. 

In addition to undue influence, if the testator lacks capacity at the Will or Trust’s execution, then that invalidates the documents. Lack of capacity means that the testator executed the Will or Trust at a time when such a testator lacked a sound mind. Many a litigant has tried and failed to prove a lack of capacity, even though it’s common. Frighteningly, the Alzheimer’s Association estimates that nearly 6 million individuals have Alzheimer’s disease in the United States. This disease affects the mind at a time when the elderly individual may have other health issues. Most states require the testator to understand the nature and extent of their property, the natural objects of their bounty, the individuals who would naturally benefit from their estate, and finally, the effect of their Estate Plan. If the testator understands those things, then the testator has a sound mind. If the testator lacks that understanding most of the time but executes the Will or Trust at a time of clarity, then the Will or Trust is valid. Most states presume competence to make a Will or Trust and place the burden on the contesting party to prove that the testator or grantor lacked capacity. Note that a court may consider other factors, such as an unnatural distribution, as evidence of lack of capacity. 

Aside from undue influence or lack of capacity, any Will or Trust not executed with the requisite formalities is invalid. Most states require the presence of two witnesses who watch the testator sign, all of whom sign in the presence of a Notary Public. Although Trusts do not always require that level of formality, sometimes the testamentary provisions of a Trust will not work unless they are executed with the same formalities as required for Wills. 

Finally, any Will or Trust resulting from fraud, coercion, or forgery is invalid. If an individual intentionally misrepresents certain facts to the testator who relies upon the facts in making the Will, that’s fraud in the inducement. Common examples of this are when someone tells the testator that a particular beneficiary no longer needs the money because they have enough of their own or advises the testator that a beneficiary is stealing from the testator or speaking ill of them to other family members. If someone were to present a Will to the testator, while telling the testator that they were signing a Deed, that’s fraud in the factum. If someone else signs the testator’s name without their knowledge and without following the state statutes, then the Will is invalid. 

While these examples seem like they are out of a novel or movie, these things happen often. For example, Brooke Astor, a New York City philanthropist was abused and exploited by her only son who isolated and manipulated her to gain control of her assets, including millions of dollars that she wanted to give to charities. Brooke’s physical and cognitive impairment, dependency upon her son, and isolation made her susceptible to undue influence. If you worry that your plan may be invalid, it’s a great time to contact me to review and update the plan, as making sure that your assets get to the intended beneficiaries requires more than just good documents.

Understanding Tax Apportionment Clauses

A cohesive Estate Plan focuses on the distribution of assets and the naming of fiduciaries to carry out the plan upon the death of the Grantor or Testator. I understand that taxes and the payment thereof play an important role as well. Often, even those individuals whose gross estate falls below the Applicable Exclusion Amount ($12.06 million in 2022) need to worry about taxes. In addition to the Federal Estate Tax, clients need to consider the impact of state estate or inheritance taxes, along with local taxes and cash flow to pull it all together. It’s important to understand how taxes will be allocated among your beneficiaries upon your death and to ensure that allocation honors your wishes. I attempt to control the allocation of taxes through the use of an apportionment clause. An apportionment clause specifies who among your beneficiaries will ultimately bear the burden of the taxes. Omission of this clause or inartful drafting may result in unintended consequences, or worse yet, litigation.

Tax apportionment clauses come in many varieties. For example, a Will or Trust may contain language that designates only those assets passing under the Will or Trust are to pay the taxes. Thus, beneficiaries who receive assets that pass outside the Will or Trust, such as beneficiary designated assets like Individual Retirement Accounts, life insurance, or Pay on Death or Transfer on Death Accounts, would not bear the burden of any taxes. That may or may not reflect the Grantor or Testator’s intent. Conversely, the Will or Trust may allocate taxes among all the beneficiaries, including those who receive the assets outside through a beneficiary designation. Alternately, the documents may direct payment of taxes from the residuary estate, after payment of all specific gifts, expenses, and liabilities. Of course, if the residuary lacks liquid assets sufficient to pay the taxes, that poses another problem altogether. Let’s review an example that highlights one of the potential problems with payment from the residue.

Assume that Ned has two children, Rob, and Sansa. Ned wants to leave his home, Winterfell, valued at $10 million to Rob and the other $10 million of his estate consisting of cash and stock to Sansa through his residuary clause. Ned was clear that he intended to leave equal amounts to his children; however, an inexperienced attorney included a tax apportionment clause that directed payment from the residue of Ned’s estate. Ned died in 2022 leaving an approximate estate tax liability of $3.2 million. Because Ned’s Estate Plan directs payment from the residuary estate, the taxes will diminish the residue, which was going solely to Sansa. Thus, after payment of taxes, Sansa will receive a mere $6.8 million, while Rob will receive $10 million. If the tax clause directed apportionment between the beneficiaries proportionately based upon their share of Ned’s estate, then each of Rob and Sansa would bear $1.6 million in taxes. If we assume that Rob had no assets other than Winterfell, then the attorney needs to consider other sources of payment for the tax or structure the plan in another way to prevent a sale of Winterfell to pay the taxes. Perhaps the best plan gives each of Rob and Sansa half of Winterfell and half of the cash and stocks to ensure equal treatment.

Let’s change the facts a bit to mimic those of a recent Nebraska Supreme Court case, Svoboda v. Larson, 311 Neb. 352 (2022). Now assume that Ned lives with Catelyn and has only one child, Jon. Ned and Catelyn have a business and personal relationship but remain unwed. Ned’s estate plan leaves half of Winterfell to each of Catelyn and Jon and half of his sword-making business to each of Catelyn and Jon. Ned gives his livestock along with the residue of his estate containing minimal assets to Catelyn. Ned’s documents directed payment of estate and inheritance taxes through the residuary estate. A state statute imposes inheritance taxes at different rates based upon the beneficiary’s relationship to the decedent. Catelyn’s portion of Ned’s estate produced an inheritance tax liability of approximately $2,000,000, while Jon’s portion of Ned’s estate produced a tax liability of approximately $70,000. Ned’s residuary estate lacked assets sufficient to bear the burden of these taxes. State law indicates that if the direction given in the Will or Trust results in insufficient funds to pay the tax liability, then such direction fails and the burden of payment falls where the law places such burden, unless the testator made contingent plans in the governing documents. In Ned’s case, Catelyn will be responsible for coming up with $2,000,000 resulting from her bequest, while Jon will be responsible for the much smaller amount of $70,000 because of his legal relationship with Ned. Of note, Catelyn and Jon received substantially similar amounts but because of insufficient planning and state statutes ended up with vastly different results.

As the above examples demonstrate, we always need to consider the tax implications of a plan carefully. It’s important that the Will and Trust coordinate to avoid any confusion. In addition, we consider what assets the Personal Representative or Trustee will use to pay the liability and provide for various contingencies, for example, an insufficient residuary. Finally, remember that state laws and a beneficiary’s individual circumstance will also impact the ultimate responsibility for payment of taxes.