Like most things in life, planning for your death or disability is more complicated than it first appears. That’s why a lot of people don’t do it. Deciding who will get your things when you die is an important first step. But if you are leaving someone more than a few thousand dollars, there are other important issues to consider. Each of the people involved in your estate plan has unique abilities and limitations that can impact your estate plan. The type and value of your assets can also have important effects.
Most importantly, you should consider what you want to accomplish by leaving an inheritance to your beneficiaries. You probably wouldn’t leave assets to a charity unless you support the work of the organization and wish to ensure that it continues to function in the future. But in many cases, our clients don’t think past the division if they are leaving assets to family members.
Making a gift of cash is simple and easy to accomplish. But dividing your money between your children is not the same thing as ensuring that they will be able pay for their children to go to college. Giving your child a farm is not the same thing as keeping it in the family for multiple generations. There are an unlimited number of dangers that could consume your beneficiary’s inheritance. But one of the most common things that can go wrong is the end of a beneficiary’s marriage.
While divorce rates appear to have dropped over the last 50 years, the most current information I have seen says that about 43 percent of first marriages still end in divorce. That number goes up for successive marriages. It appears to drop as income rises. I don’t know why. But I suspect that it’s at least partly because everything in life is harder when you can’t pay the bills. It’s also easier to get divorced when there is no property to fight over. That probably means that there are a lot beneficiaries whose marriages don’t function very well.
When a marriage ends, inherited property is “separate property” for purposes of equitable distribution. But if a couple separates months or years after one party receives an inheritance, that inherited property has often morphed into marital property. Sometimes that happens quickly. Money may be deposited into a joint account or used to buy property that is jointly titled. Sometimes it happens slowly.
If one spouse inherits real estate from a parent, there are good reasons to title that property in both spouses’ names as tenants by the entirety. This protects the property from the original owner’s separate creditors. Most spouses leave everything to each other anyway. So, titling as tenants by the entirety also avoids probate and ensures that most creditors of the deceased spouse cannot reach the property. It is often bad estate tax planning. And it is even worse in the event of divorce. There is a rebuttable presumption that this was intended to be gift to the marital estate. Separate property can also become marital property if it is commingled with marital property and cannot be traced.
If your beneficiary ends up in an equitable distribution trial after your death, a judge will listen to a few hours of testimony, review some documents, classify property as marital or separate, determine its value, decide what distribution is equitable, and never think about it again. Your estate plan can make that decision easier. One of the best ways to prevent a court from giving your property to your beneficiary’s spouse it to leave that property in trust. But the trust must be designed and administered properly for your property to make its way through an equitable distribution case unscathed. The next few posts will discuss the design and administration.