How Can Remarriage Affect Your Estate Planning? 

Divorce is more common now than it was in the past, as is remarriage. Depending on how long a prior marriage lasted, the former couple may have engaged in certain levels of estate planning together. When that is the case, it is important to understand how a subsequent marriage can impact the estate planning from a prior marriage. If you or someone named in your estate planning documents has remarried, there are several major issues that you should be aware of as well as steps you should take to ensure your estate planning continues to be appropriate for your current situation.

Understand How Your Existing Estate Plan Will Operate If Left Unaddressed
First, do you understand how your current estate plan will operate at your or your former spouse’s death? Most states’ laws assume that a divorced spouse does not want their former spouse to inherit anything from them. So even if a will, a trust, or a life insurance policy names a former spouse as a beneficiary, there is a high likelihood that the law will prevent the named ex-spouse beneficiary from receiving the distribution from the deceased ex-spouse’s estate.

But be careful! This is not true in all states. Thus, regardless of what your existing estate plan says, you must be diligent in reviewing your estate plan, as well as beneficiary designations for your life insurance policies and retirement accounts, to ensure that an ex-spouse is no longer named as a beneficiary unless the terms of your divorce settlement require it. In addition, if you still want your former spouse to benefit from your estate in any way, speak to an attorney to ensure that your objectives will be met even if your state has a statute that would prevent it. It is also wise to review your divorce decree to check whether it contains a court order to retain an ex-spouse or minor children as named beneficiaries on a life insurance policy insuring your life.

Just as important, if you want your current spouse to be the beneficiary of your estate planning or insurance policies and retirement accounts, you should update those beneficiary designations. On the other hand, if you wish to designate other family members instead of your current spouse as beneficiaries, you need to update your beneficiary designations in your estate documents and financial records accordingly.

Similarly, if you are still assuming that you will inherit or be entitled to some money and property or benefits from a former spouse, determine whether those assumptions remain true. Often, remarriage will impact your ability to qualify for certain government and pension benefits such as Veteran’s Administration benefits, Social Security benefits, or even survivor’s pension benefits from a deceased spouse’s employer. If those assumptions are no longer accurate, be sure to take that into consideration when updating your estate planning documents.

How Does Your Current Spouse Factor into Your Estate Plan?
Perhaps you and your current spouse have decided to take a “what’s mine is mine, and what’s yours is yours” approach to property. If that is the case, it is crucial to understand how your state’s laws handle property division at the death of a spouse. Even if you have completed your own estate planning with provisions designed to keep your property separate from your spouse so that it will pass directly to your children, grandchildren, or others, including charities, most (but not all) states have default laws to ensure that a surviving spouse is not completely disinherited. These laws (typically referred to as intestacy or elective share statutes or community property rights) can significantly disrupt even the most carefully drafted wills and trusts. Without a pre- or postnuptial agreement in place in which both of you agree how property should be distributed upon the death of one or both of you, your efforts to leave your property to someone other than your current spouse may be seriously frustrated.

On the other hand, assuming that you do, in fact, want to ensure that your surviving spouse receives some (or even all) of your property, it is equally important that your estate planning documents clearly communicate your intent. By making your intent clear, you can preserve a good relationship between your children from a former marriage and your new spouse. When children understand what your intentions are and why you are dividing property in a particular way, their assumptions about why their stepparent is receiving, for example, the family home, can be corrected.

When Beneficiaries and Fiduciaries Remarry
Remarriage can disrupt your estate planning even when you are not the one who remarries. Sometimes, a beneficiary remarries after you have named them in your legal documents. If the new marriage is rocky because the new spouse is financially unstable, at risk for lawsuits, or so flaky that the marriage appears unlikely to last for very long, it may be time to review the provisions of your estate planning. In such a case, you may want to specify that any inheritance that passes to your beneficiary alone must be held in an ongoing asset protection trust for their benefit. Such language can prevent the inheritance you leave the beneficiary from being attached by their spouse’s creditors or even from being divided as marital property in the event of a divorce.

A related issue can arise if you have named a married couple as guardians for your minor children if something happens to you. For example, suppose you named your sister, Shelly, and her husband, Ron, as guardians for your minor children if you die unexpectedly. You have chosen them because they share your values and together would be ideal guardians for your children. Further imagine, however, that Shelly and Ron divorce, and both remarry second spouses who are nice people with shared values. If you fail to update your estate plan and revise your guardianship nominations, the court may have a very difficult time determining who should be your children’s guardian. This situation could lead to a contentious court battle over their custody, particularly if the children were also the beneficiaries of a significant amount of property from a life insurance policy and both Shelly and Ron feel that the other is interested in the guardianship only because of the money associated with your children’s care.

A recent Texas case also highlights one of the risks associated with failing to update an estate plan when a beneficiary remarries. In this case, a mother included a provision in her trust that provided for her son and her son’s “spouse” to receive a share of the mother’s estate. However, the son divorced and remarried after the mother had executed her trust. When the mother died and the son discovered that his “spouse” was entitled to a share of the trust assets, the son argued that his mother had intended his current spouse to receive that share of the trust. However, the court disagreed and interpreted the trust so that the son’s former spouse received that share of the trust.

Was this the mother’s intent? Had her intent been clear, there probably would not have been an expensive and contentious court battle. Had the mother recognized before her death that her trust created some ambiguity on this point, and had she made some important clarifications in her estate plan, she could have saved her family a significant amount of grief and expense.

We Can Help
We hope the above examples have underscored the point that remarriage is a significant enough life event that you should work with your estate planning attorney to carefully update your estate documents to reflect your current situation and intent. If you need help thinking through these various considerations for your own circumstances, please contact us. We have the expertise and experience to help ensure that your estate plan will work for you and your family exactly as you intend.

Fears When Talking about Money

Studies have shown that the largest contributing factors to generational loss of wealth are a lack of communication and trust among family members and the failure to prepare heirs. Often, fear is what underlies the lack of communication and trust that inevitably leads to unprepared heirs. Following are some of the fears that prevent people from communicating with their loved ones about their wealth.

Common Fears

Fear of Creating an Entitlement Mentality in Heirs
We have all heard horror stories about trust-fund kids who had no motivation to do anything other than relax and enjoy life because they knew that a large inheritance would be available for spending once they reached a certain age. Knowing that the large inheritance was coming, they did the bare minimum to make sure they would receive it, but in the process, ignored opportunities to get the most out of their education or learn new skills because, in the child’s mind, the future was already mapped out.

Luckily, by working with an experienced estate planning attorney, you can craft an estate plan that avoids this outcome. Your estate plan could include incentives for your beneficiary, such as qualifying to receive money from the trust only if they graduate from an accredited college or university with a certain minimum grade point average. You could also include restrictions on what the money can be used for, such as tuition, starting a new business, or the purchase of a first home, eliminating the idea that the money is available for luxury or frivolous items. On the other hand, if you are truly concerned about how your beneficiary will use the money, you can leave the decision of how much money they receive and when they receive it to the discretion of a trustee who understands your concerns about discouraging entitlement mentality and encouraging beneficiaries to develop a strong work ethic and become productive, contributing members of society.

Fear That Heirs Will Squander Their Inheritance
You have worked hard to create and maintain your wealth. You have spent where you needed to and saved in other areas. It is reasonable to fear that when you pass along your wealth, your level of frugality may not go with it. As mentioned, to combat this fear, you can include provisions in your estate plan that list exactly what the money you are leaving your loved one can be used for. If your intent is to provide your loved one with an education and seed money for their first business, you can restrict the use of the money to those purposes. Or you can select successor trustees who will make trust distributions in accordance with your long-term objectives for your money and your loved ones. This means that if your loved one wants a wild weekend in Vegas, they will have to find the money for that elsewhere.

Fear That Outside Influences Will Overtake Heirs
Unfortunately, there are some not-so-nice people in the world. These people tend to enter your life and the lives of your loved ones when there is money at stake. While your loved one may be incredibly level-headed and frugal, it can sometimes be hard to say no to a partner who wants to go on expensive trips or buy nice clothes. In addition, with about half of all marriages ending in divorce, potential gold diggers may find your loved one even more attractive if there is the possibility of a large divorce settlement. Through proper drafting, an experienced estate planning attorney can not only restrict how your loved one accesses the money you leave them but also protect it from creditors and predators.

Fear of Treating Heirs Unequally and Fostering Sibling Rivalry
Depending on your parenting philosophy, you will have to decide whether you want to treat your children or grandchildren equally or fairly in your estate plan. Treating your loved ones equally means that they all receive the same amount; treating them fairly means that your loved ones receive money and property according to their individual needs and situations. The answer to the “equally or fairly” question will depend on your unique circumstances and intentions and may take some soul-searching.

Some people believe it is crucial that everyone in the same generation (children or grandchildren) be treated the same (i.e, equally) to prevent family conflict. Others believe that because everyone is different, each person in a generation should be provided for in a way that gives them all the same access to opportunities and advantages in life (i.e., fairly). One child may make more money than a sibling, or one grandchild may have special needs while the other grandchildren do not. These differences might require different amounts and types of inheritances.

Fear That Disclosure Now Might Limit Choices and Changes in the Future
Whom you tell about your plan does not impact your ability to change your mind; however, the type of plan you create may limit your ability to make future changes. A revocable living trust or a last will and testament can be changed at any time up until you are incapacitated (unable to make decisions for yourself) or you die. On the other hand, there are irrevocable trusts that, while offering increased asset protection and potential tax benefits, may be more complicated or problematic to alter if you change your mind in the future.

Although having an initial conversation with your family about your financial wishes can be nerve-wracking enough, and meeting with them a second time to let them know you have changed your mind could be even more so, the difficulty does not diminish the importance or the benefits of being open and honest with your family. This is why we generally recommend that families hold an annual retreat to discuss their wealth in case a change has occurred, or even if nothing has changed, to spend time together as a family.

Fear about Running Out of Money
For many people, earning or acquiring money offers a sense of security. Without money, some people may feel vulnerable. Also, unless you plan to work until the day you die, you may also worry that the money you have acquired during your lifetime will run out before your death, leaving you to rely on government assistance or family members. While this scenario is always a possibility, working with an experienced financial advisor can help you get ahead of this fear by taking a look at your current income, savings, and expenses to create a budget and investment strategy that meets as many of your future needs and wants as possible.

Overcoming Your Fears
Creating a comprehensive financial and estate plan with the help of experienced advisors, in addition to having an honest and open conversation with your loved ones about it, are two of the first steps to overcoming the fears that arise about money and inheritance. To help you prepare to create your plan and discuss it with your family, consider how you would answer the following questions. You can also download our convenient handout, “Your Thoughts on Money,” to guide you through this thought exercise and any conversations you want to have with your loved ones about your financial and estate plan.

● What does money mean to me?
● Am I comfortable telling my family about my plans for my wealth?
● What do I want to teach future generations about money?
● How can I help future generations develop financial competency?
● Am I concerned that I am going to run out of money?
● Do I worry about creating an entitlement mentality among my children, grandchildren, etc.?
● If I leave a large sum of money, do I think future generations will squander it?
● Do I think outside influences will take advantage of my children and grandchildren if I leave them a large sum of money?
● Do I want to treat my children and grandchildren equally or fairly?

The answers to these questions will help you express your fears, attitudes, and goals about your wealth and how you want to ultimately pass it down (or not) to your children, grandchildren, and beyond. Also, discussing your philosophy about money with your loved ones will allow them to know what to expect after you are gone instead of being left in the dark. Call us to schedule an appointment so we can discuss your options for protecting your wealth for generations to come.

10 Types of Trusts: A Quick Look

Considering the myriad of trusts available, creating the right estate plan can seem daunting. However, that is what we, as estate planning attorneys, do every day. We know the laws and will design a plan which addresses your specific situation.

Here is a look at the basics of ten common trusts to provide you with a general understanding of the options available. There will not be a quiz at the end. When we meet, all you need to do is be prepared to share your goals and insight into your family and financial situation, and we will design a plan that incorporates the best documents for your situation.

1. Bypass Trust. Commonly referred to as a credit shelter trust, family trust, or B trust, a bypass trust contains a portion of a deceased spouse’s accounts and property and uses the deceased spouse’s lifetime exclusion amount to reduce or eliminate estate tax. Because the estate tax is calculated at the first spouse’s death, this trust is bypassed for estate tax purposes at the second spouse’s death.

2. Charitable Lead Trust. A charitable lead trust is a trust which provides a stream of income to a charity of your choice for a period of years or a lifetime. At the completion of the period of years, or at death, whatever is left goes to you or your loved ones with significant tax savings.

3. Charitable Remainder Trust. A charitable remainder trust is a trust which provides a stream of income to you for a period of years or a lifetime and then gives the remainder to the charity of your choice with significant tax savings once the period of years or death has occurred.

4. Special Needs Trust. A special needs trust allows you to provide money or property for the benefit of someone with special needs without disqualifying them from receiving governmental benefits. Federal laws allow special needs beneficiaries to receive certain types of benefits from a carefully crafted trust without defeating eligibility for government benefits.

5. Generation-Skipping Trust. A generation-skipping trusts allows you to distribute your money and property to your grandchildren, or even to later generations, without taxation, by using your lifetime exemption to offset any tax that could be due.

6. Grantor Retained Annuity Trust. A grantor retained annuity trust is an irrevocable trust which provides you with an annuity for a specific amount of time based on the value of the property in the trust and upon completion of the annuity period, the remaining money and property is transferred to those you have named. This type of trust is used to make large financial gifts to your loved ones of accounts or property that are expected to grow in value at a higher rate than the annuity rate being paid back to you.

7. Irrevocable Life Insurance Trust. An irrevocable life insurance trust is designed to own high-value life insurance and receive the payment of the death benefit upon the trustmaker’s death. The benefit of this type of trust is that the life insurance proceeds are excluded from the deceased’s estate for tax purposes. However, the proceeds are still available to provide liquidity to pay taxes, equalize inheritances, fund buy-sell agreements, or provide an inheritance.

8. Marital Trust. A marital trust is designed to protect the accounts and property for the surviving spouse’s benefit, as well as qualify for the unlimited marital deduction. These accounts and pieces of property are excluded from estate tax at the first spouse’s death but are included in his or her estate for tax purposes.

9. Qualified Terminable Interest Property Trust. A qualified terminable interest property trust initially provides income to the surviving spouse and, upon the surviving spouse’s death, the remaining money and property are distributed to other named beneficiaries, while still allowing the trust to qualify for the unlimited marital deduction. These are commonly used in second marriage situations and to maximize estate and generation-skipping tax exemptions and tax planning flexibility.

10. Testamentary Trust. A testamentary trust is a trust created in a will. This type of trust is created upon the individual’s death and is commonly used to protect the money and property on behalf of a beneficiary as opposed to transferring the money and property to the beneficiary outright. It can be used when a beneficiary is too young to manage their own money or property, has medical or drug issues, or may be incapable of responsibly managing their own money. The trust can also provide asset protection from lawsuits, or a claim by a divorcing spouse brought against the beneficiary. Unlike a revocable living trust or an irrevocable trust, where property should be transferred into a trust during the trustmaker’s lifetime to work property and avoid probate, testamentary trusts require the sometimes lengthy and expensive probate process before the trust is created.

There are many types of trusts available. We will help you select which trusts, if any, are a good fit for you. Call today to schedule your in-person or virtual appointment. We are waiting to hear from you.

How to Remove a Member of an LLC

As a business grows, its ownership structure may change and an owner may need to be removed. Removing an owner of a limited liability company (also known as a member) may become necessary if a member retires, dies, changes career, commits a breach of conduct, or has a dispute with other LLC members. When members decide that somebody within their ranks must leave the company, the removal can be voluntary or involuntary.
Involuntary removal tends to be more complicated and contentious. However, there are several legal procedures that can be followed to make the removal as smooth as possible. The LLC’s governing documents, as well as state LLC laws, affect the options available for involuntary removal of a member.

LLC Membership Structure and Governance
An LLC is a business entity that combines aspects of a traditional corporation and a partnership. However, unlike a partnership, LLCs can have one member. There is no upper limit on the number of members allowed in an LLC, unless it is taxed as an S corporation.

LLC ownership is typically expressed as a percentage of interest in the company. Depending on the provisions of the LLC’s operating agreement, the ownership percentage may affect members’ voting rights and rights to profits generated by the LLC.

Upon formation, an LLC must submit documentation to the state where it is organized. States do not require an LLC operating agreement, but having one is highly recommended for internal purposes because it describes how the LLC is to be run and often provides a mechanism for removing a member.

Removing a Member according to Governing Documents
An LLC member voluntarily withdrawing from the company is the best scenario. If the member is not willing to withdraw voluntarily, the next best scenario is having an operating agreement that provides a procedure for involuntary withdrawal (i.e., expulsion).

An LLC’s operating agreement may explain the grounds for, and means of, ousting a member. The usual method of involuntary removal is a vote by the other members followed by a buyout based on the departing member’s interest or share in the company. Member buyouts may be addressed in a buy-sell agreement or another internal governing document.

Absent a documented, formal procedure for removing a member, the LLC could negotiate a buyout deal on a voluntary basis, which would keep the matter out of court, saving time, money, and headaches.

Removing a Member according to State Law
If the LLC lacks an operating agreement that specifies a method for involuntarily removing a member, and if a voluntary departure cannot be negotiated, the removal will need to be resolved judicially in accordance with state law.

While state LLC laws vary, many are based on the Revised Uniform Limited Liability Company Act (RULLCA). Twenty-one states and the District of Columbia have adopted the RULLCA, which provides three situations in which the court, when petitioned by the LLC, may order the expulsion of a member:

1. The member engages in “wrongful conduct” that “adversely and materially” affects the company’s activities.

2. The member has “willfully or persistently” committed a “material breach of the operating agreement” or materially breached their duties to the company.

3. The member engages in conduct that “makes it not reasonably practicable to carry on the activities and affairs with the person a member.”

Importantly, in cases where the court acts to expel a member from an LLC (known in the RULLCA as “dissociation”), the member does not necessarily lose all of their rights and interests. Although they lose the right to participate in the LLC’s activities and no longer have fiduciary obligations, they are still entitled to receive distributions. In some states, including New York, however, the court may order the sale of a dissociated member’s economic interest in the LLC.

Dissolving the LLC

Rather than petitioning the court to remove a member from an LLC, members can petition the court to dissolve the LLC. An LLC must be dissolved in order for it to be terminated, i.e., for it to legally cease to exist. The LLC cannot enter into new contracts, although it may be required to satisfy existing agreements. Its creditors must also be paid and its assets must be distributed among members. Members of the LLC who wish to continue working together are free to begin a new LLC and operate under the terms they establish.

Final Steps
Once an LLC member has left the company, whether voluntarily or involuntarily, the company’s records should be updated to reflect the change. This may involve filing documents with the state where the company operates, as well as notifying financial institutions, insurance companies, investors, the Internal Revenue Service, and other stakeholders. If the existing operating agreement does not adequately address involuntary removal of a member, it should be updated to address this issue.

If you are in the process of removing a member from your LLC, schedule a consultation with our team. We can guide you in crafting a removal plan that helps you effect this change as smoothly as possible.

Make Gifts That Your Family Will Love but the IRS Won’t Tax

Do not let constant political and financial speculation prevent you from making tax-free annual exclusion, medical-payment, and educational gifts to or for the benefit of your loved ones.

Make Annual Exclusion Gifts 

Annual exclusion gifts are transfers of money or property in an amount or value that does not exceed the annual gift tax exclusion. In 2021, the annual gift tax exclusion is $15,000 per recipient. Therefore, this year you can give up to $15,000 per person to as many individuals as you choose without having to file a federal gift tax return (Internal Revenue Service Form 709). In other words, the Internal Revenue Service (IRS) does not consider gifts that are equal to or less than the annual exclusion amount to be taxable gifts at all. You may need to file a gift tax return if your gifts either exceed or do not qualify for the annual exclusion amount. Your estate planning attorney or accountant can guide you.

Married couples can take double advantage of the annual exclusion and gift $30,000 in 2021. However, in some situations, a couple may still need to file a gift tax return if the amount of the gift is to be split between them. They should consult with their estate planning attorney or accountant to be sure.

 Make Payments That Qualify for the Medical Exclusion

 A payment that qualifies for the medical exclusion is another type of transfer that the IRS does not consider to be a gift for gift tax purposes. Payments qualify for this exclusion if they are made on behalf of an individual to a person or an institution that provided medical care or medical insurance to the individual. In general, medical expenses that qualify for this exclusion are the same ones that are deductible for federal income tax purposes. Therefore, in 2021, you can pay the cost of your grandchild’s emergency appendectomy and, in the same year, give your grandchild an additional $15,000 without having to file any gift tax returns. 

 To qualify for the medical exclusion, a payment must meet two critical requirements.

• You must make payment directly to the person or institution that provided the medical care or medical insurance. If you give the money to the individual who received the medical care or insurance benefit, even with explicit instructions that it be used to pay for the medical care, your payment will be considered a gift to the individual and not payment of a qualified medical expense.
• The amount paid must not have been reimbursed by the individual’s insurance company. Any reimbursed amount is not eligible for the unlimited medical exclusion from the gift tax, and that amount will be treated as having been made on the date the individual received the reimbursement.

Make Payments That Qualify for the Educational Exclusion

 A payment that qualifies for the educational exclusion is another type of transfer that the IRS does not consider to be a gift for gift tax purposes. For example, in 2021, in addition to paying for your grandchild’s emergency appendectomy and giving them $15,000 (see above), you can pay their college tuition costs without having to file any gift tax returns or pay any gift tax. 

To qualify for the educational exclusion, a payment must meet two critical requirements.

• You must make payment directly to the institution providing the education rather than to the individual receiving the education.
• Your payment must be for tuition only, not for books, supplies, room and board, or other types of education-related expenses.

If your payment fails to meet either of these requirements, it will be considered a gift to the individual.

 Giving gifts can be an effective way to provide financial assistance to your family members. If you have any questions about how to make gifts of money or property to your family without also giving money to the IRS, please contact our office. We are available for in-person and virtual consultations.