Naughty and Nice: Tips for Post-Holiday Estate Planning

The holidays are over.  The champagne flutes and decorations are stowed away, and the prospect of spending hours feasting and reminiscing with your nearest and dearest at is again at a safe distance in the future.  

The holiday season offers an opportunity to reflect on the people in your life and how you may want to acknowledge the impact they have had on you, whether positive or negative.  One way to do this is to ensure that your estate plan adequately reflects your feelings.

The Naughty

When people—especially close relatives—really get under your skin, threatening to disinherit them can be very satisfying.  But this is not always as straightforward as it sounds.  Assuming your intention outlasts the heat of the moment, there are a few things to keep in mind.  

Spouses

It is quite difficult to disinherit a still-wedded spouse.  Most states provide for surviving spouses to receive a statutory minimum elective share of their deceased spouse’s estate.  In New York, surviving spouses are entitled to the larger of $50,000 or one third of the deceased spouse’s net estate.  This includes both the probate estate and all testamentary substitutes, so you cannot use trust structures to shelter assets from a spouse.  Some form of waiver from the spouse, acknowledging that they will receive less than the legal minimum, is required.  Prenuptial and postnuptial agreements often fulfill this purpose. 

Children

It is entirely possible to disinherit children.  However, in the absence of any governing document—like a will or trust—most states recognize children as legal heirs entitled to a portion of the estate.  After the bills are paid and the spouse’s share distributed, the remainder is divided equally among all siblings (legally known as the decedent’s “issue”).  If there is no spouse, then the net estate is divided among the siblings. Wills and trusts can be used to change the proportions and make specific bequests. 

Guarding Against Litigation

The unfortunate fact is that anybody with standing can litigate about anything.  Legal heirs—surviving spouses and children—have standing to contest an estate in probate.   While court actions are unpredictable, here are a few things you can do to make it less likely that your wishes will be overturned:

• Make your significant bequests through trusts.  While trusts are not infallible, they are typically more difficult to pierce or set aside than wills. In New York, a will does not have legal validity—nor does the executor have the legal right to act—until the court process concludes and the county surrogate grants the will probate.  Trusts, on the other hand, function in the opposite manner and are presumed valid if they are properly executed during a grantor’s lifetime.  Since the office of trustee cannot die, there is no gap in the legal right to act for the trustee. Trusts are also not typically subject to court supervision, with limited exceptions.    
• Be meticulous about proving your mental state.  One of the most common legal reasons for altering or setting aside estate plans is credible concern about the mental capacity of the decedent at the time. An independent evaluation of capacity by a licensed medical professional can be key to overcoming a potential contest.    
• Make a simultaneous gift to the person you wish to disinherit. It seems counterintuitive, but if you make a gift to someone who would otherwise be one of your legal heirs at the same time you finalize the estate documents that cut them out, it makes it harder for them to claim that you were under the influence of another person, lacked capacity to make such an estate plan or acted as a result of some fraud. 
• Put the principal out of reach.  An added benefit of certain trust structures is that they can frequently be used to limit legal heirs to interest-only access to their inheritance for life.  The principal is usually reserved for another generation or for a designated charity.
• Leverage state laws when they work in your favor.  Some states have laws that attempt to dissuade litigation against estates.  In Pennsylvania, for example, a law against “intentional interference with an inheritance” allows the designated heirs of an estate to sue anyone who tries to upset a well-settled estate plan.

The Nice

How can you use your estate plan to provide some enduring benefit to those you care about?  There are a number of strategies that look beyond simple bequests.  Here are three considerations:

• Plan with purpose.  It’s nice to leave money to people you care about.  It’s even nicer to help them achieve their dreams.  Imagine that you know someone with a special talent.  With a carefully constructed trust, you can—even during your lifetime—become their sponsor and designate funds for specific educational and related purposes.
• Take the long view.  Trust structures can last beyond a single generation—typically up to 121 years—so it’s possible to set something up that will benefit your grandchildren and even leave something after that.
• Give to charity.  Many people want to give to charity, but don’t always take the time to consider when or how to do so.  Charitable giving should be done strategically and integrated with both your estate plan and your tax planning:
  • CRAT or CRUT (Charitable Remainder Annuity Trusts or Unitrusts):  allow your heirs to receive income during their lifetimes and provide for ultimate distribution to charitable remaindermen. Appreciated assets:  there are a number of strategies for donating appreciated assets and saving yourself from the capital gains tax hit.  Consult your accountant and your estate planning attorney to discuss your options. 
  • Everyday giving:  It’s hard to walk down the street these days without being accosted by charity muggers.  Resist the temptation to give to them and find a reputable charity with which you can develop a longer term relationship.  Charitable giving is one of the few deductions the residents of higher tax states, such as New York, can continue to leverage to reduce their tax bills under the “Tax Cuts and Jobs Act of 2017.”  
  • Annual exclusion amounts:  Everyone can give gift tax free up to 15k per person, per year, with zero reporting requirements. This is the annual exclusion amount and its unlimited in the number of people you can give to. The only limitation is that you cannot give more than 15k to the same person in a calendar year without reporting the gift. So feel free to give, generously, while spending down an otherwise taxable estate.  

The post holiday season presents a good opportunity to act on your feelings about family members who may—or may not—merit your beneficence. The truth is that it’s never too early to consider your estate plan and only in one inevitable circumstance is it truly entirely too late.  At Holm & O’Hara LLP, we welcome the opportunity to discuss your objectives with you and help you put in place the flexible, creative legal structures most likely to help you achieve them.  

Posted on January 23rd, 2019 in News Items, Newsletter, Trusts & Estates