Tag Archives: Trusts

Separate Assets, Joint Problems

Image

Some married couples enjoy living together while keeping their financial assets separate. Separate ownership of assets can be advantageous in some instances, but oftentimes loving couples misunderstand the results of holding separate assets.  The Wall Street Journal recently highlighted four potential pitfalls for couples maintaining separate accounts:

  1. The assets are not necessarily separate under Nevada law.

Simply having your name on an account does not mean the account is yours alone.  Under Nevada law, pursuant to community property principles, all of your earnings and wages after marriage are the property of both parties.   This is true even if you have your paycheck deposited into a separate account.

Nevada inheritance laws can surprise couples. If you die without a will and leave a surviving spouse, no children and surviving parents, your parents are entitled to a portion of your estate.  Many spouses intend for their entire estate to go to a surviving spouse.  However, unless that desire is set forth in a will or trust, the state may direct otherwise.

  1. Separate accounts most often mean lack of communication.

Communication between spouses is critical.  Many spouses have separate retirement accounts and manage those accounts in isolation.  This isolated planning can undermine the couple’s financial objectives and their combined risk tolerance.  Regularly, I meet with clients where both spouses are unaware of accounts or policies that one spouse possesses.  These omissions could cause the account proceeds to go missing or remain unclaimed for long periods of time.

In addition, holding similar investments in two separate accounts can be more costly.  Combining the separate holdings may result in lower advisory fees.

  1. Separately-owned property may be at greater risk in bankruptcy or a lawsuit.

Nevada has very liberal exemptions for bankruptcy purposes.  These protections can be utilized best by conferring with an attorney who focuses on asset protection planning.

Joint ownership can make your assets less appealing to creditors.  Creditors loathe joint assets in which they will hold only a one-half interest.  Separately-owned property is less-protected from creditors.  The home is the primary asset to hold jointly or through a trust.

  1. Separate accounts are more difficult to administer.

The death of a loved one causes plenty of heartache.  Maintaining separate account causes needless headaches too.  The time delay in accessing separately-owned accounts can lead to draining financial stress.  Many financial institutions demand formal court orders before allowing access to financial accounts, even when such orders are not necessary.  At a minimum, couples should maintain a joint checking or savings account to make sure the day-to-day expenses can be satisfied.

Careful with Deathbed Planning

As death looms, people become much more focused on arranging their affairs.  Even those with few assets will develop a laser-like focus on leaving a suitable legacy.  There are pitfalls to death-bed estate plans or revisions to existing plans.  In a perfect world, an estate plan is constructed carefully after much thought and revisions are made regularly.  However, lawyers and financial advisors are often solicited to make changes when a client fears an imminent demise.

Image

Recently, I helped clients update their revocable living trust after the wife was diagnosed with terminal cancer.  They created their trust 20 years ago and had not made any updates since that time.  In the intervening years, one of their five children had passed away and numerous grandchildren had been born.  The prior version of their trust provided that if one of their children predeceased them, the surviving children would receive the estate equally.  The clients instead wanted the trust share that would have passed to the deceased child to be held in trust for the deceased child’s children or the clients’ grandchildren.  If nothing had been done, the clients would have disinherited their grandchildren.

When making near-death amendments or creating new estate plans, advisors and clients must consider the income tax ramifications. A common mistake is to transfer a home or real property to children or grandchildren prior to death.  Such a transfer results in loss of the step-up in basis of the property to the date-of-death fair market value.  The child or grandchild receiving the property steps into the shoes of the transferring parent or grandparent and takes the transferor’s basis in the property.  Usually, the basis is much lower than the present day fair market value.  When the child or grandchild sells the property, he or she will incur a much higher capital gains tax than necessary.

Finally, to avoid a contest, a medical or mental competency examination can assure that the client is competent to make the change.  These exams can be administered by the client’s regular physician.  By using their normal physician, the client will feel more at ease and the physician will already have a history with the client and be able to differentiate whether the client lacks capacity.

Death-bed planning can be done effectively but there are numerous considerations and precautions to follow.

Updating Your Estate Planning after You Get Married

ImageMy husband and I were married this past May 25, so today we are celebrating our sixth mensiversary (or, perhaps our semi-anniversary?). Our marriage has truly been a great blessing for both of us—doubly so because we waited until later in life to find each other. As a probate and estate lawyer, I’d like to report that as soon as we got married, we set up a trust and put all our assets in it, so that we’re perfectly prepared for the day when death does us part. However…it seems that life is a bit messier and more complicated than that, even for lawyers in love. We’ve each taken the step of updating our wills, and many of our assets are now jointly owned; but truth be told, we have a way to go before we are done combining our assets.

How does marriage change your estate planning needs? I’ve had opportunity to reflect on this recently not only because of my own life, but also because of some of the cases I’ve worked on. In one case, a couple cohabited for several years before the man died. He left no will, so pursuant to intestate succession, his child will inherit his estate. However, the former girlfriend has made a claim against his estate, claiming that they held their property in a kind of quasi-community property agreement. Would it have made a difference if they’d been married?

Yes and no. Simply getting married doesn’t mean your property is jointly held or will go to your spouse upon your death. Nevada is a community property state, meaning that money earned or assets purchased during marriage are presumed to be community property in which each spouse has fifty percent interest. Upon death, the surviving spouse inherits the other half of the community property, unless the deceased spouse provides otherwise in his or her will. Property that you owned before marriage is separate property and remains so unless you make a gift of it to the community of your marriage. Your spouse may inherit a portion of your separate property, but a portion will go to your natural relatives (children from previous marriage, parents, siblings)—again, unless you provide otherwise by will. Things can get very complicated if your assets become mixed in character; for example, if you have a house partially paid off that you bring into the marriage, and you finish paying it off while married. The house is separate to the degree you paid for it before marriage and community property to the degree that your income during your marriage was used to pay the mortgage.

My husband and I have not been married previously and neither of us has any children. If we have no children together, we will need to make provision for how our assets will be distributed upon the death of the second spouse—it will need to go to charities we both agree on, or equally to our surviving relatives. In the case of people who have children from a previous marriage or relationship, things are more complicated. You need to provide for your children while taking into consideration the needs of your new spouse.

Don’t put off your estate planning—consider it an act of love for your family, who doesn’t want to be left with a mess. Contact Woodburn and Wedge for expert advice and assistance with estate planning, trust and probate matters.