Leaving insurance policy behind to drug addicted son.

Dear Len & Rosie,

I have a $100,000 life insurance policy. I also have a twenty-four-year-old son from a previous marriage. He’s in drug rehab. Originally my son was the beneficiary of the policy, but since I found out about his drug use I thought it best to leave it to my wife. She has agreed to dole out money to my son as he needs it.

If my wife and I pass away tomorrow who will get my life insurance? Is there some document I can draw up that would allow my son to benefit from the insurance without being able to spend it all on drugs?

Barry

Dear Barry,

If your wife dies first, your $100,000 insurance policy will pass to the alternate beneficiaries that you named on the insurance company beneficiary form. If you have not named any alternate beneficiaries, then most policies will pay out to your probate estate. If that happens, all or part of the money will probably wind up in your son’s veins.

If you are survived by your wife and she gets the money, she may not leave it to your son when she dies. The money will be hers and she will have the right to leave it to anyone she wants upon her death. There’s also no guarantee that she will not become frustrated with dealing with your son and simply keep the money for herself. Remember, he’s not her son, and she may not be willing to be his keeper for the rest of her life. Clearly, you need some estate planning.

You should create a revocable trust, and name it as the primary beneficiary of your life insurance policy. A trust would protect your son’s inheritance, even if you are survived by your wife. Your wife can be the trustee after your death, and she can manage the money for your son’s benefit - spending money on him as he needs it. You can also name successor trustees who will take over if your wife is unable or unwilling to do the job.

A trust like this can be flexible. You can give the trustee discretion to make or withhold payments directly to your son, or spend money for his benefit, depending on your son’s condition. She can be empowered to withhold payments if he’s not clean, and even require him to pass a drug screening test before he receives a distribution. You can even allow the trustee to end the trust and give your son his inheritance outright, if he cleans up his life. If your son is on public benefits, your trust can give him his inheritance within a special needs trust that will not cause him to lose his eligibility for Medi-Cal.

A better alternative may be to leave your son his inheritance within a dynasty trust that will provide better protection against your son’s creditors. You have a lot more options than giving the money to your wife and hoping for the best. You should see a trusts and estates attorney and figure out the best way to provide for your son while also protecting him from himself.

Len & Rosie

What the new tax law means for A/B Trusts

Dear Readers:

Yesterday, as we write this, the United States Congress passed a new tax law that includes a significant change in the Federal Gift & Estate Tax. In 2017 each person was able to pass on, through lifetime gifting or by inheritance, up to $5,490,000. Yesterday, that amount doubled.

Under the new tax bill, passed by Congress and likely to be signed into law at the start of the new year, the Federal Gift & Estate Tax Unified Credit for 2018 will increase to allow the transfer of up to $11,200,000 without the imposition of either gift tax or estate tax. On top of that, the 2013 tax law allowing for the transfer of a deceased spouse’s Unified Credit to the surviving spouse remains. This means that a married couple will now be able to pass on $22,400,000 to their children and other loved ones.

This won’t mean much to most people. What it does mean is that in almost all cases, married couples with A/B trusts created in the 1990's and 2000's will probably want to change them so that the surviving spouse will no longer have to divide the trust upon the first death, with the deceased spouse’s portion of the trust (up to $11,200,000) being transferred into an irrevocable trust with its own taxpayer ID number (EIN), and its own annual tax returns.

Updating a trust to remove it’s A/B split provisions will make it much easier to administer upon the death of the first spouse to die. Without an A/B split, the surviving spouse will be in unquestionable control of the family’s assets. If, however, a trust is divided in an A/B split, the “B” trust will have designated beneficiaries who will have rights upon the first death even if they do not inherit upon the second death.

At this point, there is only one reason to have an A/B trust - blended families with children from prior relationships. In many modern families, the risk exists that a surviving spouse will act to disinherit the children or other chosen beneficiaries of the deceased spouse. If you fear that happening, then an A/B trust may be appropriate for you. If that is not a concern to you, you will be better off amending your trust so that upon the first death, everything passes to the surviving spouse.

One important point - if upon the first death, the surviving spouse wants to transfer the deceased spouse’s Unified Credit to himself or herself, it is necessary to file and prepare a Federal Estate Tax Return (IRS Form 706) for the deceased spouse.  The deadline for this is nine months after the date of death, with an automatic extension of six months if applied for. While in some circumstances it may be possible to file a 706 late, but that’s not anything you’d ever want to rely on - the stakes are too high.

Our recommendation to you is that in the new year, you should make a resolution to review and update your estate plan, or create one if you don’t have one already. Many people, single persons and married couples alike, have trusts and wills created decades ago that they do not fully understand. It’s a very good idea to at least review everything and know what your estate plan means instead of assuming that you do.