it’s very important to have an estate plan when you are in a blended family

Dear Len & Rosie,

My father passed away in December without a will. He had been married to his second wife for almost seven years. The house he was living in belonged to his wife long before they married but he did have a retirement account, and some other small assets. What happens to his assets now? Does everything go to his wife or are his three adult children entitled to anything? His wife has always been very nice, but this is an awkward subject and none of his children want to cause a problem.

Wendy

Dear Wendy,

Anything your father held in joint tenancy with others will pass to the surviving joint tenants. Any accounts with pay-on-death beneficiaries, such as your father’s life insurance (if any) and his retirement accounts, shall avoid probate altogether and will go to those beneficiaries your father designated. Given that it was a second marriage, there’s a fairly good chance that your father may have kept his children on as designated beneficiaries.

If your father owned any assets in his name alone, without joint tenants or pay-on-death beneficiaries, then those assets are in your father’s probate estate. Because your father had no will, his probate estate will pass by intestate succession, the law about who gets what when someone dies without a will. Any community property he owned will pass to his wife.

If your father had only one child, his wife and child would divide his separate property equally between them. But since your father had three children, his wife inherits one-third of the separate property and you and your siblings will divide the remaining two-thirds of the separate property among them.

There may be problems. There could be a dispute between you, your siblings and your stepmother  over what assets in the estate are community property going 100% to her, and what assets are separate property shared by all four of you. If your father was already retired when he married your stepmother, then his estate should be entirely separate property, but if he was still employed, there is going to be some community property and some separate property. It can turn into a mess.

The sticking point may be your father’s personal possessions, because they have no title. It wouldn’t be so nice to take away your step-mother’s dining room set, even if you want it to stay in the family. What you should do is to talk to her about those items of your father’s that you would like to keep for yourself, and try to work it out. Just remember that she was married to your father and has her own personal interest in any items of sentimental value.

As a rule, it’s very important to have an estate plan when you are in a blended family in which either or both spouses may have children from prior relationships. Your father didn’t bother. Hopefully this won’t cause you problems.

Len & Rosie

Estate Tax as of 2019

Estate Tax as of 2019. Most married couples today do not need an A/B trust any longer to avoid the estate tax and should consider updating their trusts to remove the mandatory A/B split provisions.

Dear Len & Rosie,

My father died ten years ago. My mother is still alive and she has an A/B trust. One of my brothers borrowed a lot of money from Mom and Dad and has never paid it back. Mom wants to change the trust to leave her home to only three of her four children. Mom’s lawyer says she cannot do this. Can you help?

Nena

Dear Nena,

People get confused by what an A/B trust means. You should think of the “A” as standing for the “above-ground” or surviving spouse and the “B” as standing for the “below-ground” or deceased spouse. Your parents created an A/B trust to avoid probate and reduce their estate tax liability. On your father’s death, all or part of his interest in the trust should have been transferred to the B trust, commonly referred to as the “Bypass” or “Exemption” trust.

Because the assets of the B trust are not really owned by your mother, they will not be subject to estate tax upon her death. For the B trust to avoid estate tax, it must be an irrevocable trust, and your mother’s right to withdraw trust principal must be restricted. Because this trust is irrevocable, your mother cannot change who gets to inherit the B trust on her death, unless the trust gave your mother a “power of appointment” that she could exercise by creating a new will that directs the trustee to distribute the B trust the way she wants. Most B trusts do not include powers of appointment, because the second reason couples create A/B trusts (besides estate tax avoidance) is to prevent the surviving spouse from disinheriting the deceased spouse’s chosen beneficiaries.

This does not mean your mother can do nothing. While she cannot amend the B trust she can do whatever she wants with the A trust. If she did not complete the administrative process of dividing the trust into its A and B shares after her husband’s death, she could do the A/B split now may be able to allocate the home entirely into the A trust (usually called the “Survivor’s Trust”). Since your mother can fully amend the A trust, she can leave it to three of her four children the way she wants. The B trust may also give her a limited power to invade trust principal, so your mother may be able to move part of the B trust into the A trust on an annual basis.

What your mother ought to do is to review the trust with a trusts and estates attorney to objectively review the trust and explain to your mother exactly what she can do to change the trust to suit her wishes.

Your letter raises another very important point. As of January 1, 2019, the amount a person may pass to their loved ones free of estate tax  $11,400,000, with an automatic inflation adjustment. In addition, a surviving spouse can take a deceased spouse’s exemption and pass as much as $22,800,000 fee of estate tax. Most married couples today do not need an A/B trust any longer to avoid the estate tax and should consider updating their trusts to remove the mandatory A/B split provisions.


Len & Rosie