Wed, 27 August 2008
A number of years ago, I received a call from a potential client who had the following tale to tell. The woman’s husband had died leaving a will and some assets, one of which was a 401k. The marriage was a second for her husband, who had 2 sons from his first marriage. While he was single he had changed the beneficiaries of his life insurance and 401k plan to his sons and had redone his will.
After his second marriage, the husband and his new wife bought a new home together. They asked their real estate attorney, who handled the purchase for them, to draft new wills as well. The husband listed for his attorney the assets he wanted to pass to his sons and which to his new wife. The 401k he wanted to go to his wife. Unfortunately, the attorney didn’t understand the difference between probate and non-probate assets. So when he wrote a will that specifically left the 401k to the wife, he didn’t know that the will would have no effect on this asset because the beneficiary designations on file with the custodian of the 401k plan still listed the sons from the first marriage.
When the husband died, the wife received a big shock when she was told that she had no interest in the $500,000 account. That’s because a will doesn’t automatically control the distribution of all your assets. Contract property such as life insurance, annuities and retirement accounts pass in accordance with whom you have designated on the beneficiary forms completed and filed with the life insurance and annuity companies or retirement account custodians. Other types of property pass by operation of law such as joint accounts with right of survivorship or real estate that is owned by husband and wife. When one owner dies the property automatically passes to the surviving owner. It does not matter what the will says.
That is what happened in our story. The 401k is contract property so it passed according to the beneficiary designation form on file, not by the will. The wife tried unsuccessfully to get a court order directing the funds be paid to her. She did recover about half of the account balance, filing a malpractice action against the attorney who drafted her husband’s will, for failing to recognize that listing the 401k account in the will was meaningless.
The moral of the story is that although many people think drafting a will is simple and often undertake to do it themselves or ask the attorney who did other work for them to handle this task as well, they may miss important steps that must be taken that can save a lot of heartache and money.
Category:Probate -- posted at: 12:00pm EST
Tue, 24 June 2008
I had a call not too long ago from a woman who was concerned about avoiding probate and paying estate taxes upon her death. She had figured out, or so she thought, how she could solve both problems and wanted confirmation from me that it would work. She had written out a check to her son leaving the dollar amount blank. She then instructed her son that upon her death, or if her passing was imminent, that he should write in the dollar amount and deposit the check in his account.
Of course, trying to outsmart the government in this way won't work. Firstly, going through probate will still be necessary as long as there are any assets that can only be accessed by appointing an executor. In many states probate is not something to fear anyway. Usually it is an inexpensive process that can be handled with little or no court involvement. In those states where probate is messy and expensive, however, this woman's solution still won't work as long as she has even a single asset that requires the appointment of an executor. Often, refund checks payable to the person who died will necessitate the appointment.
As for estate taxes, the government is smarter than that. In determining the size of one's estate all assets transferred within 3 years of one's death are included as part of the estate for tax purposes. This will specifically prevent the strategy of transferring all of one's assets before death to eliminate the estate tax. Now, you might be thinking that the estate tax is not something to worry about since the federal estate tax only kicks in on estates over $2,000,000 (and will go up to $3,500,000 in 2009). However, most states have their own estate tax as well and the amount exempt from tax is much lower. In New Jersey, for instance, the estate tax is owed on estates greater than $675,000 and in New York on estates greater than $1,000,000.
There are other ways this woman may be able to minimize taxes on her estate but writing blank checks with instructions to cash them when she dies is not one of them. The government is much too smart for that.
Category:Probate -- posted at: 2:46am EST