November 13

Avoid Accidentally Cutting Someone out of your Will — Ademption and Abatement Explained

Some wills lump together all property in the estate, and simply divide it amongst the beneficiaries.  An example would be a clause in a will saying, “I give all my property, real and personal, to my two children, to be divided in equal shares, per stripes.”  In contrast, other wills break out specific pieces of property, which is known as making specific devises.  For example, “I give my 2014 Ford Fusion to my son, John; I give my house at 123 Main St, Naperville, IL, to my daughter, Erica.”  However, making specific devises carries risks, especially to those who do not frequently review their estate plans:

The first major risk associated with making specific devises arises if the property referenced in the will no longer exists at your death.  Imagine that years after you write your will, you sell your Ford Fusion or lose your wedding ring.   In those cases, the doctrine of ademption could apply, depending on state law.  Ademption means that the property named in the will is no longer in the possession of your estate, so the gift fails.  In other words, a beneficiary named in your will may be entirely cut out because of a legal doctrine.  The beneficiary who was cut out may end up arguing that you would have intended him or her to receive a substitute piece of property, even though the original gift failed.  Imagine the family strife and litigation such a fight could cause.

A second risk associated with making specific devises arises if you end up dying with less overall wealth than you anticipated.  Let’s say when you write your will, you have $1 million in savings.  Your will makes specific devises of $10,000 to the humane society, $10,000 to your best friend Michael, and the rest (the residuary estate) to your children.  At the time you draft your will, you expect your children will receive the remaining $980,000 of your estate, the vast majority of your wealth.

Imagine that due to some expensive medical condition, you die with only $20,000 in your estate.  Under the doctrine of abatement, state law may presume that the highest priority in your estate plan was making specific devises ($10,000 to the humane society, and $10,000 to your friend Michael).  The residuary devise (all remaining property) to your children is secondary to the specific devises.  So, even though you may have intended for your children to receive $980,000, they may end up receiving nothing because they are lower on the priority list than the non-relatives who received specific devises.  Again, the beneficiaries who are shortchanged may feel slighted, or commence expensive litigation against other family members arguing your intent was not met.

An experienced estate planning attorney can help you avoid ademption or abatement problems in your estate.

Published by Ian Holzhauer, Esq. of Nagle Obarski PC in Naperville, IL.  
Note:  The information above is not legal advice and is not the basis of an attorney-client relationship.  If you need assistance, you can hire an attorney to assist you with your individual legal needs. 

November 12

Controversial Estate Plans: Can you Legally Encourage Divorce? Disinherit a Spouse? Make Religious Restrictions?

“Testamentary freedom” is a terms lawyers use to describe a person’s freedom to dispose of his or her own property at death.  While American law generally supports the idea of testamentary freedom, this power is not limitless.  In this article, I will discuss controversial estate planning provisions, such as provisions that disinherit spouses, encourage divorce, or make religious restrictions.

A prime example of the limits on testamentary freedom arises in situations where one spouse disinherits the other spouse in a will.  In a world of unlimited testamentary freedom, a wealthy businessperson could disinherit his or her spouse and leave that person destitute and on public assistance for the rest of his or her life.  To avoid this, states have created spousal elective share laws, giving the surviving spouse the right to a set percentage of the estate, no matter what the estate plan says.  For obvious reasons, state legislatures have reasoned that “public policy” favors ensuring that surviving spouses (who are often elderly) are provided for.

Most people do not take issue with spousal elective share laws.  However, let’s discuss some more controversial will provisions.  Imagine that you really dislike your son-in-law, and want to encourage your daughter to divorce him.  You may have excellent reasons.  However, is it advisable to put a provision in your will or trust stating that your daughter will be disinherited if she does not divorce him within a certain amount of time after your death?

Don’t count on a will provision that actively encourages divorce being upheld in court — many states consider anti-marriage provisions to be highly suspect, or automatically void against public policy.  In Illinois, there has historically been a distinction between conditioning an inheritance on the completion of a divorce that is already in progress (possibly legal), and requiring a potential beneficiary to begin divorce proceedings that were not already happening (void against public policy).   However, a provision that in any way encourages divorce is likely to spark expensive probate litigation after your death, and the state of the law in the future is never guaranteed.

Finally, let’s turn to an issue the Illinois Supreme Court wrestled with in 2009:  Will provisions that disinherit family members that marry outside the faith.  In the case of In re Estate of Max Feinberg, the court dealt with a will clause that sought to disinherit any descendant that married outside the Jewish faith.  A provision of this nature pits testamentary freedom against other rights, such as religious freedom and freedom to marry.

Ultimately, the Feinberg court did not invalidate the religious restriction (overturning a lower court decision), finding that testamentary freedom prevailed.  But it limited its finding essentially to the facts of this case.  In non-legalese, this means the court ruled a certain way in this specific case, but was careful to avoid making broad pronouncements about the state of the law regarding religious restrictions in general.  I would not read too much into this one result.

As this article from the American College of Trust and Estate Counsel notes, the Feinberg litigation was so expensive for the family, that there was no longer enough money left in the estate for the religious restriction clause to even matter.  Tread carefully when putting any type of restriction in your estate plan that comes close to violating public policy, or your estate may also end up in unproductive litigation.

Published by Ian Holzhauer, Esq. of Nagle Obarski PC in Naperville, IL.   
Note:  The information above is not legal advice and is not the basis of an attorney-client relationship.  If you need assistance, you can hire an attorney to assist you with your individual legal needs. 

November 10

Estate Planning Advice for Military Members and Veterans

If you are currently serving in the Armed Forces or are a dependent or retiree, you are entitled to free legal assistance services at an installation legal office.  In my seven years as a JAG, I saw hundreds of legal assistance clients from all over the country.  By far my most most common legal assistance service was estate planning, especially for airmen deploying to a combat zone.

JAGs must be licensed to practice law in at least one US jurisdiction (Illinois in my case).  In the civilian world, only an attorney licensed in your state can give you legal advice.  However, a special law, 10 USC 1044, allows JAGs to provide worldwide legal assistance, and mandates that states give full effect to the wills, healthcare directives, powers of attorney, and notary services we provide.

Most of my military estate plans were for couples, and I would commonly provide eight to ten documents at the end of an appointment — everything from wills to trusts to community property arrangements, durable powers of attorney, living wills, and advance funeral directives.  JAGs are happy to provide these services at no charge, saving our fellow military members thousands of dollars in legal fees.

Additionally, note that JAGs may be intimately familiar with common military estate planning issues, like owning property in multiple states, having domicile outside one’s state of residence, and having one’s family spread in jurisdictions across the country or the world.  JAGs also commonly insert clauses in estate planning documents designed to express military members’ wishes regarding burial in VA cemeteries, burial with full military honors, etc.

One note of caution:  I have observed over the years that deploying military members may be quick to request a general power of attorney from the legal office.  A general power of attorney grants the appointee the legal power to make transactions on behalf of the grantor.  If the document is drafted to be “durable,” it continues to remain in effect even if the grantor becomes incapacitated due to a combat injury or other medical condition.  I understand people’s reasoning for wanting these documents:  Once a military member deploys half way across the world, the last thing he or she wants to be worrying about is taking care of day-to-day financial issues back home.

However, be aware that a general power of attorney can be used to empty a bank account, sign up for new accounts, sell a car, etc.  Giving this kind of power to the wrong person can destroy your finances, your career, and worse.  A JAG may be able to direct you to more appropriate tools to accomplish your objectives, like a narrowly-tailored special power of attorney (or no power of attorney at all).

Finally, note that you are not limited to legal assistance services from just your branch.  During my years of service, I helped Airmen, Soldiers, Sailors, Marines, dependents, and veterans alike.  A JAG from your nearest legal office can assist you with your estate plan.

Some useful links are below:
Air Force Legal Assistance
Army Legal Assistance
Navy-Marine Corps Legal Services
Coast Guard Legal Assistance
American Bar Association Pro Bono Resources for Veterans

Published by Ian Holzhauer, Esq. of Nagle Obarski PC in Naperville, IL.  
Note:  The information above is not legal advice and is not the basis of an attorney-client relationship.  If you need assistance, you can hire an attorney to assist you with your individual legal needs. 

November 6

Prepare for your Attorney Meeting

My wife and I will be seeing an attorney tomorrow to update our estate plan.  In theory we could prepare the plan ourselves, but there is an old adage that, “an attorney who represents him/herself has a fool for a client.”  Knowing this, we value the outside perspective of a different estate planner taking a fresh look at our situation.

I thought this would be a good time to cover my next blog topic:  How to prepare for your first meeting with your estate planning attorney.  Some basic tips follow:

First, obtain detailed written information about everyone you expect to name in your estate plan.  Make a list of everyone who you might want to raise your kids, receive money or property, serve as your executor or trustee, etc.   You should know how to correctly spell each of their full names, and have their addresses and phone numbers.  This may sound basic, but just yesterday, I realized I did not know the middle initial of the person we plan to name as the alternate executor of our estate, and could not remember if he was a “Jr.” or “III.”  Imagine sitting in an attorney’s office, spending time on your cell phone scrambling to reach friends to get this kind of information…it happens all the time.  Also don’t forget to bring information about your primary care physician for advanced medical directives.

Second, do a thorough scrub of your records to find every single asset you own, and anything you might come to own through inheritance or other means.  Bring paper copies of these records to your attorney’s office, so you can properly reference these assets in your estate plan.  Recently, a relative of mine discovered her family had purchased oil rights to some rural property in the early 20th Century.  This property was almost lost to the sands of time, as it was not referenced in an estate plan.  By properly referencing your property, you can ensure it actually passes to your loved ones.

Finally, even though “the clock” may be running (if your attorney bills by the hour), I would not recommend rushing through your meeting.  Of course, spend the time productively, not on administrative matters (see above).  However, I would not rush through the “get to know you” phase of the meeting.  As an attorney, I have been amazed by how different each family is, and how unique the dynamics of every relationship can be.  A big part of good lawyering is building a relationship with your client.  By letting your attorney know a little bit about yourself, your background, how you met your significant other, and even your hobbies, values, etc, you establish a relationship where your attorney knows the right questions to ask.  Just as importantly, you become more comfortable sharing important details with your attorney.  Hopefully this gives you, the client, a sense of understanding and ownership of the end product, your estate plan.

Published by the Law Office of Ian Holzhauer in Naperville, IL.  
Note:  The information above is not legal advice and is not the basis of an attorney-client relationship.  If you need assistance, you can hire an attorney to assist you with your individual legal needs. 

November 3

Probate Avoidance Topic #5: Life Insurance

Courtesy of NARA

This is topic #5 in this series on strategies to avoid the court-supervised probate process.  Previously in this series, I have provided an overview of the probate process, discussed how to avoid probate by using a living trust, explained how to use joint ownership and death beneficiaries, and most recently discussed lifetime giving as a probate-avoidance strategy.

Today’s post will describe life insurance, one of the oldest, most flexible, and widely-used estate planning tools.  Unfortunately, many internet resources discussing life insurance and estate planning have a laser-like focus on one topic:  Using an irrevocable life insurance trust to avoid federal estate tax.  However, federal estate tax only applies to estates above $5.34 million this year ($10.68 million per couple).  For many families  below this threshold, these internet resources may be confusing and irrelevant.  This post explains some of the more fundamental aspects of life insurance as an estate planning tool:

Life Insurance Basics

The biggest benefit of life insurance is that you can adjust your coverage to your family’s needs over time.  For example, I have a spouse and three young children.  If I were to die today, my family would need enough money for many years of food, housing, clothing, college expenses, etc.  At this point in my life, a large policy makes sense.  As the years go by, and my children begin their own careers, I can gradually decrease the value of my insurance policy and reallocate the money I was spending on life insurance to something else.

Think of a life insurance policy as a well-tailored plan to make sure your loved ones receive the amount of money they would need to survive at a given point in time, in the event of your death.  Contrast this to relying on a will or living trust alone, with no life insurance.  If I declined to buy health insurance, and simply relied on a will as my sole estate plan, I would be gambling on my children’s future.  The gamble could pay off:  If I died late in life and wealthier than I am now, my children might end up with a large sum of money at a time when they are already self-sufficient (a windfall).  But if I died now, when my children are not yet self-supporting, my will may not provide sufficient enough funds to comfortably raise them (my kids pay for my gamble).

In previous generations, people sometimes advised that life insurance was only necessary for parents earning money outside the house, and that coverage was unnecessary for spouses that worked in the house.  I do not believe this advice is sound.  No matter your contribution to a family, whether it be monetary, in the form of raising a family, caring for a sick relative, or keeping a house, rest assured that it would be very expensive to even begin to replace your most basic contributions to the family if you were suddenly gone.  With few exceptions, parents should have life insurance, period.

Probate Avoidance Benefits

In addition to the benefit of protecting your family financially in the event of your early death, life insurance helps your estate avoid probate.  Here is an example:  Imagine you die with $250,000 in a checking account, and your will says that $250,000 should go to your son, a student at the University of Illinois.  During this time, your son (having suddenly lost a source of support) may badly need the money.  Unfortunately, the court-supervised probate process can effectively freeze this money for well over a year, leaving your son suddenly without a source of rent or tuition.  In addition, it may be impossible to move the funds to a higher income-producing account during this period.  And perhaps worst of all, your family may be stuck feeling like they are still dealing with the emotional aftermath of your death in a seemingly endless court process.  In contrast, a life insurance policy is a contract which has nothing to do with probate court.  If you die with a $250,000 life insurance policy, your son applies to receive payment directly from the insurer and completely bypasses the court process.

Additionally, if a sufficient enough proportion of your estate passes through life insurance (or other probate avoidance mechanisms), you may be able to avoid formal probate altogether.  As an example, in Illinois, a probate estate containing under $100,000 and no real estate, and meeting certain other criteria, can be handled through “summary administration.”  For example, a Naperville parent, passing enough of her estate through life insurance (and other probate avoidance mechanisms), could avoid probate by shrinking her estate below the threshold and using a small estate affidavit

Important Details about Life Insurance

The following are some additional considerations when using life insurance as a part of your estate plan:

  • Remember that a life insurance policy is a contract, which is separate from what you put in your will.  Therefore, frequently check your life insurance beneficiaries, perhaps setting an annual reminder on your birthday.  Your life insurance policy is counterproductive if the beneficiaries listed on your policy are people you intended to disinherit in your latest will.
  • Make sure your family knows about your life insurance policy, and that you keep your insurance documents in an easy-to-find and secure location.
  • Consider listing your revocable living trust as a life insurance beneficiary, especially if you have minor children.  Doing so can ensure your children are most appropriately provided for after your death.  An attorney can help with this.
  • If you are anywhere near the $5.34 million threshold for federal estate tax, talk to an attorney about irrevocable life insurance trust planning.

Consult an estate planning attorney about the proper role of life insurance in your estate plan.

Published by Ian Holzhauer, Esq. of Nagle Obarski PC in Naperville, IL.  
Note:  The information above is not legal advice and is not the basis of an attorney-client relationship.  If you need assistance, you can hire an attorney to assist you with your individual legal needs.