Will contests don’t happen only on TV: Take the proper steps to avoid family chaos after your death

Will contests don’t happen only on TV: Take the proper steps to avoid family chaos after your death

If you watch enough drama-based television shows, you’re likely to come across a scene where family members are gathered to hear the reading of a loved one’s will after his or her death. Once finished, an heir stands up and starts shouting how he or she has been treated unfairly and plans to contest the will.

This occurs not only on TV or in the movies. It also happens in real life. Indeed, regardless of how harmonious your family may be during your life, there’s always a chance that a disgruntled family member may challenge your estate plan after your death.

Contesting a will

Your last will and testament, if properly executed, is a road map for an executor to follow. Notably, it includes a legally enforceable mandate as to the distribution of your assets to named beneficiaries. Some bequests are specific, while others may be covered by the residuary clause.

The contest to a will is made in probate court by an “interested party.” To contest a will in any state, the person must have legal standing. This ability generally is restricted to beneficiaries named in the will, those who were named as beneficiaries in a prior will that have been cut out or that are receiving a reduced inheritance, and anyone else eligible under the state’s intestacy laws. Typically, this means a spouse, child or other lineal descendant.

Beneficiaries can’t contest a will until they’ve reached the age of majority in the state (age 18 in most states). However, a parent or guardian can initiate legal action on a younger beneficiary’s behalf.

Understanding why wills are contested

There are several reasons for contesting a will:

Violation of state law. Each state has specific laws governing the wills of its residents. Generally, you must sign the will in the presence of at least two witnesses. All three people must be in the room watching each other sign the document. Depending on state law, other technicalities may have to be observed. Don’t assume that the will is legally binding just because it was signed in your attorney’s office.

Lack of competency. Did the testator (the person who made the will) have the capacity to understand the terms of the signed will? This is another aspect that’s governed by state law. It’s typically difficult to prove to the court that a testator lacked the requisite mental competency.

Undue influence. As people get older, they may be more susceptible to being influenced by others, sometimes resulting in revisions or even a complete rewrite of a will. The main issue is whether enough pressure was exerted on the testator to cause a loss of free will. For example, this may occur when the influencer isolates the testator from other family members and friends. Note that mere threats, nagging and verbal abuse usually aren’t sufficient to uphold a challenge. As with a lack of capacity, this charge generally is difficult to prove under state law.

Fraud. Someone contesting a will may claim that the testator was duped into signing it. Let’s say that the testator signs a different document, such as a living will relating to end-of-life decisions, and thinks that it’s a last will and testament. This type of challenge often relates to mental competency. The testimony of witnesses can be significant in these cases.

A subsequent will. Did the executor probate the latest version of the will? A subsequent will revokes other versions. It’s only the last one that counts as long as it meets state requirements. Frequently, a testator modifies or rewrites a will without notifying all the interested parties, leading to a challenge in court.

Taking proactive protection steps

Be proactive about protecting your estate from will contests. Start by observing all the legal technicalities in your state. Discuss the terms of your will and the reasons for your decisions with your loved ones so they won’t be caught by surprise.

© 2024

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation. All THK blogs are considered advertising material by the Indiana Bar Association.

To avoid unexpected tax bills, adequately disclose your gifts

To avoid unexpected tax bills, adequately disclose your gifts

If you transfer business interests or other assets to your loved ones, the IRS generally has three years to challenge their value for gift tax purposes or to claim that a transfer you treated as a nongift was in fact a gift or partial gift. However, the three-year statute of limitations period doesn’t begin to run until you “adequately disclose” the transfer to the IRS. Otherwise, the IRS can come after you for unpaid gift taxes, plus penalties and interest, years or even decades later.

To avoid this situation, your gift tax return must satisfy federal tax regulations’ adequate disclosure requirements. And even if you treat a transfer as a nongift (such as the transfer of an asset in exchange for full and adequate consideration), you may want to report it on a gift tax return anyway to prevent the IRS from arguing, many years later, that you made a taxable gift.

Note that if you decide not to disclose the transaction on a gift tax return, it’s crucial that the transaction is documented properly and that the documentation is retained by you and the buyer.

What are the adequate disclosure requirements?

Generally, to adequately disclose a transfer, file a gift tax return for the year in which the transfer is completed, containing the following information:

  • A description of the transferred property and any consideration received,
  • The identity of, and relationship between, the transferor and each transferee,
  • If property is transferred to a trust, the trust’s tax identification number and a brief description of its terms (or a copy of the trust instrument),
  • A detailed description of the method used to value the transferred property or a qualified appraisal, and
  • A statement describing any position taken that’s contrary to any proposed, temporary or final tax regulations or revenue rulings published at the time of the transfer.

Additional information is required for certain transactions between related parties, such as grantor retained annuity trusts, qualified personal residence trusts, and transfers of interests in corporations or partnerships.

For transfers reported on a gift tax return as nongifts, describe the methods used to value the property or furnish an appraisal. You’ll also need to explain why they’re not gifts.

Substantial compliance is sufficient

Often, strict compliance with tax regulations is required. However, in a recent U.S. Tax Court case (Schlapfer v. Commissioner), the court held that substantial compliance with the adequate disclosure regulations is sufficient. However, the disclosure must be “sufficiently detailed to alert the Commissioner and his agents as to the nature of the transaction so that the decision as to whether to select the return for audit may be a reasonably informed one.”

This decision provides some comfort to taxpay- ers who fail to cover all the bases when disclosing gifts. But to avoid an IRS challenge and potential litigation, it’s advisable to follow the regs as closely as possible.

Protect your estate plan

Does your estate plan involve gifting assets to family members or others? Or is there a risk that a nongift transfer could later be characterized as a partial gift? The best way to protect your plan is to report the gift or transfer on a timely filed gift tax return that satisfies the adequate disclosure requirements. Doing so can help minimize the chances of unwelcome tax surprises years or even decades in the future. Contact your estate planning advisor for more details.

© 2024

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation. All THK blogs are considered advertising material by the Indiana Bar Association.

What to do when you and your siblings have inherited your parents’ home

What to do when you and your siblings have inherited your parents’ home

It’s not unusual for parents to leave their primary residence or vacation home to their children. Unless your parents’ wills or trusts specify otherwise, you and your siblings will receive equal shares of the home, which may lead to conflicts if you have different financial needs or differing views about how the home should be used.

The first step is to sit down with your siblings and have an open, honest discussion about your wishes for handling the inherited home. Generally, the options are:

  • Keep the home and share it among family members,
  • Rent out the home and share the rental income,
  • Sell the home and divide the profits, or
  • Arrange for one sibling to buy out the others.

If you decide to share the home, have a written agreement drafted by your attorney that outlines rules regarding scheduling, allowable uses, and responsibility for maintenance and expenses. If you choose to sell the home or arrange a buyout, obtain a professional appraisal to avoid disputes over the home’s value.

If you rent out the home, determine how you’ll handle rent collection, maintenance and other rental activities. One option is to engage a property management company to handle the day-to-day management.

Another issue to consider is how the title to the property will be held. For example, if you and your siblings own the home as tenants in common, then your respective interests will pass to your heirs according to your individual estate plans. But if you hold the property as joint tenants, then when one sibling dies, the surviving siblings receive his or her share.

© 2024

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation. All THK blogs are considered advertising material by the Indiana Bar Association.

Be wary of leaving specific assets to specific heirs in your estate plan

Be wary of leaving specific assets to specific heirs in your estate plan

When creating your estate plan, it may be tempting to leave specific assets to specific loved ones. Perhaps you want your oldest child to have the family home or a stock that has sentimental — as well as financial — value. Unfortunately, by doing so you risk inadvertently disinheriting other family members, even if you’ve gone out of your way to ensure that they’re treated fairly.

Consider the following example:

Lucy has three children, Susan, Peter and Emma. At the time she prepares her estate plan, Lucy has three main assets: company stock valued at $1 million, a mutual fund with a $1 million balance and a $1 million life insurance policy. She leaves the stock to Susan, the mutual fund to Peter and appoints Emma the beneficiary of the life insurance policy. When Lucy dies 15 years later, things have changed considerably. The stock’s value has dropped to $500,000, the mutual fund has grown to $2.5 million and she has allowed the life insurance policy to lapse.

The result:

Although Lucy intended to treat her children equally, Peter ends up with the bulk of her estate, Susan’s inheritance is significantly smaller than expected and Emma is disinherited altogether. To avoid unintended results like this, consider distributing your wealth among your heirs based on percentages or dollar values rather than providing for specific assets to go to specific people.

However, if it’s important to you that certain heirs receive certain assets, there may be planning strategies you can use to ensure that your heirs are treated fairly. Returning to the previous example, Lucy could’ve provided for her wealth to be divided equally among her children, with Susan receiving the stock (valued at fair market value) as part of her share. That way, Susan would have received the stock plus $500,000 of the mutual fund, and Peter and Emma would each have received $1 million of the mutual fund.

© 2024

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation. All THK blogs are considered advertising material by the Indiana Bar Association.

Your beneficiary designations may be obsolete: Review and update as needed

Your beneficiary designations may be obsolete: Review and update as needed

The chances are good that you’ve made beneficiary designations in your estate plan. Indeed, for most people, a substantial amount of wealth is transferred to their loved ones that way.

Making beneficiary designations is an excellent tool for transferring assets that aren’t subject to probate, including IRAs and certain employer-sponsored retirement accounts, life insurance policies, and some bank or brokerage accounts. Still, it’s important to occasionally revisit those decisions. Over time, these beneficiary designations may become inappropriate or obsolete because of changes in life circumstances. Making changes may be required.

Follow best practices and avoid pitfalls

As you conduct your review of your current beneficiaries, here are some points to consider:

Name a primary beneficiary and at least one contingent beneficiary.

Without a contingent beneficiary for an asset, if the primary beneficiary dies before you do, the asset will end up in your general estate and may not be distributed as you intended. In addition, certain assets, including retirement accounts, offer some protection against creditors, and those protections would be lost if the assets are transferred to your estate. To ensure that you control the ultimate disposition of your wealth and protect that wealth from creditors, it’s important to name both primary and contingent beneficiaries and to avoid naming your estate as a beneficiary.

Update beneficiaries to reflect changing circumstances.
Designating a beneficiary isn’t a “set it and forget it” activity. Failure to update these designations to reflect changing circumstances creates a risk that you will inadvertently leave assets to someone you didn’t intend to benefit, such as an ex-spouse.

It’s also important to update your designation if the primary beneficiary dies, especially if there’s no contingent beneficiary or if the contingent beneficiary is a minor. Suppose, for example, that you name your spouse as primary beneficiary of a life insurance policy and name your minor child as the contingent. If your spouse dies while your child is still a minor, it’s advisable to name a new primary beneficiary to avoid the complications associated with leaving assets to a minor (court-appointed guardianship, etc.).

Consider the impact on government benefits.
If a loved one depends on Medicaid or other government benefits (a disabled child, for example), naming that person as primary beneficiary of a retirement account or other asset may render him or her ineligible for those benefits. A better approach may be to establish a special needs trust for your loved one and name the trust as beneficiary.

Keep an eye on tax developments.
Changing tax laws can easily derail your estate plan if you fail to update your plan accordingly. For instance, the SECURE Act sounded the death knell for the “stretch” IRA. Previously, when you left an IRA to a child or other beneficiary (either outright or in a specially designed trust), distributions could be stretched out over the beneficiary’s life expectancy, maximizing tax-deferred savings. Today, most non-spousal beneficiaries of IRAs must distribute the funds within 10 years after the owner’s death.

In light of this change, review the designated beneficiaries for your IRAs and other retirement accounts, evaluate the impact of the SECURE Act on these beneficiaries, and weigh your options. For example, you might consider naming different individual beneficiaries or leaving IRAs to a charitable remainder trust or other vehicle that mimics the benefits of a stretch IRA.

Review your entire estate plan

Bear in mind that major life changes can affect other aspects of your estate plan — not just beneficiary designations. Your estate planning advisor can help point out areas of your plan that may require revisions after such a change.

© 2024

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation. All THK blogs are considered advertising material by the Indiana Bar Association.