Hinshaw Estate Planning Blog

Thursday, October 6, 2016

The Dangers of "Disinheritance" Caused by Outright Distriubutions

Most married couples, particularly in a first marriage, share a basic planning goal:  the property of the first spouse to die should pass to the survivor who can use, control and enjoy all of the property until the survivor’s death; then, at the survivor’s death, the remaining property should pass to that couple’s children in equal shares.  The revocable living trust is one of the best tools available to make sure that all of the goals of this plan are met. If a trust is not used and property is transferred outright to the surviving spouse, the couple’s goals may be partially or completely defeated, particularly if the surviving spouse remarries. The typical married couple owns the assets of the marriage jointly. The survivor "inherits" the marital assets by simply being the surviving spouse. Similarly, each spouse will typically name the other spouse as the primary beneficiary on property that passes by beneficiary designations such as life insurance, annuities, IRAs and qualified benefit programs. Consequently, all the marital assets end up in the name of the survivor. Upon remarriage, property received by a spouse outright may be lost to a new spouse. This can happen either inadvertently or intentionally.

If the surviving spouse remarries after the death of the first spouse, the spouses in this new marriage may, without really thinking about it, title some or all of their property in joint tenancy or create marital property interests.  If the original surviving spouse is the first to die in the remarriage, the property titled with a marital interest in the new marriage will pass automatically to the new spouse who then has no obligation to pass that property to the children of the original couple.  Although the children of the original marriage were meant to receive the property, it will likely be passed to the family of the new spouse. The children of the first marriage were "disinherited" simply because the parents did not understand the impact of joint ownership. In addition to the inadvertent possibility of joint ownership causing problems, the surviving spouse who receives his or her property outright may simply choose to give some or all of the property to the new spouse.

As we can see, transferring property outright leaves the surviving spouse with the ability to transfer the inherited assets, either mistakenly or intentionally, to a new spouse thus preventing the property from ending up in the hands of the children of the original marriage.  This is not what most couples intend. The most effective solution to these problems is for each spouse to leave property to the other in trust, rather than outright.  Property left to the surviving spouse in trust can contain the simple directions that the surviving spouse may control, use and enjoy the property but only for himself or herself and the children. Property in a properly designed trust cannot inadvertently end up as joint tenancy property nor can it be gifted to a new spouse. When the surviving spouse dies, the trust provides that any of the property not consumed by the surviving spouse or the children will pass, according to the terms of the trust, to the couple’s children or other designated beneficiaries. The use of a trust also prevents the surviving spouse from being free to give the property to a new spouse at death.

Thus, with a trust, the first spouse of a couple to die can eliminate the possibility that either through inadvertence or intention his or her property will end up in the hands of a new spouse or the new spouse’s family, rather than the original couple’s family. For most couples, it will be the most effective way to meet the basic estate planning goal.

Hinshaw Estate Planning is a practice group of Hinshaw, Marsh, Still & Hinshaw and assists clients in matters related to Estate Planning, Asset Protection, Planning for Children, Inheritance Protection, and Estate & Trust Litigation in the areas of Saratoga, San Jose, Los Gatos, Monte Sereno, Campbell, Santa Clara, Sunnyvale, Cupertino, Los Altos, Los Altos Hills, Mountain View, and Palo Alto within Santa Clara County, the areas of Menlo Park, Woodside, Atherton, Portola Valley, San Carlos, and Redwood City within San Mateo County, and the Greater San Francisco Bay Area.

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