How Doctors Divvy Up the Estate Money [New Spouse v. Kids]

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The Kids of a New Spouse

Dr. David Edward Marcinko MBA CMP™

[Publisher-in-Chief]

Multiple marriages entail interesting estate planning moves. Why? In these days of multiple marriages, doctor clients and others often can get caught between wanting to provide for their children from a previous marriage and their spouse’s statutory inheritance rights. Depending on the state of residence, the surviving spouse may have a statutory right to a specific share of his or her spouse’s estate. But, states define what constitutes the “augmented estate” in different ways. Some fairly sophisticated estate planning may be appropriate.

States Right’s

Inasmuch as spousal rights of election were codified many decades ago when divorce was not a common occurrence, many states’ statutes do not fairly recognize the economics and family dynamics of married individuals who have children from a prior marriage. In some states, a spousal right of election is limited to those assets that pass through probate. In other states, the right of election is enforceable against not only probate assets but certain assets, such as jointly held property that would otherwise pass via title to the co-owner, gifts the decedent made within a certain time period prior to death, and life insurance benefits. This expanded pool of assets against which the right of election may be assessed is typically referred to as the “augmented estate.” Most states provide that the right of election is charged ratably against the beneficiaries under the decedent’s will and the beneficiaries of any testamentary substitutes.

The UPC

In many states, the same percentage would apply regardless of the length of the marriage. In 1990, the model Uniform Probate Code (UPC) was amended to provide a scaled right of election based on the length of the marriage. It ranges from a minimum of 12% up to a maximum of 50% for marriages of 15 years or more. Only a handful of states have adopted it. Even though the UPC includes pension and profit sharing plan benefits in the augmented estate, the sliding scale is subordinate to federal pension legislation which can result in an inequity in the case of a short-term marriage.

Assessment

While both pre- and post-nuptial agreements can help, life insurance is favored, particularly in the majority of states where it is excluded from the augmented estate. And, in states where life insurance is part of the augmented estate, it could be used to provide the surviving spouse with his or her share, particularly when a closely held business is passed on to children of a prior marriage. Financial planners, doctors and advisors need to be familiar with this area to effectively serve clients.

Note: “Providing for Children from a Prior Marriage: An Estate Planning Entry Point,” George B. Kozol, Journal of the American Society of CLU & ChFC, January 1997, pp. 52–57, American College.

Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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3 Responses

  1. Grannies Are Younger, Richer, More Generous to Grandkids

    The number of grandparents in the U.S. has hit a record high and is still growing.

    Not only that, they are younger, financially comfortable and bestowing a “good deal” of money on their grandchildren, according to a new report from the MetLife Mature Market Institute.

    Brenda

    Like

  2. Marital Portability Election Extension

    In Notice 2012-21; 2012-10 IRB 1 (16 Feb 2012), the IRS created a special category with a six month additional period to file IRS Form 706 and elect marital portability.

    In the tax bill signed December 17th, 2010, Sec. 2010(c)(5)(A) created a new option called marital portability. If an executor files IRS Form 706 for a person who passes away during 2011 or 2012, the deceased spouse’s unused exclusion amount (DSUEA) may be transferred to a surviving spouse. The transfer may permit a surviving spouse to have an applicable exclusion that would be double the basic amount, or over $10 million (plus indexed increases).

    For some 2011 estates, IRS Form 706 may not have been filed because the estate was under $5 million and the IRS had not yet given guidance on how to qualify for marital portability. In Notice 2011-82 published on October 17, 2011, Treasury explained the applicable requirements for filing IRS Form 706 and qualifying a surviving spouse’s estate to claim the DSUEA.

    Executors for many 2011 decedents with estates under $5 million did not file IRS Form 706 within the required nine month period and did not file Form 4768, “Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-skipping Transfer) Taxes.” In order to give fair opportunity for all executors to make the marital portability election, Notice 2012-21 grants a period of up to 15 months to file Form 4768. In essence, there is an automatic six month election that will be permitted for 2011 decedents.

    Editor’s Note: The Treasury position shows welcome flexibility. Decedents with estates under $5 million who passed away in January or February of 2011 may still file Form 4768. There still is a requirement to file Form 706 within 15 months of the date of death. The April deadline for the executors of January decedents will approach rapidly, but this still permits the preservation of DSUEA. Most commentators expect that marital portability will be extended after 2012.

    Source: Children’s Home Society of Florida Foundation

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  3. What parents want for their kids

    Almost all the financial decisions parents make around our kids have one thing in common: we want what’s best for them. This is the case whether we’re setting the amount of an allowance for an eight-year-old, helping a teenager make college choices, or deciding whether to loan adult children the money for a down payment on a house.

    Here’s the problem: what we assume to be the best isn’t necessarily what our kids need or want.

    Financial planner Ross Levin, who writes a monthly column for the Minneapolis Star-Tribune, addresses this question in a recent article. He describes a situation almost identical to one I have encountered with clients: parents intending to leave a vacation or family home to their adult children without first finding out whether the inheritance would be a blessing or a burden.

    Levin says, “Many clients come into our office with the unstated, but limiting, assumption that “I want my kids to have what I have.” This usually leads to bad decisions.”

    I would add that this assumption is based on a second one that goes even deeper: “I want my kids to want what I want.”

    This unconscious belief can lead to expectations and actions that result in hurt feelings, resentment, and family discord. Some of these are related to major life choices: assuming children should or will take over a family business, for example, or pushing them toward careers the parents see as best for them.

    Smaller decisions can be problematic, as well. In his book Intentional Wealth, counselor and coach Courtney Pullen tells the story of a successful entrepreneur who bought his son a car for his 16th birthday. Unfortunately, the car was a brand-new white Lincoln Continental. The boy’s friends promptly dubbed it his “Pimpmobile.” The gift that represented success and value to the father was an embarrassment to the son.

    An important first step toward reducing the impact of “I want my kids to want what I want” is recognizing that we have the belief in the first place. My suggestion? Assume that you do. It’s perfectly normal. If something is important or brings satisfaction to us, it’s natural to think other people will see it the same way. The problem arises when we act on that assumption instead of finding out whether it’s valid.

    Most of the time, the best way to find out whether someone wants what you want is simply to ask. Suppose the father in Courtney’s story had talked with his son about what kind of car he might want—ideally, within some clear limits about cost, safety, and practicality. They could have shopped together to find a car the son genuinely appreciated. The experience could have created more closeness between father and son.

    In the case of my clients and their home, I encouraged them to discuss the inheritance with their kids at the next family gathering. The discussion included information on the cost of upkeep and taxes, how much time the various families would be able to spend at the house, and how the shared ownership might work.

    Ultimately, the siblings all agreed that they didn’t want the house. The memories of family time spent there were precious to them, but those memories were primarily about the people, not the property. The relationships were more important than the place.

    The parents’ intent with this inheritance was clearly to provide “the best” for their children and grandchildren. Their goal—which the children appreciated—was to encourage continued family closeness. The family conversation showed everyone that ownership of the house wasn’t a necessary part of that goal.

    Rick Kahler MSFS CFP®

    Like

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