Can an Inheritance Lead to Trouble?

October 21, 2020

Can an inheritance lead to trouble? Is it a blessing, or a curse? That’s the question from the recent article “When One Spouse Gets an Inheritance It Can Be Hard on a Marriage” posed by The Wall Street Journal. The emotional high of receiving an inheritance is often paired with legal issues. Emotional and life changing decisions can take a toll on the best of partnerships. Spouses may disagree with how assets should be used, or if an inheritance should be set aside for children from a prior marriage. The question of what happens to the inheritance in the case of death or divorce also needs to be addressed.

Couples are advised to start exploring these issues, with the help of an experienced estate planning attorney as soon as they know an inheritance is in their future. For starters, couples should learn about the legal issues surrounding inheritances. Most states recognize inheritances as separate property. However, if funds are co-mingled in a joint account, or the deed for an inherited house is in both names, it becomes more complicated to separate out, if necessary.

Couples who decide to use an inheritance for a large purchase need to be mindful of how the purchase is structured and recorded. Writing a check directly from an account dedicated to the inherited funds and keeping records to show the withdrawal is recommended. If a check needs to be drawn from a joint or single account, the inherited funds should only be placed in the account for a short period, preferably close to the time of purchase, so it is clear the funds were transferred solely for the purpose of the particular transaction.

Before an inheritance leads to trouble, it would be wise to obtain a written agreement between spouses, making it clear the money was contributed with the understanding if there is a sale of the property or a divorce, inherited funds and any appreciation would be credited back to the contributing spouse.

For one couple, a $100,000 inheritance received by a man in his mid-50s with adult children and a second spouse created friction. The man wanted to set the funds aside for his children from a prior marriage, and his wife felt hurt, because she had every intention of giving the money to his children in the event of her husband’s death. She didn’t see the need to keep things separate. However, when advisors ran a series of projections showing the wife would be well cared for in the event of his death, since most of his own $1 million estate was earmarked for her, she relented. They also helped her understand if she racked up big medical bills later in her own life or creditors went after the estate, the money would be better protected by keeping it separate.

It is important for couples understand the risks that come with co-mingling inheritances before it leads to trouble. Another example: a couple who expected to receive a sizable inheritance and did not save for their own retirement. Instead, they used up the wife’s inheritance for their children’s college educations. When the husband filed for divorce, the wife was left with no access to her ex-husband’s expected large inheritance and had no retirement savings.

These are not easy conversations to have. However, couples need to look past the emotions and make business-like decisions about how to preserve and protect inheritances. It’s far easier to do so while the marriage is intact, then when a divorce or other unexpected life event shifts the financial event horizon.

If you would like to learn more about the role inheritances can play in estate planning, please visit our previous posts.

Reference: The Wall Street Journal (Sep. 13, 2020) “When One Spouse Gets an Inheritance It Can Be Hard on a Marriage”

Make the Most of Your Social Security Benefits

August 26, 2020

Famous motivational speaker Zig Zigler reportedly said “If you want to earn more, learn more.” That’s true for careers and investments. It is also true for Social Security. The more you know how it works, the more likely you’ll be able to make the most of your Social Security benefits, says the article “Social Security tips: 10 ways to get more money in benefits” from USA Today.

1—Check your Social Security work record for errors. Create an account for yourself at the “My Social Security” page on the Social Security Administration’s website. You’ll be able to see your entire income history. Check it against your tax returns to be sure that the numbers are right. If you see mistakes, call the SSA and have them fixed now.

2—Work for at least 35 years. The SSA uses a formula to calculate benefits based on 35 years of earnings (adjusted for inflation). If you’re thinking about working for 28 years, your benefits are going to be lower. If you can keep working to reach the 35-year mark, you’ll increase your benefits.

3—Boost your earnings. Bigger paychecks equal bigger benefits. If it’s too late for a career change, adding a part-time job could boost your lifetime income. You could also just work a few more years—it makes a difference. The annual statement from SSA on the website will show you just how much.

4—Wait until age 70 to start collecting. For every year after your full retirement age, your benefits grow by about 8%. If you are able to tap other sources of income before you turn 70, you can maximize this benefit.

5—You can also start collecting benefits at age 62. Your checks will be smaller, but if you have had a job loss and need the money, you are now eligible to take them. There will be many more checks now, than if you waited until age 70. If your health is poor, or your family history does not include longevity, there’s no benefit in waiting.

6—Understand how spousal benefits work. For non-working spouses, Social Security allows a spouse to collect a benefit based on their spouse’s earnings record – up to one half (50%) of the spouse’s benefits.

7—Can you delay a divorce? You might be able to collect benefits based on your former spouse’s earnings record, if you meet the requirements. You need to have been married for at least ten years. If it’s been nine years, and if your not-soon-enough ex has significantly higher earnings than you, consider delaying until the ten year mark. Not everyone can do this, but if you can, it could make a big difference.

8—Keep your income lower, while collecting Social Security. If you plan on working while collecting benefits, understand that some of your benefit dollars will be withheld. For someone who is younger than their Full Retirement Age in 2020, for every $2 earned over $18,240, $1 dollar will be deducted. If you reach Full Retirement Age in 2020, the SSA will deduct $1 for every $3 you earn above $48,500, until the month you do reach full retirement age. Be mindful of the “cost” of your working on your benefits.

9—Find out if you qualify for survivor or disability benefits. There are Social Security benefits for spouses, ex-spouses, the disabled and survivors. Other programs with benefits include Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI). If your spouse dies after working long enough to qualify for Social Security, the surviving spouse and children under age 17 may also be able to collect survivor benefits.

10—Think strategically about Social Security. If your spouse has a stronger earnings history than you, they might delay collecting benefits to age 70 to maximize the size of their benefit checks. If they die before you, as a surviving spouse you may collect either their benefit amount or your own—whichever is larger.

Reference: USA Today (July 28, 2020) “Social Security tips: 10 ways to get more money in benefits”

Times In Life When Wills Need To Be Reviewed

June 22, 2020

There are times in life when wills need to be reviewed. Estate planning lawyers hear it all the time—people meaning to update their will, but somehow never getting around to actually getting it done. The only group larger than the ones who mean to “someday,” are the ones who don’t think they ever need to update their documents, says the article “12 Different Times When You Should Update Your Will” from Kiplinger. The problems become abundantly clear when people die, and survivors learn that their will is so out-of-date that it creates a world of problems for a grieving family.

There are some wills that do stand the test of time, but they are far and few between. Families undergo all kinds of changes, and those changes should be reflected in the will. Here are one dozen times in life when wills need to be reviewed:

Welcoming a child to the family. The focus is on naming a guardian and a trustee to oversee their finances. The will should be flexible to accommodate additional children in the future.

Divorce is a possibility. Don’t wait until the divorce is underway to make changes. Do it beforehand. If you die before the divorce is finalized, your spouse will have marital rights to your property. Once you file for divorce, in many states you are not permitted to change your will, until the divorce is finalized. Make no moves here, however, without the advice of your attorney.

Your divorce has been finalized. If you didn’t do it before, update your will now. Don’t neglect updating beneficiaries on life insurance and any other accounts that may have named your ex as a beneficiary.

When your child(ren) marry. You may be able to mitigate the lack of a prenuptial agreement, by creating trusts in your will, so anything you leave your child won’t be considered a marital asset, if his or her marriage goes south.

Your beneficiary has problems with drugs or money. Money left directly to a beneficiary is at risk of being attached by creditors or dissolving into a drug habit. Updating your will to includes trusts that allow a trustee to only distribute funds under optimal circumstances protects your beneficiary and their inheritance.

Named executor or beneficiary dies. Your old will may have a contingency plan for what should happen if a beneficiary or executor dies, but you should probably revisit the plan. If a named executor dies and you don’t update the will, then what happens if the second executor dies?

A young family member grows up. Most people name a parent as their executor, then a spouse or trusted sibling. Two or three decades go by. An adult child may now be ready to take on the task of handling your estate.

New laws go into effect. In recent months, there have been many big changes to the law that impact estate planning, from the SECURE Act to the CARES act. Ask your estate planning attorney every few years, if there have been new laws that are relevant to your estate plan.

An inheritance or a windfall. If you come into a significant amount of money, your tax liability changes. You’ll want to update your will, so you can do efficient tax planning as part of your estate plan.

Can’t find your will? If you can’t find the original will, then you need a new will. Your estate planning attorney will make sure that your new will has language that states revokes all prior wills.

Buying property in another country or moving to another country. Some countries have reciprocity with America. However, transferring property to an heir in one country may be delayed, if the will needs to be probated in another country. Ask your estate planning attorney, if you need wills for each country in which you own property.

Family and friends are enemies. Friends have no rights when it comes to your estate plan. Therefore, if families and friends are fighting, the family member will win. If you suspect that your family may push back to any bequests to friends, consider adding a “No Contest” clause to disinherit family members who try to elbow your friends out of the estate.

Reference: Kiplinger (May 26, 2020) “12 Different Times When You Should Update Your Will”

Category: Divorce

Can an Inheritance Lead to Trouble?

Times In Life When Wills Need To Be Reviewed

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