In today’s society, as we age, life becomes more complicated.
More and more couples are not parting at death, but instead may be married multiple times. Many questions arise in these situations on both sides.
Can a prenuptial or postnuptial agreement address all of your concerns? What if one spouse needs nursing care? How do you preserve assets for your children from a previous marriage while respecting and supporting your current spouse? After your spouse passes, how do you protect yourself from your spouse’s children taking control? What about assets that have beneficiaries designated? Are trusts a useful tool?
The following example may provide some insight.
Agreements and assistance
Tammy and John have been happily married for 15 years, each for the second time. Tammy is 65 and John is 75. John was divorced 20 ago and has three children, Bob, Sue and Nancy. Tammy is a widow and has one child, Sara.
John has Parkinson’s disease. Tammy and John had a prenuptial agreement prepared prior to their marriage to make sure that their separate assets coming into the marriage would stay separate and go to their respective children. This was especially important for Tammy, who had inherited $500,000 from her deceased husband’s life insurance. She has always kept the life insurance proceeds in a savings account in her name alone.
John’s Parkinson’s disease is getting worse and he now needs nursing care. He does not have many assets and would qualify immediately for Medical Assistance. However, Medical Assistance will count the savings account in Tammy’s name alone to pay for John’s care, even though they created a prenuptial agreement years ago to protect that asset.
In order to prevent this Medical Assistance determination from occurring, Tammy could have created an irrevocable trust more than five years ago. Unfortunately, she does not have five years before John will need Medical Assistance. In the alternative, Tammy could get a Medicaid compliant annuity that would enable her to protect the life insurance proceeds by converting them from cash to an immediate annuity that will pay her monthly. This type of annuity is quite complicated and has to meet certain federal requirements.
John has a 401K plan. After his divorce, he forgot to change the primary beneficiary from his ex-wife to his current spouse. His will states that he wants all of his assets to be distributed to his current spouse upon his death.
Unfortunately, the beneficiary designation will control here, and his ex-wife will receive what is left in his retirement plan. Beneficiary designations can be a helpful tool for completing your estate plan as long as you keep them current.
If John wanted his retirement plan proceeds to be given to his children, but have his other assets go to his current spouse, then he could have named his children as beneficiaries of his retirement plan and kept his will the same. If John forgot to update his will and remove his ex-wife, Pennsylvania law will automatically remove the ex-wife from the inheritance equation, unless the will states the intent was to include her.
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Joint marital property
John and Tammy own a home together. John paid for the down payment of the house in cash with the understanding that Tammy would pay the mortgage.
Who owns the house when John dies? The answer depends on whether they own the property as joint tenants with right of survivorship, tenants by the entirety, or as tenants in common.
How can insurance be used to help Tammy pay off the house when John dies? If Tammy uses the money from her deceased husband’s life insurance to pay off the mortgage, how can she account for the fact that her child may then get less of an inheritance?
John and Tammy decide to change their wills to leave everything to each other, and then when they are both deceased, to have the remainder be distributed equally to all of the children and step-children.
John dies first leaving everything to Tammy, but there is not anything in place that would prevent Tammy from changing her will and disinheriting John’s children.
There are various types of trusts that can be created to accomplish the goal of treating all of the children equally. In addition, John and Tammy can use a particular type of trust to protect assets from nursing care expenses and inheritance taxes. However, the nursing home protection will only apply if the items are in that particular trust for at least five years prior to an application for Medical Assistance for nursing home care.
John and Tammy’s children are actively involved. What are the pros and cons of allowing all of the children to see their parents’ estate plans?
Tammy’s daughter, Sara, does not get along with John’s children, and John’s children are not always fond of Tammy. Tammy fears that as John’s condition worsens, Sue is going to come in, take over, and place John in a nursing home without Tammy’s input.
Is Tammy going to be able to afford to live in their home without John’s income? What can she do to prevent this intervention? Do John and Tammy need separate attorneys to represent them?
As the movie title suggests, “it’s complicated.” If you have any of the above questions or concerns and are looking for answers, come to our seminar Tuesday, June 13 at 7 p.m. in Mechanicsburg. Please call us at 717-697-3223 to register and for directions.