Caught in the Undertow: How No Estate Plan (or a Bad One) Could Leave Your Family Overwhelmed

Many people love to spend part of their summer vacation at the beach, enjoying the ocean and sunshine. But there may be unseen dangers that are crucial for beachgoers to keep in mind: For example, the undertow is a current of water, often quite powerful, below the surface, that is moving away from shore when waves are approaching it. It can easily knock a smaller person off balance and could be dangerous for those who are not strong swimmers. As a result, it is very important to take steps to protect family members from this danger. Likewise, there are a number of dangers associated with failing to put a well-thought-out estate plan in place that could make your family members feel as though they are drowning if you were to pass away.

State law, not you, will determine who gets your money and property. If you pass away without a valid will and/or trust, by default, much of your property will go to the individuals (heirs) spelled out in your state’s intestacy law in the proportions determined by the law. In effect, the state makes a will for you if you fail to do so. This may not seem like a major concern until you consider the potential consequences: A major one is that loved ones you want to provide for, including your own children, could be disinherited.

The following are several situations in which loved ones could be disinherited if you do not have a will and/or trust naming them as beneficiaries:

  • Children from a first marriage who have been adopted by a stepparent, or children who have been adopted by other family members or an unrelated person, may no longer be legally recognized as your children under state law. As a result, even if you still love and care for them, they will receive nothing from you unless you specifically include them in your will or trust.

  • Children conceived after one parent’s death using assisted reproductive technology, such as frozen embryos, may not inherit from that parent under intestacy statutes, many of which do not address the rights of posthumously conceived children.

  • In addition, although children of unmarried parents can always inherit from their mothers under state law, they may have to produce proof of paternity to inherit from their father under an intestacy statute.

  • A significant other with whom you have spent your life is unlikely to receive anything under state law if you are not married. Although state law does allow a spouse to receive some proportion of your estate, if you are not legally married to your partner—or in a legally recognized civil union or registered domestic partnership, he or she will inherit nothing from you.

There are many other situations in which intestacy statutes are unlikely to achieve your wishes: for example, a special needs child may need a larger inheritance amount to pay for future care than an adult child who is not disabled. Intestacy statutes provide no exceptions for these special circumstances.

You can ensure that everyone you wish to benefit from your estate will receive the money and property you want them to have by naming them and specifying the gifts you want them to receive in your will and/or trust.

An outright gift under state law will not protect your heirs’ inheritance. Outright gifts made pursuant to an intestacy statute provide no protection for your spouse or children, which is often problematic. Once they receive a distribution from your estate, the money and property they have received may not benefit them at all if they have creditors or ex-spouses who can reach it to satisfy their claims. In addition, if one or more of your children are irresponsible with money (i.e. spendthrifts), they could quickly squander the money and property you have worked a lifetime to save. These common problems can be addressed through the creation of certain types of trusts. There are a number of possibilities to consider, but two of the most commonly used trusts are those that distribute money and property in certain percentages at specific ages and discretionary trusts.

Creating a trust with distributions at specific ages will help to ensure that your beneficiaries will only begin to receive distributions at an age when you believe they will be sufficiently mature to responsibly handle them. Also, because the gifts are made in increments, you can rest assured that your beneficiaries will not be able to quickly exhaust their entire inheritance. The money and property held by the trust will be protected from creditors until it is distributed to your beneficiaries.

The trustee of a discretionary trust has the authority to make distributions to beneficiaries but is not required to make them. Because the beneficiaries do not have a legally enforceable right or entitlement to receive any of the funds in the trust, the money and property held by the trust are protected from their creditors until a distribution is made. The trustee of this type of trust should be someone you have confidence will make wise decisions regarding when and if distributions should be made since that person will have a significant degree of control over the trust’s funds.

Failing to create a trust could mean that your estate will be tied up in a lengthy court-supervised probate process. Instead of being immediately available to provide for the financial needs of your family members, your money and property will have to go through the probate process, which could last up to a year even if your estate is not very complex. This is true even if you have a will, as probate can only be avoided if you die with no accounts or property in your name. Typically, this is accomplished by transferring all of your money and property into a trust or naming a beneficiary for your accounts and other eligible property.

In addition, it is important to keep in mind that if you have minor children, money or property that they inherit under state law or a will cannot be immediately distributed to them (nor should it be). Rather, because minor children are not legally able to control property, unless you have named someone you have chosen to fill this role in your will, a conservator will need to be appointed by the court to manage the inheritance for them until they reach the age of majority under state law, at which point it will be distributed to them outright. Locating, screening, and appointing an appropriate person (who may not be someone you would have chosen) is a time-consuming process for the court. Further, the money and property you want to be used to care for your children will not be fully available to benefit them until the administration process concludes. Lastly, while the conservator will be supervised by the court, there is no guarantee that the court-appointed individual will use the money and property for the benefit of your children in the way you would have wanted.

Allow Us to Help You Care for Your Family

A carefully designed estate plan is like a life vest for your family in a rough sea. Losing a family member is never easy, but we can help you put plans in place that will provide you with the peace of mind of knowing that your grieving family will not be overwhelmed if you die. Give us a call to set up an appointment to talk about the best estate plan to provide for the needs of your family and loved ones. If you prefer, we are happy to meet with you over the phone or by videoconference.

Can a Non-U.S. Citizen Create an Estate Plan in the U.S.?

The United States has experienced a surge in immigration since 1970, and there are now approximately 45 million foreign-born people living in the United States. Some of them have become U.S. citizens, but many non-citizens live in the United States as well. In 2019 alone, approximately 1,031,000 foreign nationals obtained lawful permanent resident status.[1] It is not only permissible, but essential for those individuals, like U.S. citizens, to have estate plans in place. There are a number of special issues non-citizens may need to consider.

Property Located in Another Country

It is possible that a non-U.S. citizen may own property located in another country. This should be considered in designing his or her estate plan.

Common law vs. civil law

There are many differences in the law between countries such as the United States and the United Kingdom, which have common law systems, and countries such as Germany, France, or China, which have civil law systems. For example, common law countries recognize trusts, but civil law countries do not.

In addition, common law and civil law countries have different rules regarding which country’s law will apply (e.g., in a common law country, the jurisdiction where real estate is located governs its disposition, but under civil law, the law of the country of the deceased person’s nationality or habitual residence may be the governing law).

These differences (and there are many more not discussed here!) must be taken into account in determining the best options for estate planning involving property located in other countries.

Wills and trusts

In the United States, wills and trusts are some of the instruments most commonly used by individuals to distribute their money and property. However, when a non-citizen owns property in other countries, the law of the country where the property is located may affect how it is distributed. In addition, if the property is located in another country, that country may not accept a United States will as valid. Some foreign countries may recognize it if it satisfies all of their legal formalities. However, other countries never recognize a will drafted in another country or recognize it only in certain special situations.

As a will created in the United States may not be legally valid in other countries, it may be necessary to have multiple wills, each one dealing only with money and property located in that country (and drafted by someone familiar with the local law). In addition, it is important for special care to be taken to make sure that none of the wills unintentionally revoke any previously drafted wills from another jurisdiction.

Another option is an international will. The United States and a limited number of other countries enacted the Uniform International Will Act pursuant to the International Institute for the Unification of Private Law (UNIDROIT) convention. The Uniform International Will Act establishes criteria that must be met for a legally effective international will. However, many countries have not signed on to the convention and thus do not recognize international wills.

As mentioned above, civil law countries do not recognize trusts. As a result, trust-based estate planning may not work in some foreign countries where real property or children who are beneficiaries are located. Further, civil law countries may treat a trust as an unrelated party and impose the highest inheritance tax rate. In addition, some common law countries may impose taxes on transfers to trusts or impose periodic taxes upon trust property.

Tax Considerations for Non-Citizens

Property located abroad taxed in U.S. for U.S. residents

U.S. citizens, and non-citizens who meet the IRS’s definition of a “resident” of the United States, are subject to federal gift and estate taxes on all of their money and property, worldwide. However, U.S. residents can also benefit from the $11.58 million lifetime gift and estate tax exemption and the $15,000 gift tax annual exclusion. In general, a non-citizen is a permanent resident if he or she currently resides in the United States and intends to remain there indefinitely.

A permanent resident should also keep in mind that he or she must pay an exit tax (i.e., a capital gains tax on the appreciation of any property they own) upon giving up permanent resident status.  

Different rules for non-residents

For non-residents, i.e., non-citizens who do not intend to remain in the United States, only money and property “situated” in the United States is subject to estate and gift tax in the United States. However, their estate tax exemption drops from $11.58 million to $60,000, which could result in a very large estate tax bill if the non-resident has a lot of property located in the U.S. Moreover, they may also be subject to estate tax in their country of citizenship, raising the issue of double taxation. The United States has entered into an estate and/or gift tax treaty with a limited number of countries allowing a citizen of one of the treaty countries who owns property to avoid the possibility of both countries taxing the same asset at the time of death.[2]

Special rules for non-citizen spouses

Unlimited marital deduction not available. A U.S. citizen who is married to a non-citizen should keep in mind that the unlimited marital deduction is not available for gifts or bequests to non-citizens, even if the spouse is a permanent resident. If the spouse receiving the assets is not an U.S. citizen, the tax-free amount that can be transferred to a spouse is only $157,000 a year (in 2020).  However, the unlimited marital deduction is available for transfers from a non-citizen spouse to a citizen spouse.

Tip: A non-citizen spouse can inherit from a U.S. citizen spouse free of estate tax if the U.S. citizen creates a special trust called a qualified domestic trust (QDOT). The U.S. citizen can leave property to the trust, instead of directly to the non-citizen spouse. The spouse is the beneficiary of the trust, and the trust cannot have any other beneficiaries while the non-citizen spouse is alive. The non-citizen spouse, as the beneficiary of the trust, can receive the income that the trust property generates without having to pay the estate tax. The estate tax on funds or property transferred to the QDOT will be deferred until the principal is distributed. However, if a distribution is made because the non-citizen spouse has an urgent, immediate need and has no other resources available, the principal may also be distributed to him or her without incurring estate tax liability. Further, if the non-citizen spouse eventually becomes a U.S. citizen, the principal can be distributed to that spouse without any further tax.

A QDOT must be established, and the property must be transferred to it, by the time the estate tax return of the deceased spouse is due. Usually, it is set up while both spouses are alive and comes into existence when the citizen spouse dies. The trustee—that is, the person or entity in charge of managing the trust assets—must be a U.S. citizen or a U.S. corporation such as a bank or trust company.

Jointly owned property treated differently. If a married couple jointly owns a home, it is assumed to belong to both spouses equally when both are U.S. citizens. This means that each of the spouses is considered to own a 50% share of the home. However, if one of the spouses is not a citizen, this presumption does not apply. For example, if the spouse who is a U.S. citizen dies first, and the jointly-owned home is worth $200,000, the entire $200,000—instead of $100,000—will be included in that spouse’s taxable estate unless the non-citizen spouse proves he or she contributed a certain amount toward the purchase of the home. Thus, if the non-citizen spouse made $50,000 in mortgage payments, the amount included in the U.S. citizen spouse’s estate would only be $150,000. If the married couple buys property together, and the spouse who is a U.S. citizen pays the entire purchase price, 50% of the value of the property will be considered a gift to the non-citizen spouse.

We Can Help

Estate planning for non-citizens is very complex. If you are a non-citizen or are married to a non-citizen, we can help you think through all of the issues that may affect how you plan for the future. Call us today so we can help ensure that all of your documents are valid and enforceable, that proper planning is in place for property located in other countries, and that your estate and gift tax liability is minimized.

[1] Department of Homeland Security, “Legal Immigration and Adjustment of Status Report Fiscal Year 2019, Quarter 4,” accessed March 16, 2020, https://www.dhs.gov/immigration-statistics/special-reports/legal-immigration

[2] Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, Norway, South Africa, Sweden, Switzerland, and the United Kingdom.

COVID-19: A Reminder of Why Estate Planning Is Important

Many people love to spend part of their summer vacation at the beach, enjoying the ocean and sunshine. But there may be unseen dangers that are crucial for beachgoers to keep in mind: For example, the undertow is a current of water, often quite powerful, below the surface, that is moving away from shore when waves are approaching it. It can easily knock a smaller person off balance and could be dangerous for those who are not strong swimmers. As a result, it is very important to take steps to protect family members from this danger. Likewise, there are a number of dangers associated with failing to put a well-thought-out estate plan in place that could make your family members feel as though they are drowning if you were to pass away.

State law, not you, will determine who gets your money and property. If you pass away without a valid will and/or trust, by default, much of your property will go to the individuals (heirs) spelled out in your state’s intestacy law in the proportions determined by the law. In effect, the state makes a will for you if you fail to do so. This may not seem like a major concern until you consider the potential consequences: A major one is that loved ones you want to provide for, including your own children, could be disinherited.

The following are several situations in which loved ones could be disinherited if you do not have a will and/or trust naming them as beneficiaries:

  • Children from a first marriage who have been adopted by a stepparent, or children who have been adopted by other family members or an unrelated person, may no longer be legally recognized as your children under state law. As a result, even if you still love and care for them, they will receive nothing from you unless you specifically include them in your will or trust.
  • Children conceived after one parent’s death using assisted reproductive technology, such as frozen embryos, may not inherit from that parent under intestacy statutes, many of which do not address the rights of posthumously conceived children.
  • In addition, although children of unmarried parents can always inherit from their mothers under state law, they may have to produce proof of paternity to inherit from their father under an intestacy statute.
  • A significant other with whom you have spent your life is unlikely to receive anything under state law if you are not married. Although state law does allow a spouse to receive some proportion of your estate, if you are not legally married to your partner—or in a legally recognized civil union or registered domestic partnership, he or she will inherit nothing from you.

There are many other situations in which intestacy statutes are unlikely to achieve your wishes: for example, a special needs child may need a larger inheritance amount to pay for future care than an adult child who is not disabled. Intestacy statutes provide no exceptions for these special circumstances.

You can ensure that everyone you wish to benefit from your estate will receive the money and property you want them to have by naming them and specifying the gifts you want them to receive in your will and/or trust.

An outright gift under state law will not protect your heirs’ inheritance. Outright gifts made pursuant to an intestacy statute provide no protection for your spouse or children, which is often problematic. Once they receive a distribution from your estate, the money and property they have received may not benefit them at all if they have creditors or ex-spouses who can reach it to satisfy their claims. In addition, if one or more of your children are irresponsible with money (i.e. spendthrifts), they could quickly squander the money and property you have worked a lifetime to save. These common problems can be addressed through the creation of certain types of trusts. There are a number of possibilities to consider, but two of the most commonly used trusts are those that distribute money and property in certain percentages at specific ages and discretionary trusts.

Creating a trust with distributions at specific ages will help to ensure that your beneficiaries will only begin to receive distributions at an age when you believe they will be sufficiently mature to responsibly handle them. Also, because the gifts are made in increments, you can rest assured that your beneficiaries will not be able to quickly exhaust their entire inheritance. The money and property held by the trust will be protected from creditors until it is distributed to your beneficiaries.

The trustee of a discretionary trust has the authority to make distributions to beneficiaries but is not required to make them. Because the beneficiaries do not have a legally enforceable right or entitlement to receive any of the funds in the trust, the money and property held by the trust are protected from their creditors until a distribution is made. The trustee of this type of trust should be someone you have confidence will make wise decisions regarding when and if distributions should be made since that person will have a significant degree of control over the trust’s funds.

Failing to create a trust could mean that your estate will be tied up in a lengthy court-supervised probate process. Instead of being immediately available to provide for the financial needs of your family members, your money and property will have to go through the probate process, which could last up to a year even if your estate is not very complex. This is true even if you have a will, as probate can only be avoided if you die with no accounts or property in your name. Typically, this is accomplished by transferring all of your money and property into a trust or naming a beneficiary for your accounts and other eligible property.

In addition, it is important to keep in mind that if you have minor children, money or property that they inherit under state law or a will cannot be immediately distributed to them (nor should it be). Rather, because minor children are not legally able to control property, unless you have named someone you have chosen to fill this role in your will, a conservator will need to be appointed by the court to manage the inheritance for them until they reach the age of majority under state law, at which point it will be distributed to them outright. Locating, screening, and appointing an appropriate person (who may not be someone you would have chosen) is a time-consuming process for the court. Further, the money and property you want to be used to care for your children will not be fully available to benefit them until the administration process concludes. Lastly, while the conservator will be supervised by the court, there is no guarantee that the court-appointed individual will use the money and property for the benefit of your children in the way you would have wanted.

Allow Us to Help You Care for Your Family

A carefully designed estate plan is like a life vest for your family in a rough sea. Losing a family member is never easy, but we can help you put plans in place that will provide you with the peace of mind of knowing that your grieving family will not be overwhelmed if you die. Give us a call to set up an appointment to talk about the best estate plan to provide for the needs of your family and loved ones. If you prefer, we are happy to meet with you over the phone or by videoconference.Coronavirus has been all over the news—and with good reason. For some people, it can turn into a serious illness if contracted. Thankfully, for the great majority of people who have contracted the disease, the symptoms appear to be relatively mild. Nevertheless, it is crucial for everyone, particularly those who are in good health, to continue to take all the steps necessary to protect those around us who are more vulnerable to becoming seriously ill if they are exposed to the coronavirus. Among the people who have died in the United States as a result of the coronavirus, 37 people, mostly elderly residents who had underlying medical conditions, were from one Seattle nursing home. We should all care for our neighbors and communities by staying home if we are sick, washing our hands frequently, sanitizing frequently touched surfaces, and implementing any other steps recommended by health experts.

Although most people are not likely to be in serious danger even if they come down with the coronavirus, it is a wake-up call to those who have been putting off creating or updating an estate plan. None of us knows what tomorrow will bring, so for your own peace of mind and the good of your loved ones, it is important to stop procrastinating.

There are several key documents an estate plan should include to protect you and your family if you should suddenly become very ill or pass away:

Last Will and Testament and/or a Trust

A will enables you to specify the individuals you would like to receive your money and property. In addition, you can name a guardian(s) to care for your children or other dependents if you are unable to do so and a conservator to handle their financial needs. For many, however, a will alone is not the best solution, as it is only effective after you pass away.

In a revocable living trust, you can name yourself as a trustee and continue to exercise control over the money and property you transfer to the trust. However, it also enables you to name a co-trustee or successor trustee who can manage your money and property for your benefit and the benefit of any other beneficiaries of the trust if you become too ill to do it yourself. In addition, your trust can specify when and how the funds should be distributed to your beneficiaries when you pass away. Further, if you have transferred all of your property into the trust, it will not have to go through the probate process—which can be expensive, time consuming, and open to any member of the public.

For some, other types of trusts may be appropriate to achieve particular goals, for example, protecting assets from creditors or providing for a child with special needs.

Note: If you do not create a will or trust specifying who you would like to receive your money and property when you die, it will pass to the individuals specified in the state intestacy statute, who will receive the shares mandated by the statute. Obviously, this is not optimal, as the people and shares spelled out in the statute may be vastly different from what you would have specified in your estate planning.  Moreover, probate is required for the administration of your estate if you die without a will or trust. In addition, a court will have to appoint a guardian and/or conservator to care for your children—and the person appointed may not be the individual you would have chosen.

Powers of Attorney

Using a power of attorney, you can name people you trust to make decisions on your behalf if you become ill and are unable to make them for yourself. Even if you are married, your spouse may not have the authority to make all of these types of decisions for you without the proper documentation.

A medical power of attorney can be used to name a trusted person as your agent to make medical decisions on your behalf if you are unconscious or otherwise unable to communicate them to your health care provider. As your agent, the person you have named is required to act in accordance with your wishes to the extent that they are known to that individual, so it is important to communicate important information regarding your preferred providers, medical conditions, treatments you do not want, religious convictions, and other pertinent information.

A durable financial power of attorney will allow the person you have named as your agent to make financial decisions and conduct business on your behalf if you cannot handle these matters for yourself. It can be as broad or as limited as you choose: For example, you could authorize a trusted individual to run your business for you, or you could simply authorize another person to write checks and pay your bills on your behalf.

Note: If you do not name trusted individuals to act for you in medical and financial powers of attorney, your family members, including your spouse under some circumstances, will have to go to court to be appointed to this role. As in the situation in which you do not have a will or trust, you no longer have any control over who is named to act on your behalf. The person appointed by the court may not be the person you would have wanted to take on these important roles.

Advance Directive/Living Will

Your advance directive, also known as a living will is a document that clearly spells out your wishes for the end of your life, for example, whether or not you want to be placed on life support if you are in a vegetative state or have a terminal condition. This important document allows your family and health care providers to understand your wishes even if you are no longer able to communicate them.

Funeral Planning

You can use a memorial and services memorandum to provide information to your family and loved ones about your wishes for your service, people who should be notified when you pass away, instructions regarding your remains, and information you would like to be included in your obituary. If you do not provide this information in advance, your grieving family will be left to guess about what you would have wanted after you pass away. This could lead to unnecessary stress and conflict at a time when they are likely to be feeling emotionally overwrought.

Give Us a Call

Certain situations can bring our own mortality to the forefront of our minds, even if they are unlikely to have a severe or direct effect on us. The coronavirus has still only affected a limited number of people in the United States so far, but it provides an important reminder of just how important it is, not only to us, but also to our family members and loved ones, to have an estate plan in place in case the unexpected happens. Our foremost goal is to help you have confidence that if you become ill, your own care and the needs of your family will be addressed. Call us today to set up a meeting, which can occur virtually if you prefer.