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Davidow, Davidow, Siegel & Stern, LLP
Long Island's Elder Law, Special Needs & Estate Planning Firm

Monday, August 30, 2004

Advance Planning in Second Marriages

Second marriages, particularly those later in life, can pose issues and challenges which require careful consideration. Prenuptial Agreement - a written agreement or contract drafted by lawyers and signed by the prospective husband and wife before the marriage - are designed to cover each spouse's rights in the event of divorce and upon death. Typically, the Prenuptial Agreement will cover a couple's individual property brought to the marriage, what is to be done with future-acquired property, and support of a surviving spouse. Prenuptial Agreements have expanded to cover the rights and obligations of the husband and wife during the marriage, as well. Even with these agreements, under New York law each spouse has a duty to support the other during marriage and possibly after divorce.

The importance of property rights notwithstanding illness and incapacity, although not just the province of second marriages, pose difficult issues for second marriage couples and their families. Who will care for the sick spouse? Who will be responsible for arranging for care and making decisions about that care? Who will pay for the care - whether at home or in a nursing home? And, if necessary, will Medicaid be available to pay for care?

Prenuptial Agreements can and should address many of these issues. If either spouse could remain at home with home care services, the agreements should have payment plans for care and other possible extraordinary medical expenses. Medicaid planning with respt to resources should also have been considered. Will one spouse be allowed to "gift" assets to adult children leaving the other spouse's assets exposed to Medicaid recovery or subject to spend down if either should require long term care? Has the prenuptial agreement provided for payment for supplemental Medicare policies and/or long term care insurance?

The issue of who will make actual health care decisions for an ill spouse must be addressed outside the prenuptial agreement in a Health Care Proxy and Living Will. Careful consideration in selecting the agent and alternate agent is essential. should the spouse be the agent or adult children from the prior marriage? If adult children, will the agent be accessible in the event of a medical emergency?

The facts of each case will differ as will the needs of the couple entering into a second marriage. Management of and payment for health care in a second marriage should not be overlooked in Prenuptial Agreements.

Sunday, August 15, 2004

Per Stirpes

An essential part of drafting a will or a living trust involves collecting information about personal and financial objectives of a client. Most clients are very clear as to whom they wish to leave their personal and financial property - a surviving spouse, children, and grandchildren are the most common beneficiaries.

It is also our job to make sure that those intended beneficiaries receive their inheritance. What happens if the intended beneficiary of a specific or residuary bequest under a will or trust dies before the client? Who will inherit?

There are three designations commonly seen in estate planning documents such as wills and trusts - Per Stirpes, Per Capita and By Representation. Each will be discussed over the next few weeks. We will also be discussing the importance of these designations in 'will substitute' instruments such as IRA and 401K plans, life insurance, etc.

The most common phrase used in estate planning documents is "per stirpes". Essentially, "per stirpes" means that a distribution will be made to the surviving family members in the family tree when an individual dies before the testator or settlor of a trust. This means that surviving "issue" will inherit equal portions of the share their deceased ancestor would have taken if living. "Issue" are persons descended from a common ancestor.

For example, assume that Mr. Client leaves his estate to three Children, A, B, and C, each of whom has three children. At the time of Mr. Client's death, one of his children, A, has predeceased. Mr. Client's Will says, "I leave all of my property, real and personal, to my three children, per stirpes." Who will inherit and in what proportions? The answer is that Mr. Client's two living children (B & C) will each inherit a 1/3 share of his estate. The remaining 1/3 share which would have been inherited by the predeceased child, A, will now be divided equally between the three surviving children, or issue, of A.

Sometimes, instead of using the phrase, per stirpes, estate planners will use another format. For example, Mr. Client's trust says, "The Settlor directs that the trustee shall distribute all of the then remaining property, both real and personal, of this trust to Settlor's Children A, B, and C, except that, should any of them not be living at such time, but leave issue surviving, the issue of such predeceased child shall take the share, per stirpes, which their parent would have taken, had he or she survived." The result is the same if A should predecease Mr. Client and leave three surviving children.

What happens if there is no per stirpes designation in a will or trust? The answer will be discussed next week.

Thursday, August 5, 2004

What Happens When "Per Stirpes" is not used?

We began our discussion last week on the importance of proper designation of beneficiaries in estate planning documents, such as Wills and Living Trusts, and on beneficiary designation forms for life insurance, IRA's, 401K's and certain bank accounts.

The most common planning phrase used is per stirpes. Here, the issue (children or grandchildren) of a predeceased child will take their ancestor's share. What happens if no designation is made? That is, what happens if the phrase per stirpes is not used?

Under wills executed before September 1, 1992, if per stirpes is not specified, the distribution will be per capita if all beneficiaries are equally related to the testator, and per stirpes if not equally related.

A per capita distribution means that each person who is entitled to inherit receives an equal share. Assume Mr. Client has four children - A has two children, B has 1 child, C has 1 child and D has three children. A and C die before Mr. Client. Mr. Client's will does not specify per stirpes. All 5 beneficiaries - A's two children, B, C's child and D - will divide the estate equally.

Under wills executed after September 1, 1992, if a disposition of property is made to "issue" without the phrase per stirpes or per capita, then the issue take by representation. Again, assume Mr. Client has four children - A has two children, B has 1 child, C has 1 child and D has three children. A and C die before Mr. Client. Now, B and D will each receive their 25% share of Mr. Client's estate; A's two children and C's one child (three in total) will share the balance of the estate (about 16.5% each).

In calculating a share by representation, the intital division of shares is made at the first generation level (here, the children of Mr. Client) in which a member is living. Members of the nearest generation to the testator will each receive one share and the remaining shares are combined and equally divided among the heirs in the next generation.

Monday, August 2, 2004

The Use of a GRAT (Grantor Retained Annuity Trust)

A GRAT (grantor retained annuity trust) is a technique for transferring property to members of the grantor's family at a reduced transfer tax cost. A grantor creates a GRAT by transferring property to a trust and retaining a "qualified annuity interest" in the property. The trust lasts for a specified period of time that the grantor is expected to outlive(the trust "term"). At the end of the specified term, the trust property passes to the trust's remainder beneficiaries (members of the grantor's family).

GRATs take advantage of special IRS valuation rules which make tax savings possible. The grantor is treated as having made a gift of a remainder interest in the property, the value of which is determined under these special IRS valuation tables. For tax purposes the value of the interest passing to the grantor's family (the gift) is less than the total value of the property at the time the trust is created because the value of the gift is deemed to be (1) the value of the property (2) as reduced by the value of the interest retained by the grantor. The grantor's Applicable Credit against gift and estate taxes (currently $675,000, and increasing in phases to $1,000,000 in the year 2006) can be applied to the reduced gift to avoid or minimize the payment of gift tax on the transfer to the trust. If the trust does not qualify as a GRAT, the special valuation rules would not apply and,as a result, the value of the retained interest would be deemed to be zero, meaning that the grantor would have to pay gift tax (or apply his Applicable Credit) the entire value of the trust property at the time he created the trust.

When the grantor's retained interest terminates, the property remaining in the trust passes to the grantor's beneficiaries free of a gift tax, even if it has appreciated in value since the trust was created. If the grantor survives the trust term, the trust property won't be includable in his estate for estate tax purposes when he dies because he will no longer have any interest in the property. If the grantor dies during the term, part or all of the trust property will be includable in his gross estate. But, he won't be any worse off than he would have been if he hadn't created the trust in the first place.