A $500,000 Estate Planning Mistake (Part 2)
Last week we were talking about Mary, who is losing out on a $500,000 401k her husband left to her in his will. So, why is the 401k custodian telling her she isn’t entitled to it? The reason is that the will does not automatically control how all property passes. It applies to what are called probate assets, those that pass by way of the will. Non-probate assets, such as retirement accounts and other assets which have beneficiaries designated upon death, are not governed by the will. That was Mary’s problem here. She asked me if I thought a lawsuit could force the 401k custodian to pay the account to her because the will clearly states John’s intent. She showed me the paragraph which makes reference to the 401k and his desire to leave it to Mary. I told her about a case I had years ago which was similar to hers. An attorney I knew filed a lawsuit to try to get a court to order the IRA custodian to pay a surviving spouse even though the beneficiary designation on file named someone else. Not surprisingly he lost the case because the beneficiary designation trumps the will. Retirement
A $500,000 Estate Planning Mistake
Mary called after her husband, John had died. She had questions about his will and his 401k. Mary was John’s second wife and he had two daughters from his first marriage. Between his first and second marriages, John had designated his daughters as the beneficiaries of his life insurance and 401k and had changed his will to leave everything to them as well. After they married, John changed his will to leave some of his assets, including his $500,000 401k, to Mary. The home he and Mary lived in, but which he owned, he left to his daughters, but provided Mary with the legal right to live there. The life insurance he didn’t change. His daughters remained the beneficiaries. So what was the problem? Mary was told by the 401k custodian that John never changed the beneficiary designation to her. As such, she was told, they must pay John’s daughters, not Mary, despite what the will says. Understandably, Mary didn’t like that answer. Next week I'll tell you why.
Can I Leave the House to my Children and not my Spouse? (Part 2)
Last week I was telling you about Sara, who called about her Mom. Dad left the house to Sara and her sisters but because of something called the elective share, I told Sara that the house may not be entirely protected when it is time to file for Medicaid benefits. Here’s how it works. The elective share is a law that protects an unsuspecting surviving spouse from being cut out of the will, only to find this out upon the predeceasing spouse’s death. In New Jersey, unless the surviving spouse knowingly waives this right, he/she is entitled to 1/3 of the deceased spouse’s estate less what he/she already has in his/her own estate. Let’s say, for example that husband dies leaving an estate of $600,000. 1/3 of his estate equates to $200,000. If wife already has $200,000 or more as part of her own assets, she doesn’t receive anything from his estate. If she has $100,000 then she receives another $100,000 from him. If she has nothing, then she receives $200,000. So, what has this anything to do with Medicaid? Because if the wife doesn’t assert her right to the elective share, Medicaid says, in effect, that she has
Can I Leave the House to my Children instead of my Spouse?
Sara called because her mom, living at home, needed nursing home care and would need Medicaid after spending down her remaining $20,000 of assets. She told me that her dad had died 3 years earlier. I asked her about what happened since then. Sara explained that Mom’s health had steadily declined after Dad died but they were able to keep her home with aides. She estimated that they had spent about $150,000 during that time. Then she told me that she and her sister actually own the home where Mom lives. That’s because his will left the property to his children and not his wife. I told Sara that Mom may not yet be eligible for Medicaid, even after spending the remaining $20,000 in her bank account. She was puzzled. “How can that be”, she asked. “It’s because of the house”, I told her, “and something called the elective share>” Next week I’ll fill you in on what I told Sara.
Little Known Law May Help Seniors Needing Long Term Care (Part 2)
Last week we were discussing a little known law that can be a boon to seniors. The Pension Protection Act of 2006 contains provisions that allow individuals to use their annuity cash value to purchase long term care coverage. Let’s look at an example of how that can work. Bob is age 70 and recently widowed. His children live out of town and are concerned about what would happen if he needs long term care in the future. Bob has had some health issues and was recently diagnosed with diabetes. He also has a history of heart disease and is not a good candidate for traditional long term care insurance. What Bob was able to do, however, is take advantage of an annuity based long term care strategy that utilizes the benefits of the Pension Protection Act. He was able to take his $140,000 fixed annuity which had a low cost basis of $40,000 (the amount he originally deposited), and using the IRS 1035 tax free exchange, transfer from his existing fixed annuity to a new annuity that complied with the rules set out in the Act. Bob’s annuity could continue to earn interest, but, in addition to that,
Little Known Law May Help Seniors Needing Long Term Care
On August 17, 2006, President George W. Bush signed into law the Pension Protection Act of 2006. The average American probably never heard of the law but some provisions in that law, which became effective in 2010, can be a real boon to Americans struggling to find ways to pay for long term care. Many seniors own annuity contracts. Individuals who own annuities can now add long term care riders with special tax advantages. The Pension Protection Act allows the cash value of annuity contracts to be used to pay premiums on long term care contracts. Money coming out of the annuity in this way is treated as a reduction of the cost basis of the annuity and thus is non-taxable. The cost basis is generally going to be the amount of money originally deposited with the insurance company when the annuity was purchased. In addition, the Act allows annuity contracts without long term care riders to be exchanged for contracts with such a rider in a tax free transfer under Section 1035 of the Internal Revenue tax code. This may be helpful to individuals who own annuities that have a low cost basis and are not in the