Tennessee Estate Planning Law : Tennessee Estate Planning Lawyer & Attorney : Bryan Howard : Howard & Mobley Law Firm : Nashville, Chattanooga, Memphis

A recent case (pdf) decided by the Tennessee Court of Appeals highlights the challenges of planning for spouses involved in a second marriage, especially when both spouses have children from a prior marriage. The children of the first spouse to die generally do not fair well.

The case involved Mr. and Mrs. Reinhart, who both had 2 children from a prior marriage. When Mr. Reinhart died, his entire estate went to his widow. Before her husband's death, Mrs. Reinhart had prepared a Will which left her estate in 4 equal shares to the children if her husband predeceased her. After her husband died, Mrs. Reinhart changed her Will to leave her entire estate to her two children. The stepchildren were not successful with their attempt to overturn the change that had been made to Mrs. Reinhart's Will.

I was not involved in the case, but I would venture a guess that the Reinharts had an "understanding" that the survivor would treat all 4 children equally. I have heard this plan many times before. It is a simple and beautiful estate plan when it works. Regrettably, what happened with the Reinharts occurs frequently. It is natural for a widow or widower to spend more time with their own children than with their stepchildren. The children are often successful in persuading their parent to change the parent's Will in their favor.

Another concern is the potential remarriage of the survivor followed by a significant transfer of assets to the next spouse. If this occurs, the children of the survivor can also lose their inheritance.

Estate planners are very well aware of the dangers of planning for couples in second marriages. The problem is that there are drawbacks to all potential solutions that we can recommend.

My preferred solution is to give the children of the first spouse to die a significant portion of their inheritance at the first death. In some cases, this benefit is funded by life insurance. The survivor can then leave all or most of their estate to their own children. This solution might generate estate taxes at the first death and may not be feasible if it does not leave enough assets to take care of the survivor for their remaining lifetime.

Another solution is to put a significant amount of assets in a marital trust for the survivor. There are a variety of safeguards that can be used to ensure that the trust is not depleted during the survivor's lifetime. These safeguards are often disliked by the survivor. The trust arrangement puts the stepchildren in the position of "waiting" for the survivor to die. I have been involved with a lot of these trusts where the survivor and the stepchildren were all unhappy with the arrangement.

My least favorite solution is for the spouses to enter into a contract that requires the survivor to treat the children equally. At best, this gives the children of the first spouse to die a chance to sue their stepsiblings if they are not treated as outlined in the contract.

Married persons who have children from a previous marriage must plan carefully if they want to provide for their children and spouse without pitting them against each other.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

I occasionally receive inquiries from a child whose parent has early stage dementia. The conversation frequently starts out with statements like “Dad’s short-term memory is awful” or “Mom is beginning to make some really bad decisions.”  Even better, “Dad has had 3 wrecks and refuses to quit driving.” The Child wants to know what can be done to protect the parent.

I encourage the child to seek medical help from the parent’s physician and to build a strong support group of friends and family members who will watch out for the parent.

Today, I received an inquiry from the son of a man who recently gave $100,000 to a stranger that is currently in FBI custody.  Apparently, this stranger has persuaded several other elderly folks to make "investments" with him.  The father has horrendous short-term memory, but still recognizes family members and other close acquaintances and can handle routine financial transactions such as writing a check to pay the electric bill.

I told the son that he has two choices. The best course of action is for the son to try to convince the father to visit with an attorney to discuss ways of protecting his assets.  I encouraged the son to enlist the aid of his father’s closest friend in discussing this matter with his father.

If the father is unwilling to cooperate in seeking a solution, the son’s other alternative is to petition the court to appoint a conservator for his father. This course of action should not be taken lightly. Judges are very hesitant to take away a person’s legal rights. Proof of “bad decisions” is not enough to take away a person’s legal rights when that person has periods of “lucidity.” Furthermore, even if the Judge agrees to appoint a conservator, this does not necessarily mean that the father will be unable to change his Will. The dilemma for the son is that he may jeopardize his future inheritance by applying for conservatorship.

I have seen the problem from other perspectives.  I have been involved in several lawsuits involving decedents who had a period of dementia prior to dying and either made suspicious gifts or changes to their Will late in life. The net effect of the gifts or Will changes was to distribute the decedent’s assets in a significantly different manner than had been intended by the decedent before the onset of dementia. As a general rule, it is very difficult to change this result.  The beneficiaries who were harmed by the change must prove that the decedent lacked legal capacity and/or was unduly influenced to make the change. Because the decedent is not available to testify, his mental condition can only be proved by inference.

Sometimes, my clients ask for my assistance on how to plan ahead to protect themselves from making bad decisions if they later suffer from dementia.  There are some very good safeguards that can be put in place.

In summary, the onset of dementia poses a great risk to a person's financial well-being. There are no foolproof solutions, but planning ahead can minimize the damage.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

More than 50% of marriages end in divorce. When one spouse enters the marriage with significant assets, they often leave with less than they started with.

The traditional method for protecting your assets is to enter into a prenuptial agreement before you get married. I recommend this to all of my clients who are getting married.

In lieu of or in addition to a prenuptial agreement, Tennessee residents can protect their assets by transferring them to an asset protection trust {pdf} before they get married. Even if they do not have a prenuptial agreement, their spouse will not be entitled to any of the trust assets upon divorce. Furthermore, their spouse will not be able to claim any portion of the trust assets upon death. This latter point is especially important for later-in-life marriages when one or both spouses have children from prior marriages.

I have mostly used pre-marital asset protection trusts for young adults who have received substantial gifts and/or inheritances from their parents and grandparents. As a general rule, these young adults have relied solely upon the protection afforded by the trust because they were not willing to discuss a prenuptial agreement with their future spouse.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Your family LLC or limited partnership might be hit with a large tax bill from the Tennessee Department of Revenue for 2009 and future years. The law was recently changed to remove the exemption from Franchise and Excise taxes for certain family LLCs and limited partnerships that own commercial real estate.

Under prior law, rent income from commercial properties was defined as passive, which allowed family-owned entities to avoid paying the tax. The new law changes the definition of passive income to exclude rental income from commercial properties and residential properties containing more than four units.

The result of this change is to make entities owning such property subject to franchise tax on the value of the entity’s property ($2,500 per million dollars of value) and an excise tax of 6.5% on the net income earned by the entity.

If the owners of the entity do not want to pay the tax, they can waive liability protection prior to October 1, 2009. This means that if the entity suffers a judgment that exceeds the value of the entity's assets, the owners would be personally liable for the judgment. A lot of my clients are choosing this option and purchasing additional liability insurance.

Another change concerns the registration requirements for all entities that claim an exemption from Tennessee Franchise and Excise taxes. Each such entity must notify the Tennessee Department of Revenue of its exemption within sixty (60) days after creation and then each following year no later than April 15. If you are late, the Department of Revenue will either eliminate your exemption or charge you a $1,000 penalty.

Questions and answers regarding franchise and excise taxes.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The recent turmoil in the financial markets has caused a lot of concern about FDIC coverage for CDs and other bank deposits. It is quite a nuisance for a depositor with hundreds of thousands of dollars or a few million dollars in CDs, to deposit the money in several banks and/or in several different names.

Last fall, the FDIC expanded the amount of coverage available to persons who have Revocable Trusts.  If you already have a Revocable Trust, or are willing to establish one, you can increase your FDIC coverage.

The new rules allow the trust to get $250,000 of coverage for up to five beneficiaries of the trust. Thus, as long as there are at least four persons who will become beneficiaries following your death, your trust can get coverage for $1,250,000 of CDs in the same bank. You can get an additional $250,000 of coverage for a CD owned by you that is payable to your trust upon your death. Several of my clients have used this simple method to obtain $1,500,000 of FDIC coverage for CDs in the same bank.

More information about FDIC Coverage:

• Read the specifics about Revocable Trust coverage at the FDIC site
• Call the FDIC at 1-877-275-3342 with questions about coverage.
• Calculate the amount of your FDIC coverage

• Email This
• Print
• Comments
• Trackbacks
• Share Link