Imagine that you set up a trust for your son and give an independent trustee the discretion to make distributions to your son for his health, education, maintenance and support.  Next, imagine that your son gets divorced, loses his job, and is unable to pay his alimony.  Can your son’s ex-wife access the trust to satisfy the unpaid alimony.  In Tennessee and some other states, the answer is a resounding “No.”  These states zealously protect a person’s right to determine the beneficiaries of the person’s largesse.  Other states have determined that the public policy of making sure that alimony is paid is a higher priority.

Florida is one of the states that places more importance on satisfying alimony claims.  In the recent case of Berlinger v. Casselberry, the Court prohibited the trustee from making distributions to the primary beneficiary of the trust unless and until the beneficiary was current on his alimony obligations.  The Judge’s Order effectively meant that the alimony had to be paid first, and thus, the beneficiary’s ex-wife became the primary beneficiary of the trust.  The reason that the ex-wife sought the Court’s help is because her ex-husband was not working and was receiving no income that she could attach to satisfy her alimony.  Her ex-husband’s trust was directly paying all of his living expenses.  This technique of paying a beneficiary’s expenses out of the trust is specifically authorized by a recent Tennessee statute, but it was not allowed in the Florida case.

The Berlinger case highlights the significance of choosing the state law that will govern the trusts that you establish.  Tennessee passed substantial changes to its trust laws in 2013 to strengthen the rights of a grantor to choose who will benefit from the trust.  If you believe you can do a better job of picking your beneficiaries than a judge, you should make Tennessee law the governing law for your trusts.

On Thursday, August 29, 2013, the IRS issued Revenue Ruling 2013-17 regarding the tax treatment of same-sex spouses. Effective immediately, same-sex spouses will be treated the same as a heterosexual married couple for federal tax purposes. The District of Columbia and 13 states now allow same-sex spouses to become legally married. Prior to the issuance of the Revenue Ruling, the IRS did not recognize a same sex marriage for purposes of federal tax laws. The change in policy does not apply to civil unions or registered domestic partnerships.

There are numerous tax ramifications to this change. One consequence is that same-sex couples are now required to file a joint income tax return, even if they live in a state that does not recognize same-sex marriages. For 2012, they have an option to file as two single persons or as a married couple. However, if they want to file as two single persons, they must file or amend their 2012 income tax returns on or before September 16, 2013. If they file their 2012 income tax returns after September 16, 2013, they are required to file as a married couple. Due to the so called "marriage penalty," it is hard to predict whether it is better to file together or separately. In general, if there is a wide disparity between the amounts of income earned by the spouses, it will be better to file a joint return. If the spouses earn approximately the same amount of income, it will probably be better to file as two single persons.

In addition to the very quick decision that must be made with respect to 2012 income tax returns, a decision also needs to be made about filing claims for refund. If it would result in a tax refund, the spouses can amend their tax returns for 2011 and 2010, and perhaps 2009 (depending upon when their 2009 tax returns were filed), to file their returns as married filing joint. They do not have to amend their returns if it would cause additional taxes to be paid.

A gift or bequest to your spouse now qualifies for the federal gift or estate tax marital deduction. If taxes have been paid on a gift or bequest to a same-sex spouse within the last 3 years, or if gift tax exemption has been used, you should consider filing a refund claim. If your Will makes a bequest to a trust for your spouse, you should consider modifying the trust to qualify for the estate tax marital deduction. If you are not married, have an estate of more than $5.25 million, and plan to make a bequest to a same-sex partner, you should consider getting married in one of the states that allows same-sex marriages.

This week, I worked with three different clients whose families had some involvement with one or more disinherited children. Two of my clients treat their children disproportionately, or totally disinherit a child. The third client has been emotionally and financially disinherited by one of her parents. I ruminated on the family circumstances that led to the disparate treatment of the children. In all three families, the disinherited child’s natural parents went through a bitter divorce. In all three families, the parent who is disinheriting a child had remarried. One parent who is disinheriting a child was disappointed in the child, primarily because the child "favored" the child’s other parent.

When I reflected on other clients of mine who are either disinheriting a child or have been disinherited, or whose sibling has been disinherited, I noticed a pattern. In a significant percentage of these families, there was a divorce of the child’s natural parents. As we all know, divorce is not only difficult for the spouses, but is also difficult for the children. A lot of divorcing couples use their children to exact emotional or financial retribution. Predictably, a child who is cast into the middle of a nasty divorce is more likely to experience emotional problems. When the attention of one of their parents is diverted by a new spouse, it is not surprising that the child may become closer to their parent who does not remarry.

If you have gone through a divorce, and are considering disinheriting one of your children from a prior marriage, you should make allowances for the fact that your divorce created difficulties for your children. If your parents go through a divorce, my advice to the children is to continue to honor both of your parents and do the best you can to avoid taking sides in disputes between your parents. Your parents will take note if they perceive that you are teaming up against them.

A previous article detailed a case in which Edith Windsor had to pay $350,000 of federal estate taxes when her spouse died because Edith’s spouse was a woman rather than a man. The tax penalty was based on a 1996 federal law signed by President Clinton known as the Defense of [Heterosexual] Marriage Act (“DOMA”). The actual tax cost was significantly higher than $350,000 because New York also charged more than $200,000 of inheritance taxes that would not have applied if Edith’s spouse had been a man.

A federal judge in New York recently ordered the IRS to refund the federal estate taxes that were assessed. The judge ruled that DOMA is unconstitutional.

It appears that the constitutionality of DOMA will eventually be decided by the U.S. Supreme Court. Unless and until DOMA is thrown out, you should assume that gifts and bequests to your spouse will not qualify for a gift or estate tax marital deduction unless your spouse is a member of the opposite sex.

In a recent case, Estate of Ina Ruth Brown, the Tennessee Court of Appeals upheld the validity of a contract to execute Wills. These contracts are most often used in second marriages when at least one of the spouses has children from a prior marriage.

The contract typically works as follows: Each spouse agrees to bequeath certain property to the survivor with the understanding that the survivor will bequeath the property to the children of the first spouse to die following the survivor’s death.

Following the execution of the contract, the husband and wife each execute Wills which are consistent with the contract. After the first spouse dies, the children of the surviving spouse sometimes persuade the surviving spouse to change his/her Will in a way that totally disinherits the stepchildren. That is exactly what happened in the Brown case.

After Mrs. Brown died, her son probated her Will, which left everything to him.  Mr. Brown’s children filed a Will contest.  The children should have filed a claim for breach of contract against the estate of Mrs. Brown rather than a Will contest.  Nevertheless, the Court of Appeals granted to Mr. Brown’s children the property they were entitled to receive based upon the contract.  Even though Mr. Brown’s children were ultimately successful, it took them 8 years and significant legal fees to protect their rights.

Estate planning for spouses in second marriages is challenging. Each spouse wants to benefit their spouse and benefit their children from the prior marriage. The best solution is to transfer separate assets to the spouse and children upon the first spouse’s death. When there are not enough assets to take care of the spouse and the children, various approaches are used to enable the property to benefit the surviving spouse during his/her lifetime with the property to pass to the children upon the surviving spouse’s death. All of these techniques inevitably create tension between the stepparent and the stepchildren.

I have prepared contracts to make a Will for several couples, though only after investigating other solutions and with a warning to my clients that such contracts are a challenge to enforce by the children of the first spouse to die.

In a recent case, Cajun Industries, LLC vs. Robert Kidder, et al., the decedent designated his three children as beneficiaries of his 401(k) plan after his first wife died. He remarried a few months before he died and did not realize he needed to make any changes because he still wanted his 401(k) plan to go to his children. Unfortunately, when he died, his new wife successfully claimed the entire 401(k) account due to a federal law known as ERISA. This law required Mr. Kidder to fill out a new beneficiary form after he remarried and to obtain the consent of his new wife.  Because his wife had not consented to his designation in favor of his children, ERISA required the account to be distributed to his wife.

There were two other potential solutions that would have allowed the funds in the 401(k) account to go to Mr. Kidder’s children. Prior to getting married, Mr. Kidder could have asked his wife to sign a prenuptial agreement wherein she agreed to sign a waiver of his 401(k) plan. Alternatively, before he married, Mr. Kidder could have rolled his 401(k) account to an IRA and then designated his children as beneficiaries of his IRA. The rules requiring a spousal waiver to a beneficiary designation do not apply to IRAs.

In the Liner divorce case, the court awarded 1/2 of the equity in the husband’s premarital residence to the wife. As a general rule, assets owned by one spouse prior to the marriage are treated as separate property and are not divided in the divorce. There are some exceptions, including the division of appreciation of the property if the non-owner contributes to the appreciation. This case did not involve appreciation. Rather, the wife was awarded 1/2 of the house primarily because she made non-financial contributions to the ongoing maintenance and management of the residence.

This case demonstrates the importance of entering into a prenuptial agreement or an asset protection trust prior to marriage. Assets that you transfer into an asset protection trust prior to the marriage will belong to the trust and will not be subject to division in the event of a divorce.

 

In the attached Carnahan decision, the Tennessee Court of Appeals appointed a disabled man’s daughter as his conservator despite his objections.  The Court also allowed the daughter to file a divorce on behalf of her father.

It is somewhat unusual for a child to be appointed as a conservator ahead of a spouse who is willing and able to serve in such role. However, in this case, the ward’s wife had signed a prenuptial agreement that waived her right to seek the appointment of a conservator for him. If there had not been a prenuptial agreement, it is likely that the wife would have been appointed as the conservator due to the priorities set forth by Tennessee law.

It is also unusual for a court to give the conservator the power to file a divorce on behalf of the ward. This is generally thought to be such a personal matter that it should not be exercised by a conservator. When the daughter’s father had legal capacity, he decided to get married. By allowing the daughter to file for divorce in her capacity as conservator, the court allowed the daughter to substitute her judgment regarding her stepmother in place of her father’s decision made while he was competent. Have you ever seen a friend or family member marry someone whom you did not approve of?

There are two lessons to be learned from this case. You should address conservatorship in your prenuptial agreement and your financial and healthcare powers of attorney. If you do not want your future spouse to participate in the appointment of your conservator, then make sure that point is addressed in the prenuptial agreement.

Your financial and healthcare powers of attorney should clearly state who you want to serve as your conservator in the event that you become incapacitated. Further, your powers of attorney should state whether or not you want the agent or conservator to be able to file for a divorce on your behalf. I personally do not like the idea of an agent under a power of attorney or a conservator being able to file for divorce. When your spouse is not your agent or conservator, it will often be one of your children. Your children are likely to benefit financially if you obtain a divorce before you die. Therefore, your conservator or agent has a built-in financial conflict of interest. Even if there is not a financial conflict of interest, a lot of step-children dislike their step-parents and might file for divorce just to be mean.
 

I previously wrote about Edith Windsor, who was required to pay $350,000 of estate taxes because her deceased spouse was a woman rather than a man. This tax was caused by the Defense of Marriage Act (“DOMA”), which classifies same sex married couples as unmarried for purposes of federal taxation and various benefits.

President Obama has decided that certain portions of DOMA are unconstitutional and has directed the Justice Department to stop defending the law in court, including the pending appeal in the Windsor case.

There are many people who agree with the President’s assessment of the constitutionality of DOMA. Nevertheless, it is not the President’s job to determine the constitutionality of laws that have been enacted. Laws may be changed by Congress or ruled to be unconstitutional by the judicial branch of the government. It would create chaos if the President is allowed to prohibit enforcement of laws that he does not like.

If DOMA is overturned by Congress or the U.S. Supreme Court, this will be a watershed event for same sex married couples. There are numerous tax and non-tax benefits provided to couples who are treated as married by the federal government.