My uncle died last year leaving his wife and his son as co-trustees of his trust. He also made the trust the beneficiary of one of his IRA's, and he did this without his wife's knowledge. She maintains that an IRA can not be left to a trust without the written agreement of the spouse. The IRA is worth about $100,000 which she claims is hers. Is she correct?
Sally
Dear Sally,
Your uncle's wife may be as much as half right. IRA's are titled solely in the name of the contributor (in this case, your uncle) but his wife may have a claim against it based on community property law. Income earned by either spouse during a marriage is community property, owned equally by both spouses regardless of how the accounts holding that income are titled.
The law permits your uncle's wife to void certain transactions in which your uncle transfers community property without her consent. That's why IRA custodians and life insurance companies have "spousal consent" language in their beneficiary designation forms. If your uncle's wife had signed the consent form, then she would have waived any potential community property rights she had in her husband's IRA. The fact that she did not sign the consent form does not mean she's entitled to the entire IRA, but it does mean that she may assert a legitimate community property claim against it.
If your uncle was married to his wife throughout his entire career while he contributed to his retirement account, then the income used to fund his IRA is 100% community property, and half of it should belong to her outright. On the other hand, if your uncle was already retired when he married his wife, then the IRA is 100% his separate property and she has no interest in it at all.
If their's was a second marriage, chances are the IRA is partially community property and partially separate property. It will take some doing, but it will not be too difficult to discover how much of the IRA is your uncle's separate property, and how much of it is community property that should go half to her. If she successfully asserts a claim, she'll wind up with her half of the community property interest in the IRA, and the trust will get the rest.
To make this even more complicated, your uncle's estate planning documents may include a "forced election" that may cause the trust's no-contest clause to disinherit his wife if she asserts a community property claim against assets your father assigned to the trust, such as the IRA. For this reason, if your cousin objects to the wife's community property claim, he should review his father's estate plan in detail with an attorney.
Len & Rosie
Dear Len & Rosie,
I lost my wife to cancer on March 13th. About six years ago we bought ourselves life insurance and we each named our daughter as beneficiary. Because my daughter is nine years old, the insurance company is asking for a document naming her court-appointed guardian. I would like to know what I need to do to get something like this. Otherwise, they will keep the money for another nine years until my daughter turns eighteen. Please help.
Mohsen
Dear Mohsen,
You have run into one of the unfortunate problems with leaving assets to a minor child. Children under the age of eighteen do not have the legal capacity to manage their own affairs. Your daughter cannot legally sign the documents necessary to cash in her mother's life insurance policy, and neither can you.
There are two ways of solving this problem, both of which regretfully involve attorneys and courtrooms. As the insurance company suggested, you can petition the court to create a guardianship over your daughter's inheritance. As her legal guardian, you can collect the proceeds of the life insurance policy and hold it for your daughter's benefit until she turns eighteen. The downside is that you would have to provide periodic accountings to the court as to how you use your daughter's inheritance for her benefit.
If you do not need the money to provide for your daughter's immediate needs, or if the policy does not pay very much and creating a guardianship would be a bother, then you can petition the court to put the insurance policy proceeds into a blocked account, probably a bank certificate of deposit. Then, the money can sit there earning interest and gathering dust until your daughter turns eighteen and can collect the money herself.
For the readers of this column, there is a lesson to be learned here. Mohsen and his wife probably ought to have named one another as the beneficiary of their life insurance policies, while naming their daughter as the contingent beneficiary in a manner that would avoid having to go to court. They should have created a trust for their daughter's benefit. Or, if there was not enough of an inheritance to make a trust worthwhile, they could have left the insurance policy and their other assets to a custodian of their choice for their daughter's benefit under the Uniform Transfers to Minors Act. By neglecting to create an effective estate plan, they have made things more difficult for themselves.
Len & Rosie
Dear Len & Rosie,
I have IRA and 401k retirement accounts with my sons named as beneficiaries. I also have a trust, but my attorney advised me that these accounts didn't have to be in it. Would my sons have to take these monies as a lump sum in the event of my death? Someone recently told me the monies couldn't be distributed periodically to lessen the tax bite and would have to be distributed in a lump sum which would be a killer tax-wise.
Carol
Dear Carol,
You cannot transfer your IRA and 401k into the trust while you're alive without cashing them in and paying income tax all at once. But your retirement accounts will avoid probate anyway as long as you name your sons or anyone else you want as your pay-on-death beneficiaries.
If your sons inherit your IRA upon your death as your designated beneficiaries, they do not have to cash it in all at once. Instead, they can each draw down their share of your IRA with annual minimum distributions based on their life expectancies starting in the year after your death. They will still have to pay income tax on the money they take out of the IRA each year. However, by spreading out the payments, they can put off paying all that income tax and also allow the IRA to continue to benefit from tax-free growth after your death.
401k's are different. Each 401k plan has its own plan document, and depending on the terms of your plan, your sons may be forced to cash in your 401k upon your death. The reason this happens is that while employers offering 401k plans are willing to take the responsibility of managing their employees' retirement accounts, many are not willing to continue managing these accounts after their employees' deaths. You should check with your plan administrator to see what distribution options will be available to your sons after your death. If your 401k must be completely cashed out after you die, you may want to consider rolling it over into an IRA after you retire or quit your job.
Finally, it is possible to name your trust as IRA beneficiary and allow the trust to cash in your IRA over your sons' life expectancies. To make this happen, your trust must include provisions creating a "Designated Beneficiary Trust" upon your death. It is usually easier not to bother doing this, but you may want to consider it if you have a minor, disabled, or spendthrift child who should not inherit your IRA outright.
Len & Rosie
Dear Len & Rosie,
My friend recently passed away. She had only one son. The problem is that she never changed the beneficiary of her life insurance and 401k plan. Both name her husband as beneficiary, but he died ten years ago, and he wasn't even the father of her son. What can we do?
Diane
Dear Diane,
Since your friend's husband died before she did, the fact that he was named as the beneficiary on the life insurance and retirement plan means only one thing: Her son will have to send in a copy of his step-father's death certificate so the insurance company and 401k plan administrator know that the husband isn't going to collect the money.
What happens to the accounts depends on the terms of the life insurance policy and the 401k plan document. In most cases, the money will revert to your friend's probate estate unless she had named her son or someone else as the contingent beneficiary. But it's important to check with the plan administrator and the insurance company, because there could be default language that may result in your friend's son getting the money outside of probate.
If the money does pay into your friend's probate estate, then what happens next depends on how much the estate is worth. If there is more than $100,000, then your friend's son will have to file for probate. If, however, there is less than $100,000, then he can collect his mother's accounts using the small estate declaration form found in section 13101 of the California Probate Code. In either case, he will probably need the help of an attorney.
He should also understand that 401k plans are retirement accounts and that the money in his mother's 401k plan is pre-tax income. He will have to pay income tax on the account, either directly or through the probate estate, so it is important for him to set aside enough money for this purpose.
The lesson here is that when you create an estate plan, you should take into account not only what the situation is today, but what can happen tomorrow. If your friend's mother had taken the simple step of naming her son as the contingent beneficiary of her life insurance policy and retirement account, then he could have collected the accounts himself without having to pay a lawyer money to help him do it.
Len & Rosie
Dear Len & Rosie,
My Mother is a 78-year-old woman of meager means. She has no real property but does have several thousand dollars in a Vanguard rollover IRA. She does not have a will and I believe that there is really no need for one. I'm hoping that you can tell me that I am correct. If she chooses to name her five children the beneficiaries of the IRA, does this allow us, in the event of her death, to avoid probate?
Mona
Dear Mona,
Your mother's estate will avoid probate if the assets titled solely in her name upon her death total less than $100,000. From what you have told us, she has nothing to worry about. She can avoid probate with "poor man's estate planning".
She should name her children as IRA beneficiaries, assuming she wants them to get the money. Anything passing upon her death by means of a pay-on-death beneficiary designation will avoid probate. And it's good for her children too. If your mother's IRA pays into her estate, it will be subject to income tax upon her death. But if you and your siblings inherit the IRA as designated beneficiaries, you will have the opportunity to stretch out IRA distributions over your own life expectancies. Your mother can also name the children as joint tenants or pay-on-death beneficiaries on her bank accounts so that they will also pass free of probate upon her death.
The only downside to avoiding probate this way is that if one of the children were to die before your mother, that child's living descendents, if any, won't inherit anything. Only the surviving joint tenants or pay-on-death beneficiaries will get a share. But as your mother doesn't have that much anyway, it's probably OK to do this. She can update her beneficiary designations upon a child's death if she is able to.
She does not need a will if she wants everything divided equally among her children. If she dies without a will, her children and the living descendents of her deceased children will inherit her estate by intestate succession. But that doesn't mean your mother needs no estate plan. At the very least, she should have a durable general power of attorney and an advance health care directive. These documents are very important because they will give her children the means of making important legal and medical decisions on her behalf should she ever become incapacitated.
For those of you readers who own homes, poor man's estate planning is not for you. It is almost always a bad idea to put your children on the title to your home, because they'll be part owners now, not just upon your death. If you want the property back in your name, they may not be willing to cooperate. If you own a home and you want to avoid probate, you need a trust.
Len & Rosie
Len Tillem and Rosie McNichol are elder law attorneys. Contact them at 846 Broadway, Sonoma, CA 95476, by phone at (707) 996-4505, or on the Internet at www.lentillem.com. Len also answers legal questions each weekday, Noon-12:45 PM, and Sundays, 4-7 PM, on KGO Radio 810 AM.
