Contesting Life Insurance Beneficiary – A Guide

Contesting Life Insurance Beneficiary – A Guide – SmartAsset

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Life insurance beneficiary designations allow the policyholder to decide who should receive a death benefit when he or she passes away. That doesn’t prevent someone from contesting life insurance beneficiary payouts, however. There are different reasons why someone may choose to dispute the beneficiary of a life insurance policy. If you believe you have a valid claim to contest someone’s beneficiary status or your own position as a beneficiary is being challenged, it’s important to understand how disputes can affect life insurance payouts.

Life insurance is one part of a complete estate plan, which is something a financial advisor can help you create and update. 

Is Contesting a Life Insurance Beneficiary Legal?

Generally speaking, yes. If someone else believes that the policyholder’s choice of beneficiary should not be honored then they can raise a claim to dispute it. This, however, can be a lengthy and time-consuming process that involves hiring an attorney and contesting the beneficiary in court. Only a court decision can change who can benefit from a life insurance policy; the insurer is required to abide by the terms of the original contract.

So who can contest a life insurance beneficiary?

In simple terms, anyone who believes they have a valid claim to a life insurance policy can contest the original policyholder’s choice of beneficiary. Some examples of when a life insurance beneficiary may be contested include:

  • A current spouse who objects to a former spouse being named as the life insurance policy’s beneficiary
  • Adult children who believe they should be named beneficiaries to a parent’s policy
  • Anyone who believes the original beneficiary designation was made under duress or undue influence

It’s not uncommon for disputes over life insurance beneficiaries to arise after someone makes changes to their policy (or fails to) after a major life change. So for example, if you get divorced and remarry you’d have to update your policy to make your new spouse the beneficiary. Otherwise, your former spouse would still be entitled to the policy’s death benefit when you pass away.

Can a Life Insurance Beneficiary Be Removed?

As long as the policyholder is alive, they can remove or add beneficiaries to their policy. Doing so typically requires filling out the appropriate paperwork with the insurance company.

Again, the reasons for removing a beneficiary from a life insurance policy may tie in to life changes. A change in marital status, the birth or death of a child or a falling out with a family member could all prompt a change of life insurance beneficiary.

Before changing a beneficiary, it’s important to consider the financial and legal implications. If you’re divorced, for example, but you’re required to keep your former spouse as the beneficiary as part of your divorce decree attempting to make changes could be problematic. In that scenario, it could make more sense to simply purchase a new policy and name someone else as a beneficiary.

Once the policyholder passes away, no changes can be made to the policy or its beneficiaries by the insurance company. A court order would be necessary to remove a beneficiary and replace them with someone else.

How Contesting Life Insurance Beneficiary Works

Contesting life insurance beneficiaries is a legal process but whether your dispute is subject to state or federal law can depend on the policy. If, for example, the life insurance policy was issued by an employer and is covered by ERISA guidelines then federal law would apply when disputing a beneficiary. A lawsuit would need to be filed in the probate court that’s overseeing the disposition of the deceased person’s estate.

Once the lawsuit is filed, the insurance company may choose to hold off on distributing death benefits to the named beneficiary until the case is resolved.

The person bringing the lawsuit to contest a beneficiary would need to demonstrate to the court why their claim should be upheld. The type of proof or evidence required to do so may depend on the nature of the claim.

For example, say you have two siblings and all three of you were named as co-beneficiaries on your mother’s life insurance policy. But just before she passed away, she changed the designation to exclude you and one of your siblings, leaving the entire death benefit to the third sibling. If you believe this change was made under duress you’d need to be able to prove that your sibling coerced your mother into making the changes.

If you’re able to prove to the court that the change of beneficiaries shouldn’t have happened, then the court can order the life insurance company to uphold the original designations. But if you’re unable to show evidence that supports your claim, the court may rule in favor of your sibling and allow them to remain as the sole beneficiary.

Disputes over life insurance beneficiaries can be costly, as they typically require the expertise of one or more attorneys. They can also take time to process so it may be months or even years before a death benefit can be paid out, depending on the nature of the dispute claim.

Preventing a Contest of a Life Insurance Beneficiary

If you have a life insurance policy, there are some things you can do to minimize the possibility of someone challenging your choice of beneficiary.

First, consider carefully who you want to benefit from your policy. This is especially important if you have minor children. In that case, you could either name your children as beneficiaries along with a custodian who can manage the death benefit on their behalf until they reach adulthood or set up a trust. You could then name the trust as beneficiary to the policy, with your children serving as beneficiaries of the trust itself.

Next, consider reviewing your policy at least once a year to make sure your beneficiary designations still match up with your wishes. If not, you can get in touch with your insurance company to find out what you need to do to change your beneficiaries. Once you change them, let the old beneficiaries know that they’ve been removed from the policy.

When changing beneficiaries, consider talking to a financial advisor or an attorney first. If you’re divorced, for instance, it’s important to make sure changing beneficiaries won’t lead to any conflicts over your estate down the line if you decide to remarry or have more children. And a financial advisor can help you evaluate whether your current policy is sufficient in terms of what you’ll leave behind to your beneficiaries.

The Bottom Line

Contesting life insurance beneficiary designations can happen for a number of reasons. If you’re the beneficiary that’s being contested, you may need an estate planning attorney to help guide you through the legal process. And if you have a life insurance policy, it’s important to know what can trigger disputes over beneficiaries after you’re gone. Of course, there are alternatives to life insurance as ways to benefit a survivor. It might, for example, make sense for you to create a testamentary trust.

Tips for Estate Planning

  • Consider talking to a financial advisor about purchasing life insurance if you don’t have a policy yet. And if you don’t have a financial advisor, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors in your local area. It takes just a few minutes to get your personalized recommendations online. If you’re ready, get started now.
  • Knowing how much life insurance you need, or your beneficiary should have, is important. Use SmartAsset’s free life insurance calculator to get a good estimate of what the right amount for you is.

Photo credit: ©, ©, ©

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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PODCAST: Estate-Planning Your Stuff with T. Eric Reich

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David Muhlbaum: When it comes to estate planning, money is usually front of mind. Makes sense, that’s where decisions about wills, trusts and more can realize real tax savings. But it’s stuff, tangible things like houses, china and collectibles that often generate drama and conflict. We talk with a financial advisor who’s touched a nerve on this front. Also, meet Generation I. All coming up in this episode of your money’s worth—stick around.

David Muhlbaum: Welcome to Your Money’s Worth, I’m senior editor David Muhlbaum, joined by my co-host, senior editor Sandy Block. How are you doing Sandy?

Sandy Block: I’m doing good.

David Muhlbaum: Well, good. Short of talking politics, there’s probably no quicker way to generate angry feedback than waging intergenerational battles.

Sandy Block: But you’re going to do it anyway?

David Muhlbaum: Sort of? I say that in part because while the study I’m going to discuss sounded like it was going to be kids versus the olds, it turns out there’s more nuance than that. Anyway, I’m going to talk about Generation I, which isn’t really even a generation but rather a handy little term that the Charles Schwab Investment firm cooked up for new investors. By that they mean people who are new to stock market investing.

Sandy Block: And those folks have been the source of some of the market drama we’ve seen this year like the GameStop bubble we talked about earlier this year.

David Muhlbaum: Yes, yes. There is overlap between the whole meme stocks crowd and Generation I. I stands for investor but since it’s a new term, let’s start with the definition. What Charles Schwab means by Generation Investor, Generation I, is people who started stock market investing in 2020—not before. So it doesn’t matter what your actual age is. There are Generation I members who are Boomers, Gen X, Millennials. Obviously, the group skews younger than investors broadly, but what’s striking is that Generation I, according to Schwab, accounts for 15% of all U.S. stock market investors.

Sandy Block: By population, not by dollars invested.

David Muhlbaum: Yes, by population. They don’t have a figure for a Generation I’s sum assets but I see what you’re getting at. And yes, Gen I earns about $20,000 less in annual income, at $76,000 a year, than those who began investing before 2020. And here’s another interesting number, half of Generation I says they live paycheck to paycheck.

Sandy Block: Okay. That sounds worrisome.

David Muhlbaum: Yeah, but here’s the thing. Some of the so-called Generation I are people who downloaded Robinhood and are watching a handful of stocks for big moves, short term trading. And if they’re doing that while missing payments on their car note, okay, that’s bad. But at least according to the study, they say they’re learning that investing is more about longer-term gains versus shorter-term wins. About learning to do research, diversification, capital market gains, taxes, risk tolerance, all that—the knowledge if you will.

Sandy Block: I’m hearing echoes of what Kyle Woodley was talking about when he joined us for the GameStop discussion about how it’s possible for people who came in for this excitement might be convinced to stay around for the long term, grow your wealth, not double your money, kids.

David Muhlbaum: Yeah, I totally agree. However, the big factor here is that the sum of Generation I’s market experience is this strong bull market. Will they stick around when things go south, which someday, sometime we’ll have a bear market. Markets go up, markets go down.

Sandy Block: That’s right, and I’m constantly reminded what our editor Anne Smith reminds us all the time, is that we’ve been here before, maybe not at these numbers. But in the 90s, when tech stocks were taking off, all kinds of people got in the market for the first time. And while you couldn’t make trades for nothing on an app, it was cheaper to buy and sell stocks than it had been in the past. And a lot of these people piled in because they had heard that tech stocks would never go down and they didn’t think they would ever lose money and they learned the hard way that they could.

David Muhlbaum: When we return for our main segment, we’ll talk with a financial advisor with some insights about the estate planning for stuff. Not just the money, the stuff.

David Muhlbaum: Welcome back to Your Money’s Worth. Joining us today is T. Eric Reich, the president and founder of Reich Asset Management in Southern New Jersey. Eric has a whole slew of professional certification acronyms after his name, including CFP. And the way we found him is that he’s a contributor to Kiplinger’s Wealth Creation Channel. That is an area of our website that has content from a range of financial professionals, CFPs, CPAs, tax lawyers and more. They’re qualified and they’re good writers. Plus, since they’re dealing directly with clients, I’d venture to say that they often have a closer sense of what personal finance guidance people actually need than personal finance writers. So Eric wrote a piece for us called, Time to Face Reality, Your Kids Don’t Want Your Stuff. And well, it was a hit. Welcome, Eric. We will get into what stuff and why, but since we’ve brought up how you professionals get to hear it directly from the clients, why don’t you tell us a little bit about the reaction you’ve been getting? Because, I understand from your assistant that you’ve gotten a lot of feedback.

T. Eric Reich: We have. We got probably a few dozen emails across the country from different readers of Kiplinger’s that saw it and then of course our own clients, of course, were calling us. They were writing or calling and letting us know their thoughts on it. And it’s funny, I wrote it because it’s such a recurring theme with a lot of people. They’re always convinced that people want all of your stuff and they just don’t. So I wanted to touch on why, but I knew it was going to get a strong reaction because I hear the same thing all the time from people. So if I hear locally on the ground, then I’m sure to a bigger audience, we were going to even get more opinion on that.

Sandy Block: Well, Eric, I immediately latched onto your piece because I am in the process of… My father passed away a couple of months ago and I’m in the process of distributing and cleaning out his house and it’s a mammoth job. So many of the things that you talked about really resonated with me. Obviously, we’re going to link to your piece so that people can follow up and read it in its entirety but we’re going to hit on some highlights and my question is, what’s the number one item people planning their estate think their kids want but the kids don’t actually want?

T. Eric Reich: By far the biggest one is the house. And it’s not that the kids don’t want the house, it’s that logistically it just doesn’t work. My example: I have three children, I have a nice house and I have three young kids. Let’s say my kids were in their twenties and something happened to me. My kids might want the house, but how’s that going to work? None of them can afford it because they’re just starting out in their careers. There’s three of them, they’re certainly not going to share it. And then one of them invariably wants to buy it, but they think they’re entitled to a discount because they’re my kid. But then the other two would be offended if they got a discount because they’re my kids, so why should they get shortchanged in favor of another one? So everybody thinks that their kids want the house, but the reality is most often that the biggest misconception is that your kids just really don’t want your house.

Sandy Block: So a follow-up question, Eric, if you aren’t going to leave the kids your house, how should you plan your estate so that doesn’t happen?

T. Eric Reich: So if you’re not going to leave the house to the kids, I mean, you can leave it to them, but you can reference in there, “Hey, these are the parameters in which someone’s going to keep it.” So if you want to keep it, it has to be appraised by two different independent people or three different and you take the average of the three it’s bought at fair market value. You have to specify the rules to which someone can keep it because if not, that’s where all the fights start, is the more ambiguity you leave in it the bigger the fight. So all of those things should be spelled out ahead of time. If you want it to be sold, say you want it to be sold. If somebody wants to keep it, fine, but here are the rules under which someone gets to keep it.

David Muhlbaum: What about setting up a trust? Couldn’t that help establish the rules you’re talking about?

T. Eric Reich: It can, I mean, I think a trust in general can help with a lot of things. Again, this is for an estate planning attorney more but to me, I like using trusts in general. Simply because it’s a way to control things and I hate to use this phrase, control from the grave, but that’s exactly what it is. And sometimes that comes off as sounding like a control freak or overbearing, but sometimes it’s for, honestly, just the protection of the beneficiaries themselves. If one’s a spendthrift, if one’s in a bad marriage, if one has a lot of creditors, you could be doing them a disservice by giving it to them outright instead of via trust.

Sandy Block: So, Eric, isn’t the other advantage of putting your house and other items in a trust that it keeps it out of probate?

T. Eric Reich: It keeps it out of probate and the biggest part of that too, is, that’s public record. I mean, I remember when a client had a family member pass away, they got a phone call a few months later from a guy wanting to buy the antique car that they just inherited. To which their response was, “Wait, who are you again?” Well, here they looked up in public records that one of the assets was this old antique Chevy and the guy wanted to buy it off him. And I always say, you see it in real life, you know,. Princess Diana’s will was published in a magazine. Whereas I always say, “Well, what about, Frank Sinatra?” And they go, “Well, I never heard anything about that.” Exactly, because everything was in a trust. So privacy is a big component of that as well. So avoiding probate and also what goes along with that is the privacy factor.

David Muhlbaum: The main family house is one thing but a vacation house can be even more emotionally loaded, no? I imagine someone working on their will thinking, wouldn’t be great for everyone to get together at the lake house every summer, roast marshmallows and remember grandma and grandpa for having found this place. And actually the kids are like, “Eh, we like going to Europe.”

T. Eric Reich: You’re absolutely right. It’s definitely bigger for the creator of the estate. It’s not that the beneficiaries don’t love the idea of the vacation home and everything else. The problem is, and again, I always go back to my example, I have three kids. Who gets to use it when? It’s only fit to be used in the summer months. I live at the Jersey shore, so, super-popular here June through the end of August. So, who gets to use it during that time period and what weeks and what holidays? And as I get older and my kids get older, their kids get older,

If one family has five kids and the other has one, are they getting more usage out of it? How are the expenses being paid? Is everyone sharing in that equally? So it really starts to create a problem. One of the ways around that maybe is that if that were in a trust, then I could also put money into that trust for the maintenance of the house, to pay the taxes, it’s going to pay everything it needs at least for the next decade. And then after 10 years, you guys have to come up with a solution based on x, y, and z of how we should deal with it going forward.

Sandy Block: Yeah. Eric, my experience with people who have inherited vacation homes, it sounds like a great idea at the time but very often they/ve moved and live many, many miles away. They don’t live near the Jersey Shore, they live in California, so it becomes a huge hassle. And I think that’s something probably you mentioned that people also need to think about, how close are your heirs to the actual vacation home that they could use it.

T. Eric Reich: Yeah, we actually just had a situation not too long ago. We had someone who owned a house on the beach, a very valuable house. They were kind of house poor; they had a phenomenal house, but not tons of money other than that. But the client really wanted to preserve that asset for a grandchild, the only grandchild, who lived hours and hours away. And I actually suggested, we call the grandchild and ask point blank, “Do you want this house?” The client was floored, like, “Well, of course they want the house, who doesn’t want a house on the beach in Ocean City in New Jersey.” Well, we called and it turned out the kid said, “That’s wonderful but I’m in my 20s, I work 80 hours a week. It’s three and a half hours away. I will absolutely never use that house. I’d much rather you sold it and got to use the money and enjoyed it. And if there’s something left over, wonderful, leave it to me but otherwise, I really don’t care.”

David Muhlbaum: Well, sounds like conversations really come down to the core of doing estate planning, especially around stuff. But those could be pretty fraught conversations. It sounds like this one went okay, but I assume they don’t always.

T. Eric Reich: Well, yeah, that’s true. I mean, the reason we had to make that phone call was because they were adamant that, of course, they would want this. Who wouldn’t want it? And the reality is there’s a lot of people that wouldn’t want it. The beauty of that is in the eye of the beholder, not so much somebody on the other end, but these are real world scenarios that people have to deal with. And of course the house being the biggest, but it’s not always just the house.

Sandy Block: Now that leads me to my next question, Eric, because you also talk in the slideshow about your stuff, your collectibles. They may have great sentimental value to you but maybe not to your children. Should you start getting rid of them while you’re still around?

T. Eric Reich: We do suggest that sometimes or at least explore it. Or, if not, educate the children on the value of it. A lot of times what we’ll see is someone has a collection of stuff, whatever it might be, the owner, of course, knows how valuable it is. They’ve been collecting it for 20, 30, 40 years, but an heir doesn’t necessarily have an idea of what that would be worth. And we ran into a scenario like that: We had someone that was going to basically just sell a bunch of stuff. And I think it was for like $1,000. And then we actually brought a specialist in to review it and turns out it was worth $45 to $50,000. So this poor guy was going to get ripped off because he didn’t understand the value of what it was, and that’s not uncommon at all.

Sandy Block: That’s my Antiques Road Show nightmare, Eric, is that I will give something to Goodwill and be watching Antiques Road Show and it’ll show up being worth $50,000 and I’ll realize that I gave it away. So I think you’re suggesting that you get that stuff valued and appraised while you’re still around to help your kids is a really good one.

T. Eric Reich: If you’re not a collector, you don’t know. Either sell it and let it go ahead of time, or at least communicate that value—and an actual value, because sometimes we also think collectibles are worth a lot more than they really are. We think it’s worth $50,000 and it’s worth $1, that’s more often the case. But nonetheless, an appraisal from an independent person will help.

David Muhlbaum: I’m glad you brought up the point about actual valuation, because my cats eat from some pretty fancy china bowls that someone thought had a lot more value than they did. And I think that sometimes these items that people have had for a long time or inherited from their predecessors, they really don’t fetch that much today.

T. Eric Reich: No, because unfortunately some of the things and it’s just a generational thing and I use china, actually as the example a lot of times. Because 50 years ago, 75 years ago, china was prized. I mean, for everybody, fine china was a real hallmark of things. Today, I probably have six or seven sets of fine china. Some of them apparently, extremely old, from great-great-great-grandmothers. But the reality is the generation today doesn’t use it at all. If they do, they can’t use five, six, seven sets of it. But the reality is that value from a long time ago doesn’t necessarily translate today for those reasons. So a lot of times things you think are very valuable maybe aren’t.

Sandy Block: Yeah. David Muhlbaum: and I have discussed this, and both of us are awash in china. And, I also have at least two sets of silver that again have been handed down from generations. As you said, young people—and this goes for even furniture—young people just don’t use that stuff. So I guess, the best thing you can do is either get rid of it or have some instructions for what you’d like to have done with it.

T. Eric Reich: Yeah. And valuation is key for that as long as you have a good value placed on it and you have a sense of what it might be worth? My wife’s family, they have a much, much larger family than I do. They’ll go to everybody in the family, two and three removed and say, “Hey, does anybody want this piece?” Because it is a family piece. But if not, then what do they ultimately do with it? It sounds sad to have to part with it, if really nobody wants it, and you know you mentioned yourself and you’re going through it personally, it’s only adding to the problem, we’ll call it, of settling an estate. And the less planning involved, the bigger the problem becomes.

David Muhlbaum: I imagine that in your line of work, Eric, you refer people out for valuations pretty often. How can our listeners get good qualified valuations for their stuff?

T. Eric Reich: So there are evaluation organizations. So you basically would want to find certified valuation type of people for that.

David Muhlbaum: Do they have acronyms like CFP?

T. Eric Reich: They probably do. I think I’ve seen one or two out there, definitely not an expert on it, but it is funny because from the article, I did have two different companies reach out to me and say, “Hey, this is what we do for a living. Feel free to pass our information along.” So these companies are out there, they do understand what things are worth. I got lucky in the one example of the $1000 offer for $50,000 worth of stuff. I happened to know a person who had some expertise in that area. But we frequently do refer out to an appraiser, to an estate-planning attorney, to a CPA. And all of them can have pretty good contacts in that world as well.

Sandy Block: Eric, this wasn’t in your slideshow, but you mentioned cars. Do you want to talk about cars?

T. Eric Reich: Cars are a big issue for a lot of people. My example: I have an old classic Corvette. I have a 1963 split-window coupe. So among the rarest of the rare. I have one of them and I have three kids. They all are convinced they’re getting the, “Vette.” Or the yellow car, as I like to call it, when I’m gone someday. Well, they can’t all get it. They also probably have no idea what it’s really worth. So for that reason just like the house or anything else, get a valuation. Get an appraisal of what is this thing really worth. And then again, if somebody wants to buy it at fair market value, that’s fine.

T. Eric Reich: But if not, it has to be sold. So otherwise it’s going to be unfair. Now, you can swap assets. You might say, if that car was worth $150,000, okay, well then if you’re getting that, then you have to give up a $100,000 of something else. And so that 50 and 50 go to the other two siblings. That’s fine you’re welcome to do that but my trust would stipulate that. Would lay out the terms at which someone could buy something.

David Muhlbaum: Could people set up a corporation to manage it for them?

T. Eric Reich: They could, that’s more of an estate lawyer question from that perspective. But you could, or you could probably do it all through a trust. It might just be too onerous to set up a corporation for that purpose. The logistics and maintenance of it might be a little too much.

David Muhlbaum: One interesting word you used in your article, Eric is “fun.” It’s a little surprising. Where’s the fun?

T. Eric Reich: Well, that’s just it, estate planning is never fun. Settling an estate is flat-out awful but the estate planning process and planning for your demise is never something that’s fun. But If you don’t deal with it, it is going to be a nightmare for the people behind you. So, why not deal with it today, when you’re of sound mind and body, as the phrase goes, to make those decisions. And again, try to make it fun, try to involve the kids from day one. It’s not like they’re fighting over your stuff. If everything’s out in the open and it’s shared freely, you really can have fun with… You know, I have one kid who’s clearly closest to my old Corvette than the other two.

T. Eric Reich: So the other two say, “We want it.” But as soon as they leave the room, he says, “Well, of course you know I’m getting it.” You can joke around with it that way but sometimes in those conversations, you will find that there are things of greater value to different family members. And it doesn’t have to be monetary value, they just really want something special to them. And if that’s what they really want, then maybe they get that and somebody else gets the car or the whatever, to be even.

David Muhlbaum: I see an opportunity for the younger generations to help here. As documentarians of a sort. They can take pictures, record, video, ask questions, discuss the things. What are the stories associated with the thing? And then you can decide, okay, we have a record of everything, now, these we’re going to keep and these we’re going to want to let go.

T. Eric Reich: That’s a really good point. I mean, recording it that way. Someone had reached out to me after reading the article and said, what they did, was they took pictures and many, many pictures of all the different things that they had collection wise. Wrote about them and then sold them. So they still have the pictures, they still have the story, they still have the context and everything else. They just don’t have the asset by itself, but they still have all the memories of it. They have the pictures, they have everything. So you did keep that meaning alive behind it, without actually worrying about who’s going to maintain this asset.

Sandy Block: Eric, it sounds like bottom-line here, a lot of people might be very conscientious about having their beneficiary designations correct for all of their finances, but they really don’t think about the solid items that they’re going to leave behind. And I suspect this often comes with people—and this is the case in my situation—people who have been in the same home for many years. If you move into a retirement community, you are forced to downsize but a lot of people die in the homes that they lived in. And I can tell you from personal experience, that clean-out can be a real job, especially if you don’t know what was the intention for some of these things.

T. Eric Reich: Yeah, it’s really the case. You live in the same house, 40, 50, 60 years, you accumulate a lot of stuff. Some of that stuff probably is fairly valuable. And really it is key because, the longer you’ve been in that house, your reference point is also of that house, and you have special memories of things in that house, because you’ve been going even yourself to that same place all that time. And that’s where a lot of that interest from heirs comes in, is there is a special piece or a special thing that reminds me of mom and dad or grandparents or whoever. And that sentimental value to that item is worth more than the financial value, and that’s why that honest, open communication is really key. Have this conversation while you’re alive and you’re healthy. When you’re in more advanced decline is where we see problems come in—or I promised that Corvette to all three kids at some point, because I forgot I promised it to the other two.

T. Eric Reich: Because I might be starting to slip a little bit or I’ve let things go or I let people take things out of the house over the years, things like that. So it really is important to not just focus on the, “yes, I’ve done estate planning, I set up a will or I set up a power of attorney.” That’s the bare minimum but even just writing out things like an ethical will, here’s the things I want to happen. This is what I want to see you do with stuff. Or here’s what I would love to see happen to the car, if you can’t, fine, then do this. A lot of times heirs will try to honor those wishes, if you really put it down in paper. It’s not something that would necessarily be part of a will. That’s more just the direct transfer of the property but more what I would like to see happen with something.

David Muhlbaum: Write it down on paper, tell people what you want to happen, have honest open conversation, always good advice. And I think we’ve had a good conversation here today ourselves. Thank you so much for joining us, Eric. We’re going to link up to your piece for people who want to dig a little bit deeper into what to do and not to do with your stuff. Thanks again.

T. Eric Reich: Thanks so much for having me.

David Muhlbaum: And that will just about do it for this episode of Your Money’s Worth. If you like what you heard, please sign up for more at Apple Podcasts or wherever you get your content. When you do, please give us a rating and a review. If you’ve already subscribed, thanks. Please, go back and add a rating or a review if you haven’t already, it matters. To see the links we’ve mentioned in our show, along with other great Kiplinger content on the topics we’ve discussed, go to The episodes, transcripts and links are all in there by date. And if you’re still here, because you wanted to give us a piece of your mind, you can stay connected with us on Twitter, Facebook, Instagram or by emailing us directly at Thanks for listening.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS

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Pros and Cons: Payable on Death (POD) Accounts

Pros and Cons: Payable on Death (POD) Accounts – SmartAsset

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Payable on death accounts can help streamline the process of transferring certain assets to loved ones after you pass away. Also referred to as a POD account or Totten trust, a payable on death account can be established at a bank or credit union and is transferrable to the beneficiary of your choosing. There are different reasons for including a payable on death account in your estate plan and it’s helpful to understand how they work when deciding whether to create one. Estate planning is best done with the counsel of a financial advisor, who can help you coordinate your investment goals with your end-of-life wishes.

Payable on Death Account, Explained

A payable on death account is a type of bank account that can be used for estate planning purposes. You can create this type of account at a bank or credit union and your bank may also let you convert any existing accounts you have to a POD account.

The difference between a traditional bank account and a POD account is that the latter has a named beneficiary. This is someone you choose to receive any assets held in the account when you pass away. Depending on your bank, you may be able to name multiple beneficiaries for the same account or choose a primary beneficiary, along with one or more successor or contingent beneficiaries.

How a Payable on Death Account Works

A payable on death account is simply any bank account that has a named beneficiary. For instance, a POD account can be a:

What makes a bank account a payable on death account is having a named beneficiary. It’s up to you to decide who to name. If you’re married, your spouse might be a logical choice. But if you’re unmarried, divorced, widowed or separated you might choose an adult child, sibling or another relative instead.

During your lifetime, you have control over the assets held in a POD account. So if you name a beneficiary for your checking account, for instance, you’d still be able to spend money in the account as you normally would.

Once you pass away, the assets held in a payable on death account would be transferred to the beneficiary. Typically, they’d need to show proof of identification and a copy of the death certificate before the transfer can be completed. State laws vary, so it’s important to understand how the process works when choosing a beneficiary.

Pros of Payable on Death Accounts

There are several benefits associated with using POD accounts to transfer assets. First, assets that are passed to someone else through a POD account are not subject to probate. The probate process, which is a legal process in which your assets are inventoried, debts are paid and remaining assets distributed to your heirs, can be time-consuming and costly. Setting up a payable on death account allows the beneficiary you name for that account to sidestep it for any assets held in that account.

That’s an advantage if you want to ensure that your beneficiary is able to access cash quickly after you pass away. Even if you have a will and a life insurance policy in place, those don’t necessarily guarantee a quick payout to handle things like burial or funeral expenses or any outstanding debts that need to be paid. A POD account could make it easier for your loved ones to get the funds they need right away to pay for those and other expenses.

It’s important to keep in mind that beneficiaries can’t access any of the money in a POD account while you’re alive. On one hand, that could be seen as a pro since you don’t have to worry about them spending down the assets without your knowledge. But it also has the potential to be a con in certain situations.

Cons of Payable on Death Accounts

As mentioned, beneficiaries of a POD account can’t tap the money while the primary account owner is still living. That could be problematic if you become incapacitated and your loved ones need money to help pay for medical care. In that instance, having assets in a trust or a jointly owned bank account could be to your advantage.

Another con is that you can’t change the beneficiary of a POD account once you name someone. So if they pass away before you do and there are no other beneficiaries named to follow after them, the account would be subject to the normal probate process.

Payable on Death Account vs. Trust

You may be wondering whether payable on death accounts are better than trusts for estate planning. Trusts allow you to transfer assets to the control of a trustee on behalf of one more beneficiaries. You can act as a trustee or have someone else fulfill that role during your lifetime and after you pass away.

Technically, POD accounts are a type of trust. Again, banks may reference them as Totten trusts, informal trusts or tentative trusts. The difference is that they’re easier and less expensive to set up than a traditional living trust. And of course, they only focus on assets held in a bank account.

Setting up a payable on death account could make sense if you want to make sure your beneficiaries have a source of ready cash when you pass away. But you may still need a living trust if you have other assets you want to transfer, such as real estate, vehicles, investments or business assets.

How to Set Up a Totten Trust or POD Account

If you’re interested in creating a payable on death account, the first step is contacting your bank. They can tell you whether it’s possible to add a beneficiary designation to any existing accounts you have or whether you’d need to create a new account. From there, you’d need to decide who you want to add as a beneficiary. Remember that once you make a beneficiary designation it cannot be changed. So you need to be reasonably sure that the person you choose will outlive you and manage any assets they receive responsibly.

Next, you’d want to let the person you’re naming as beneficiary know that you’re creating a POD account. This way, they can familiarize themselves with what they’ll need to do to claim any assets in the account once the time comes.

Finally, compare the terms of the POD account with the terms specified for those assets in your will. In most cases, a payable on death account can override a will so reviewing your wishes can help avoid any potential conflicts among your heirs after you pass away.

The Bottom Line

Whether you call it a payable on death account or a Totten trust, this type of account can serve a useful purpose when creating an estate plan. If you’re not sure whether you need a POD account, your financial advisor may be able to shed some light on when it makes sense.

Tips for Estate Planning

  • Consider talking to a financial advisor about the best ways to pass on bank accounts, investment accounts and other assets. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors in your local area. If you’re ready, get started now.
  • Until you know what you’ll have to retire on no estate plan can be complete. A free, easy-to-use retirement calculator can give you a quick and accurate idea of whether you have reached your financial goals.
  • A transfer on death account automatically transfers its assets to a named beneficiary when the holder dies  For example, if you have a savings account with $100,000 in it and name your son as its beneficiary, that account would transfer to him upon your death.

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Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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Now Is the Time to Protect Your Health Care Decision-Making Rights

As hard as it is to get some people to embrace estate planning, getting them to take seriously the need for a health care decision-making plan is even more difficult. At least, that was the case pre-pandemic.

We are no longer in an era of hypotheticals. There is a growing sense that being incapacitated by a disease or serious injury is not something conjectural or out of the realm of possibility. The last 12 months have reminded us all that our health is fragile, regardless of our age or if we have an existing medical condition.

For those who are waking up to this fact, it is important to recognize that, while making our own decisions regarding medical treatment is a fundamental right, getting those decisions honored is not assured. Without a well-considered health care decision-making plan, you may forgo your right of self-determination if you later become incompetent. It also leaves your family in a difficult position, potentially needing to go to court to settle a dispute among family members over who can make decisions on your behalf.

The most effective way to exercise your rights can vary, largely depending on your state’s laws. Nevertheless, there are generally three statutory solutions that have emerged from states’ efforts to protect incompetent individuals’ decision-making abilities.

Living Will

A living will addresses the situation where you are in an end-stage medical condition or permanently unconscious. In either case, a living will can serve as your advance written directions as to the kinds of treatment you want to be withheld or withdrawn, or the treatment you always want to be provided, if you are not able to communicate your own wishes at the time.

Health Care Durable Power of Attorney

A health care durable power of attorney has a broader scope than a living will, because it will cover health care decision-making in all situations when you cannot make or communicate your own decisions. With health care durable power of attorney, you can appoint one or more agents to make health care decisions for you, which they would base on their personal knowledge of what decision you would likely make if you were able to speak, or in the absence of such knowledge then what would be in your best interests.

Health Care Representative Laws

The third statutory solution is based on the recognition that most people have not signed a Health Care Durable Power of Attorney or a Living Will prior to their becoming incompetent. These statutes are intended to fill that gap by authorizing certain family members to step forward to act as an incompetent person’s health care representative and make health care decisions for them.

Such statutes are best seen as a solution of last resort, and clearly are not the equal of a well-drafted health care durable power of attorney or living will. First, they let the state — not you — decide who can make important health care decisions on your behalf. Second, the multiple persons chosen by the statute can cause serious problems. For example, the statute might authorize all the patient’s children to act as health care representatives, with each child having an equal voice, whereas the patient may have wanted only one child to act. A tie vote among the children on a particular treatment issue would result in a deadlock, which means that none of them could act.

As we see from any of these options, the more planning an individual has done, the better prepared they and any potential decision-makers will be in a situation when the individual is incompetent. Be it in writing or through discussions with a family member or trusted surrogate, individuals must share their choices concerning treatments.

For example, would they prefer not to remain on a ventilator if they are in a coma with limited brain function? Perhaps not. But what if it was a serious respiratory disease from which there is a greater chance of recovery? The decisions are not as “either/or” as they may seem at first. There are nuances when it comes to health care.

The discussions around these decisions can be difficult or feel abstract when an individual is younger and in the prime of health. Simply put, engaging in estate planning makes many of us uncomfortable, since it involves contemplating the world when we will no longer be around to enjoy it.

However, planning for health care decision-making can give us the peace of mind that, even if we later become incompetent, our right to make our own health care decisions can continue to be exercised by those we have chosen in advance

Partner, Private Clients Group, Meyer, Unkovic and Scott

Martin J. Hagan, a partner at Meyer, Unkovic & Scott, has been serving clients in the areas of estate planning and administration, estate and gift taxation, special needs trusts, elder law, and estate and trust litigation for over 35 years. Hagan earned his Bachelor of Arts and Juris Doctor from the University of Notre Dame.


The Essentials You Need for an Estate Plan

If you’ve been putting off your estate plan, you aren’t alone. Only 47.9% of Americans age 55 or older reported having any estate-planning documents in a 2020 survey by 

No one wants to think about getting seriously ill or dying, but these things happen. That’s when having the right documents makes a big difference. “This isn’t the kind of planning you want to be doing in the hospital or the nursing home,” says Patrick Simasko, elder law attorney and wealth preservation specialist at Simasko Law in Mount Clemens, Mich. 

Not having estate-planning documents can rack up the estate’s cost—including taxes—and delay the transfer of assets to heirs. A stressful situation is made even worse for loved ones, and the courts may step in to make decisions on the deceased person’s behalf. So make the most of the tools in your estate-planning toolbox.

Here’s a primer on what those tools are and how to use them, including a new one you may not have considered.

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Write a Will and Update Account Beneficiaries

Concept art showing important estate planning documents.Concept art showing important estate planning documents.

Simasko believes that a standard estate-planning toolbox should include a will, up-to-date beneficiary designations, a living will and a financial power of attorney, also known as a POA.

A will is what people usually think of first for estate planning. It gives instructions for what you’d like to happen if you pass away, such as who would receive your property, who would be in charge of distributing your estate and who would take care of your minor children and pets. If you pass away without a will, known as dying intestate, the probate courts make these decisions for you based on state law.

Simasko considers a will to be the least urgent of the estate-planning documents, especially for retirees. “If someone dies intestate, the state courts essentially give them a will to distribute the property. Most clients plan on leaving their money to their children, which is how the courts would distribute everything anyway.” 

This isn’t to say you should skip writing a will. It’s still helpful to get your wishes down on paper, especially if you have special instructions, such as leaving some property to charity. The key point is don’t assume you’ve finished with estate planning just because you have a will.

One reason a will is not enough is that many accounts follow beneficiary designations. For your life insurance policies, qualified retirement accounts and annuities, you name a beneficiary to inherit the money after you pass away. Make sure these instructions are up to date. “The will only applies if you don’t have any beneficiaries listed on these accounts,” says Adam Goetz, a partner at Burstin & Goetz in Pittsburgh and the national president of the MassMutual Advisors Association. 

Otherwise, the beneficiary instructions take precedence, even if you ask for something different in your will. “We saw one case where a client forgot he left his 93-year-old mother as the beneficiary for his retirement account, not his spouse,” Goetz adds. “When he died, his mother inherited the money, and now we’ve got to gift the funds back to the spouse while minimizing taxes. It’s awful.”  

Goetz recommends performing an annual review of all these accounts to make sure the beneficiary instructions are correct, and that you aren’t leaving money to the wrong person.

Your bank and taxable brokerage accounts could also offer a similar system, called a transfer-on-death agreement. “Setting up a transfer-on-death agreement shows your planned distribution and helps avoid delays in transferring the assets,” says Goetz.  “It’s amazing how few brokers and banks talk about this feature.”

2 of 3

Make Sure You Have a Living Will

A picture of a living will document. A picture of a living will document.

Another key part of estate planning is figuring out what should happen if you are alive but unable to make decisions for yourself. “A will explains who you want to make decisions for your property after you’ve died, but it doesn’t give your family the right to make medical decisions when you’re still alive,” says Simasko. “For that, you’ll need a living will, also known as an advance directive or medical POA.”

A living will names a conservator to make medical decisions on your behalf. The conservator can decide things like whether you will go through with a surgery or take a medication. Your living will should serve as a guide for the conservator by listing medical instructions for yourself. For example, these instructions may include whether you want to be kept on life support if you are terminally ill or don’t want blood transfusions for religious reasons. “When my father had a stroke, he didn’t have anything. My mother had to go to court just for the right to make his medical decisions,” says Simasko. By creating this document, you can be in charge of your future health decisions, not a judge.

Although the living will gives someone the power to handle your medical decisions, it doesn’t give them the right to handle your money. For that, you need a financial power of attorney. With this document, you name a guardian to manage your finances, such as paying your bills and overseeing your investments. 

If you don’t have a financial POA, once again the courts pick a guardian for you and that can get messy. “Best case scenario, it just wastes time,” says Simasko. “But what if there’s a disagreement between the kids which leads to a costly legal battle? What if the courts name someone inappropriate?” For instance, in a Michigan case, the courts picked a home health service for this role, rather than the couple’s daughter, a decision that ended up draining the estate because the agency charged a fortune in fees.

3 of 3

Decide If You Need a Trust or

A daughter discussing important documents with her mother. A daughter discussing important documents with her mother.

There are a few other documents you might need for your estate plan. You could require a revocable trust if you’re leaving property to minor children or to someone who can’t handle the money on their own, such as a family member with special needs. 

The trust inherits the property and a trustee that you name will manage everything on their behalf indefinitely or until they reach an age you think is appropriate. “You legally can’t leave property to a minor, and you really don’t want to leave a lot of money to an 18-year-old,” says Simasko. A trust could manage everything until they’re a little older, say, age 25, while giving them income until then.

Life insurance can also be an effective way to leave an inheritance. “There’s no better way to transfer money forward,” says Goetz. “Your loved ones receive the death benefit income-tax-free without delays from probate.” On the other hand, if you leave them a retirement plan like a traditional 401(k), the balance is taxable when withdrawn. That’s why, for inheritance planning, it could be more effective to make periodic withdrawals from your retirement plan to pay for a life insurance policy.

A digital POA is a new addition to the estate-planning toolbox. This document names someone to shut down your Facebook, LinkedIn, email and other digital accounts. “It’s emotionally difficult to see someone who passed away six months ago still ‘living’ in a digital space,” says Goetz. “You need to give someone legal authority to shut them down for you or it’s challenging otherwise. It’s not like Facebook runs a call center to assist.” 

Whichever tools you decide to use, the key is to get moving on your estate plan as soon as possible. It’s even easier now with many lawyers using Zoom for appointments, says Simasko. Although you could create the documents yourself using a website such as LegalZoom, he recommends consulting an attorney to at least make sure you’ve completed everything properly. 

You should discuss your estate plans with the rest of your family and avoid unpleasant surprises, such as someone expecting a larger inheritance or being upset that they weren’t named for a certain role.  

This is also a good time to explain where family members can find all your documents and accounts so nothing gets lost. The insurance company Mass Mutual has a checklist of what to do and discuss with your family. 

Estate planning can feel a little awkward and even morbid, but it’s one of the most important gifts you can offer to your heirs and yourself. Your loved ones will thank you for it. 


Wealthy Should Act Now to Prepare for Bernie Sanders’ Estate Tax Proposal

On March 25, 2021, Sen. Bernie Sanders and the White House formally proposed a bill called “For the 99.5% Act” — so called because it aims to tax the wealthiest 0.5% of Americans — which proposes to change our current estate and gift tax system.

While there’s no telling whether this proposed law will be enacted, it seems best to “plan for the worst and hope for the best,” given the unpredictable political climate, and the possible changes that may be made if a watered-down version of this potent proposed law passes.

Some Basics of the 99.5% Act

One of the main features of the 99.5% Act is that it would cut the federal gift & estate tax exemption amount from the current $11.7 million to $3.5 million. The good news is that the reduction would not occur until Jan. 1, 2022. The same timing applies for the bill’s proposed reduction of the gift tax allowance to only $1 million, which means that people will not be able to gift more than $1 million after 2021 without paying a gift tax.

The current maximum federal estate tax rate is 40%. The 95% Act proposes to increase the estate tax rate to 45%, once a deceased person’s taxable estate exceeds $3.5 million, and 50% and higher when the amount subject to tax exceeds $10 million, maxing out at 65% for estates over $1 billion. But that increase would not apply until 2022. In addition to the above exemption and tax changes, gifting of up to $15,000 per year per person would be limited to $30,000 per donor per year for gifts to irrevocable trusts or of interests in certain “flow through entities” beginning in 2022.

Estate Strategies Could Change Drastically

The tougher news for many of our readers is that some of the primary tools and strategies that we have successfully used in the past will not be available in the future. These changes would begin on the date President Biden signs the bill into law, if indeed this occurs. Once that happens, we would not be able to fund or have assets sold to Irrevocable Trusts that can be disregarded for income tax purposes. And we would not be able to use valuation discounts or Grantor Retained Annuity Trusts (GRATs) in most circumstances. However, those arrangements put into place before the new law is passed will be grandfathered, as long as they are not added to or altered after the law is passed, as presently written.

This is an important call to action for families having assets expected to exceed $3.5 million per person. These individuals will need to take a serious look at their present planning situation to determine whether to take immediate steps to avoid death taxes.

Readers who have irrevocable trusts may want to act without delay to extend any notes that may be owned by them to the longest period practical. They might consider selling certain assets that may go up in value and exchange them for assets that may be more suitable to be owned by these trusts, given that exchanges and changes made after a new law is passed may not be possible.

Push to Eliminate Step-Up in Basis: A $1 Million Exemption

During his 2020 campaign, President Biden proposed and urged an elimination of the tax-free step-up in basis at death presently afforded by the Tax Code.  The basis adjustment at death has been part of the Code for decades but has progressively been targeted as a means to raise revenue.  

According to a summary published by Sen. Chris Van Hollen, the Joint Committee on Taxation estimates the tax-free step-up in basis will cost the United States approximately $41.9 billion in tax revenue in 2021 alone. Further, this summary asserts that 55% of the wealth in estates over $100 million is untaxed capital appreciation, currently benefiting from a tax-free step-up in basis.

The STEP (“Sensible Taxation and Equity Promotion”) Act would tax unrealized capital gains on death, effective for deaths after Dec. 31, 2020.  However, the Act includes a few “softeners”:

  • A $1 million exemption to protect smaller estates.
  • Up to 15 years to pay the tax for illiquid assets, like business entities and farms.
  • A deduction against the estate tax (for the gains taxes due) for larger estates.  

Nevertheless, the taxation of previously untaxed gains would be a major change in federal tax policy, with wide-ranging implications on estate planning. Especially for clients with depreciated real estate, the impact could be far-reaching. It would also greatly complicate the administration of estates, as there would now be a need for fiduciaries to figure out what the historical tax basis might be for assets.

Due to these anticipated possible changes, most estate and trust law firms have been exceedingly busy with estate tax planning since the middle of last year and are generally operating at capacity. If you wish to complete an estate tax plan or have put your estate planning off for far too long, now is the time to get yourself into queue and get this done, putting your plan into action before any new laws may pass.

As with most firms, we give immediate focus to those who contact us without delay and have plans in place or in progress. If you do not have an estate tax planning structure or a plan in process, we recommend you start before the demand for these services causes many firms to be unavailable to finish before a new law may be enacted.

Managing Partner, Jeffrey M. Verdon Law Group, LLP

Jeffrey M. Verdon, Esq. is the managing partner of the Jeffrey M. Verdon Law Group, LLP, a Trusts & Estates boutique law firm located in Newport Beach, Calif. With more than 30 years of experience in designing and implementing comprehensive estate planning and asset protection structures, the law firm serves affluent families and successful business owners in solving their most complex and vexing estate tax, income tax, and asset protection goals and objectives.


Worried about Your Child’s Inheritance If They Divorce? A Trust Can Be Your Answer

I recently met with a client to update her will, and her big question was whether she still needs a trust for her daughter. Her child has graduated college, is on her second well-paying job, got married and is now a new mom. Her daughter has been maturing into a responsible young adult.  But there’s another factor that weighs heavily on my client’s mind – her son-in-law and the potential for divorce.

My clients don’t want money they’ve worked hard for to pass down to their son’s or daughter’s ex-spouse, if the unfortunate reality of divorce happens.

With the current federal estate tax exemption in 2021 at $11.7 million per person or $23.4 million for married couples, setting up a trust to save taxes upon death is not as much of a driving force as it used to be. Even if the estate tax limit is cut in half, most people will still be protected, as far as taxes go.

The larger question becomes how well they think their children will handle receiving a large sum of money.  As they watch their children mature, in most cases my clients eventually feel their child is up to the task.  Yet they still want a trust because they worry about their adult child losing thousands, if not millions, of dollars of their inheritance as a result of a failed marriage. By establishing a trust as part of their will, these clients can help protect their child’s assets in a divorce settlement.

Let’s examine how this works.  In many cases, if a child receives an inheritance and combines it with assets they own jointly with their spouse – such as a bank account, car or house – depending upon the state in which they live, the inheritance may become subject to marital property division if the adult child and spouse later divorce.

But if the child’s inheritance remains in a trust account, or they use trust funds to pay for assets only in their name, the inherited wealth can further be protected from a divorce.  This gives the adult child their own assets to fall back on in the event of a divorce.

One of my clients left his daughter’s inheritance in a trust after her first divorce because he was afraid his hard-earned dollars might end up squandered if she remarried.  It turns out my client was spot on – she married again; it did not work out, but her second ex-husband never got a dime from her trust.

Trusts can be complex and involve extra administrative work and costs, which may cost more compared with leaving assets outright to your children. In addition, a person or company must be named as a trustee to oversee these funds throughout the trust’s existence. But many people are willing to pay these costs to protect their child’s wealth.

How do parents decide whether to leave assets in trust for their children because of the possibility of a failed marriage? Here are three scenarios to consider:

  1. Children 18 or younger. If your child is under 18, you’re probably not thinking about the marriage/divorce angle!  However, due to their youth, leaving assets in trust for them is often a good idea.  A trustee will be named to oversee the child’s assets and will be able to guide them to make wise decisions with these funds. And the trustee has the power to deny any financial requests, which can be valuable if a young person is immature or easily influenced.
  2. Is your child newly married? Nearly all couples are happy in the first years of marriage, but the road can turn bumpy as life becomes more stressful and complex — whether it’s a job loss, a decline in health, financial stress or simply the demands of raising children. Instead of deciding to set up a trust right after your child’s marriage, it’s best to watch how the marriage progresses over the next five to 10 years.
  3. How is the marriage going?  Even after five years or more, consider how comfortable you are with your child’s relationship and how you feel about your son- or daughter-in-law.  If there is constant fighting or you simply have that bad “gut feeling,” setting up a trust for your child’s inheritance might be a wise move.

I encourage my clients to think about estate plans as five-year plans: Review your wills, trusts and other documents every five years. It isn’t necessary to constantly change these documents, but reviewing them periodically helps a person to carefully evaluate relationships, finances and the emotional dynamics of their families. In addition, an estate lawyer can modify or delete the trust during your life, as your family circumstances change.

Partner and Wealth Advisor, Brightworth

Lisa Brown, CFP®, CIMA®, is author of “Girl Talk, Money Talk, The Smart Girl’s Guide to Money After College.” She is the Partner in Charge for corporate professionals and executives at wealth management firm Brightworth in Atlanta. Advising busy corporate executives on their finances for nearly 20 years has been her passion inside the office. Outside the office she’s an avid runner and supporter of charitable causes focused on homeless children and their families.


Qualified Domestic Trust (QDOT): Marital Deduction

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Trusts can be a useful tool for estate planning if you’d like to preserve assets for loved ones while minimizing estate taxes. A qualified domestic trust (QDOT) is a specific type of trust that can offer tax benefits for married couples. With a QDOT, a surviving spouse can qualify for the marital deduction on estate taxes for assets included in the trust. This type of arrangement can be particularly helpful when a surviving spouse is not a U.S. citizen. Here’s more on how these trusts work, the benefits and limitations of having one and how to establish a QDOT as part of your estate plan. Estate planning is always done best in consultation with a financial advisor.

Qualified Domestic Trust (QDOT), Explained

A trust is a legal arrangement in which you transfer assets to the control of a trustee. This can be yourself or someone else you name and it’s the trustee’s duty to manage assets in the trust on behalf of the trust’s beneficiaries.

A QDOT is a specific type of trust arrangement that’s designed to benefit married couples, specifically when one spouse is not a U.S. citizen. This type of trust extends the marital tax deduction to non-citizen spouses, who would otherwise not be eligible to claim the deduction on estate taxes.

If you’re married to someone who is not a U.S. citizen, then setting up this type of trust could make sense if you’d like to minimize any tax burden your spouse may assume if you pass away first. A QDOT can essentially create a tax shelter for non-citizen spouses as part of an estate plan.

How a QDOT Works

To understand how a QDOT can benefit a non-citizen spouse, it’s helpful to understand the marital deduction and how that applies to estate taxes. Ordinarily, the Internal Revenue Code allows surviving spouses to claim a 100% marital deduction for estate taxes that may be due on assets they inherit when their spouse passes away. This is a significant tax break, as it enables surviving spouses to assume control of marital assets without getting hit with a sizable tax bill.

When a married couple consists of one spouse who’s a U.S. citizen and one who is not, the marital deduction does not apply. That means a surviving spouse could face substantial estate taxes on any assets they assume control of after their spouse passes away. Creating a QDOT and transferring assets to it with the non-citizen spouse named as beneficiary solves this problem.

Assets held in the trust would go to the surviving non-citizen spouse, allowing them the benefit of using those assets as well as any income they generate. They would pay no estate tax on assets in the trust. The surviving spouse could then pass those assets on to their children or another named beneficiary when they pass away. If applicable, the estate tax would be due on those assets at that time.

Benefits of a QDOT

The main advantage of including a QDOT in your estate plan is to extend tax benefits to your spouse if they’re not a U.S. citizen and don’t plan to apply for citizenship. A surviving spouse would be able to enjoy the marital tax deduction on estate taxes. They’d also be able to receive income distributions from the trust. Those would be subject to income tax but not estate tax. If you have a sizable estate then setting up a QDOT could be worth it to ensure that you’re passing on as much of your wealth as possible to your spouse.

While setting up this type of trust is generally more complicated and expensive than setting up a basic living trust, it may be an easier way to afford tax protections to a non-citizen spouse versus having them pursue citizenship.

Limitations of a QDOT

While there are some advantages to QDOT, there are some potential downsides to keep in mind.

First, it’s important to note that the IRS is specific about how these types of trusts are set up. The trustee must be a U.S. citizen and depending on the amount of assets that are held in the trust, a secondary trustee may be necessary. This trustee must be a U.S. bank.

Once the spouse who created the trust passes away, their executor must make a QDOT election when filing a federal estate tax return. This is necessary to qualify for the marital deduction. The IRS specifies that the estate tax return with the QDOT election must be filed no later than nine months after the individual who created the trust passes away.

Estate tax may be due if a surviving spouse receives principal from the trust, rather than income. There are, however, some exceptions to this rule. For instance, if a surviving spouse is experiencing financial hardship and has no other assets to tap into it may be possible to receive principal from the trust without being required to pay estate tax.

Perhaps most importantly, spouses should be aware that a QDOT only extends to assets held in the trust. If you have other assets you wish to pass on to a surviving spouse who’s not a U.S. citizen, those wouldn’t be eligible for the marital deduction protection offered by a QDOT if they’re not included in the trust.

How to Set Up a QDOT

Setting up a QDOT starts with determining whether it’s something you can benefit from having in the first place. If you’re married to someone who is not a U.S. citizen, then it may be worth meeting with your financial advisor to discuss the pros and cons of including a QDOT in your estate plan. Your advisor can help to assess any potential estate tax consequences associated with passing on wealth to a non-citizen spouse.

If you’ve determined that a QDOT is something you need, the next step is finding an experienced estate planning attorney who can help with setting one up. Creating a QDOT  means understanding which IRS rules apply and that’s something an estate planning attorney or a tax professional can help with.

The Bottom Line

A QDOT could be useful to have if you’re married and you want to minimize tax impacts associated with leaving assets to a non-citizen spouse. The biggest considerations to keep in mind are what assets you’ll transfer to the trust and how those will be managed on behalf of your spouse once you pass away. Again, getting help from a tax professional, estate planning attorney and your financial advisor can make creating this type of trust as smooth a process as possible.

Tips for Estate Planning

  • Consider talking to a financial advisor about the tax implications of passing on assets to a non-citizen spouse and whether it makes sense to have a QDOT. If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. SmartAsset’s financial advisor matching tool makes it easy to connect in just minutes with professional advisors in your local area.  If you’re ready then get started now.
  • Wondering if you have enough to retire? Our free, easy-to-use retirement calculator can give you a good estimate of your annual, post-tax income upon retirement.

Photo credit: © Skjoldborg, ©, ©

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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Getting the Best of Both Worlds from an Irrevocable Trust

The seeming finality of an irrevocable trust can sound scary to a lot of people. The whole idea that you are tying up large pools of your assets in a trust, and then giving control of that trust to someone else just doesn’t sit well with them. However, irrevocable trusts have a little more leeway to retain some control than you might realize.

Before we get into the details, we should talk about the two different types of trusts: revocable and irrevocable. The revocable trust, or living trust, is an agreement between the client (commonly called the settlor, grantor or trustor in the document) and the trustee (usually also the client), until his or her death. The living trust is designed to hold assets that remain fully available to the settlor but are excluded from the public probate process at death. These trusts can be fairly simple or very complex. A simple version may only organize the estate for outright distribution at the settlor’s death. A complex version may include several trusts to shelter the settlor’s assets from estate and generation-skipping taxes using available lifetime exemptions. The trust may hold concentrations in family businesses and real property or administer a family office that will provide essential investment and financial services for future generations. 

All domestic trusts, whether for a small estate (under $500,000) or a massive one (worth billions), are governed by the same trust laws, under one state or another. And the Trustee’s adherence to the formalities of those trust statutes is essential to the success of the estate plan. But the settlor’s power to modify the trust is equally essential, because tax and trust laws change, as do the family’s circumstances, and that flexibility ensures that the trust will provide the benefits intended.

Why Have an Irrevocable Trust?

However, for most tax-related trust strategies to go into effect, a trust must be irrevocable when funded, and an independent trustee must be appointed. Many people are apprehensive about using an irrevocable trust in their estate plan. They fear having an unrelated trustee control the legacy for their children under a document filled with legal terms that defy plain English definition.

So, what does it mean today for a trust — any trust — to be “irrevocable,” and why might that be both good and bad?

The first thing to understand is that a trust must have a trustee: one or more institutions with trust powers or qualified individuals who act as fiduciaries. A fiduciary, as it pertains to trusts, must at a minimum act in good faith, within the scope of the authority granted, and solely in the interests of the trust’s beneficiaries.

In recent years, the trend has been to employ family members in trust committees to manage specific assets, make certain tax elections and/or approve or direct distributions for the beneficiaries. In these cases, the trustee is not the sole fiduciary. In fact, for many complex trusts, the trustee is selected mostly to ensure that the laws of a certain state will control the trust’s taxation and administration while the family exercises trust discretion over investments and distributions.

State Codes Define Many Trust Provisions

The courts in the state where the Trust is created determine just how flexible an “irrevocable trust” can be. Most states have adopted a version of the Uniform Trust Code (UTC), a model legislative act to manage trusts in the state. The adopted version of the trust code in any state includes definitions and default and mandatory terms for trust instruments. 

For our purposes, the UTC provides a definition for the term “revocable”: “As applied to a trust, [revocable] means revocable by the settlor without the consent of the trustee or a person holding an adverse interest” and “unless the terms of a trust expressly provide that the trust is irrevocable, the settlor may revoke or amend the trust.” Therefore, irrevocable means that the settlor may not retain an exclusive power to “revoke or amend the trust.”

But many state trust codes explicitly allow for the modification of a trust by the trustee and beneficiaries, subject to the settlor’s consent, if living, without court approval. Some state laws also allow a person to be appointed who may amend the trust, completely restate the trust, add or remove beneficiaries, and even pour the trust assets over into a completely new trust without the approval of any court, the consent of the settlor, or the agreement of the beneficiaries.

Make a Trust Easy to Change or Not?

There are good reasons that a settlor may want a trust to be easy to amend while he or she is living. As children grow into adulthood, many of the assumptions and expectations that may have determined the original trust’s terms and purposes can change in light of actual life events. But why would the settlor want the trust to be so easily modified by the beneficiaries after his or her death?

Simply put, the settlor might not. Clearly, there are many tax and financial reasons why a power to modify a trust that may last several generations is beneficial. But state trust laws have always included a process for a beneficiary to petition the court with jurisdiction to approve a modification, if necessary, to achieve or preserve an important trust purpose. 

The courts have great experience and legal precedent to follow when balancing the preservation of the grantor’s intent — sometimes described as a material purpose of the trust — and elevating the interests of the beneficiaries, which may be contradictory or incongruent. And the court’s power to modify or revoke the trust and distribute the assets outright among the beneficiaries is subject to review by courts of appeal. This system is designed to protect the rights of all parties to the trust, including the deceased settlor, who speaks primarily through the trust instrument itself.

The trend toward ceding greater control to the trust beneficiaries and avoiding the use of state courts may be based on several factors. One is likely rooted in a distrust of the formal judicial system. This distrust may be based on anecdotes describing incompetence, unjustified delay, high legal costs, and unfair or insufficient court orders. This distrust does not stop at the courts but includes institutional trustees, too — primarily because they diligently follow the terms and limitations of the trust instrument, much to the chagrin of beneficiaries who resent the controls authorized by the settlor.

The second factor is that settlors and beneficiaries today are more likely to view the trust relationship as a purely financial strategy to reduce taxes and provide a means for family governance. This perspective does not value fiduciary expertise and services as much as it values family control and discretion.

Getting the Best of Both Worlds with Your Trust

For most settlors, the modern trust laws are a vast improvement, which is why states are trending toward adoption of a uniform trust code that supports almost unlimited beneficiary control, when the settlor consents to such control.

 But what if the settlor wants the best of both worlds: the flexibility and control inherent in the use of family members as fiduciaries who can modify the trust and the protection of the settlor’s intent, evidenced by explicit and enumerated limitations that cannot be modified?

Well, that is the newest discussion point in the trust profession: How to draft an irrevocable trust that includes certain specific, unalterable instructions while giving authority to family members, as beneficiaries, to modify the rest of the trust as needed when laws and circumstances change. 

Most of the rules in the modern UTC are simply default rules that may be excluded or modified by the settlor in the trust instrument. The UTC provides definitions and enumerated powers, duties and standards that allow the trust instrument to incorporate well-understood conventions and context, so the settlor need not execute a hundred-page trust document. But the settlor can pick and choose among the UTC provisions, not including certain mandatory rules essential to public policy and the purpose of trusts under state law.

Likewise, the settlor may provide that certain terms and limitations cannot be modified, even if the trust is poured over, decanted to a new trust instrument. The settlor could require court approval for certain trust modifications or trust termination to ensure that the settlor’s intent is not frustrated. These provisions would essentially opt out of the parts of the UTC that allow the beneficiaries to modify those trust terms and even include a penalty for any attempt. 

An Example of How It Could Work

For instance, a settlor may want the trust to never develop a family farm transferred to the trust, now a family retreat. The trust may include a provision that the farm must be subject to a conservation easement with dedicated funding and supervision. But it may allow the beneficiaries to approve the partition of certain acreage for a limited number of homes for their use, or to sell off some or all the land, subject to that easement, after a specified term of years has passed. 

A settlor would be advised not to limit an appointed trust protector from modifying the trust to, for instance, preserve assets from increased taxation or waste, to add new protections from creditors, or to shelter trust assets for supplemental needs so a beneficiary may qualify for useful public entitlement programs, among other circumstances that may arise.

In fact, no settlor in 1970 would have imagined the economy we have today with the marked decrease in full-time employment with benefits, historically low income tax rates, consistently low inflation, almost zero depository and federal bond yields, the elimination of defined-benefit pension plans, online investment brokerage, and the creation of cryptocurrency, among many other developments.

But a settlor today is making gifts to a trust for their grandchildren, intending to meet the financial needs of a group of preteens to last through their retirement. He or she may want to limit their ability to modify some terms of the trust but should take care not to hobble the trust for lack of flexibility.

Senior Vice President, Argent Trust Company

Timothy Barrett is a senior vice president and trust counsel with Argent Trust Company. Timothy is a graduate of the Louis D. Brandeis School of Law, 2016 Bingham Fellow, a board member of the Metro Louisville Estate Planning Council, and is a member of the Louisville, Kentucky and Indiana Bar Associations, and the University of Kentucky Estate Planning Institute Program Planning Committee.


How Does an Estate Tax Marital Deduction Work?

How Does an Estate Tax Marital Deduction Work? – SmartAsset

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Estate planning as an individual is complicated enough, but planning for it in a marriage can create greater difficulties. Working as a unified partnership for your joint estate’s future means that you both will have priorities you want to bring into the plan. Some concerns you both might have include costly estate taxes and providing for the other after one passes. If so, the estate tax marital deduction might be worth investigating. Here is some basic information you’ll need before considering whether the marital deduction could fit into your estate plan.

Consider working with a financial advisor who can guide you in creating an estate plan that meets the needs of both you and your spouse.

What Is the Estate Tax Marital Deduction?

The estate tax marital deduction, otherwise called the unlimited marital deduction or more simply the marital deduction, is a valuable estate planning device for certain married couples. It allows one marriage partner to transfer an unlimited amount of assets to his or her spouse without incurring a tax. The marital deduction is determinable from the overall gross estate. The total value of the assets passed on to the spouse is subtracted from that amount, giving us the marital deduction. This inter-spousal transfer can occur during the couple’s lifetime or after one spouse’s death, according to a will.

The marital deduction applies to both estate and gift taxes as well. You can find the provision under Section 2056 of the Internal Revenue Code as the marital deduction rule.

Who Qualifies for the Estate Tax Marital Deduction?

The marital deduction applies regardless of how the property or assets are passed on to the other spouse. This can include beneficiary designation, intestacy or any other method. However, there are other requirements that determine if the marital deduction applies.

Foremost is that the involved individuals are married. After that, you need a surviving spouse. Said spouse must inherit the property. This property must come from the decedent’s, or transferor’s, gross estate, and it has to be transferred directly. It cannot be a terminable interest.

An example of a terminable interest would be if the transferor left the assets to his or her surviving spouse but with a lifetime limit. That would turn the property into a life estate, which the beneficiary cannot leave to anyone after their own passing. However, an exception to the outright transfer is qualified terminable interest property (QTIP). A QTIP is an irrevocable trust that allows the grantor to provide for the spouse but still ensure that the assets pass on to certain beneficiaries following the surviving spouse’s death.

Keep in mind: spouses who aren’t U.S. citizens don’t qualify for the marital deduction. You can obtain a qualified domestic trust (QDOT) instead, which applies the marital deduction to assets placed in the trust. A non-citizen spouse can then access this.

How Does the Estate Tax Marital Deduction Work?

We’ve established that a marital deduction applies to assets subtracted from the transferor’s gross estate. The surviving spouse then inherits this property without paying an estate tax on it. The deduction also applies if the decedent gifts the property. The gift can be given outright, like the transfer, or placed into a trust. If it’s put into a trust, the surviving spouse must have access to income throughout their life and have power of appointment over the assets. A QTIP would allow you to navigate around the latter.

It’s essential to know that the marital deduction only defers the estate and gift taxes. So, while you do not have to pay them after the first spouse’s death or transfer, the taxes will apply when the surviving spouse passes. The tax burden depends on the estate’s size at the time of this death.

Estate Tax Marital Deduction: Key Considerations 

While the marital deduction might work perfectly for certain estates, it may need support to be the right choice for yours. Or, the marital deduction might not work for you at all. Regardless of whether you need to bolster your choice or find other ways to minimize your estate plan’s costs, you should take advantage of other exemption and deduction options.

As of 2021, estates that exceed $11.7 million for individuals and $23.4 million for married couples are subject to estate tax. So, if your estate does not surpass that threshold, you will not face a federal estate tax when your spouse passes. However, if you intend to use the marital deduction, your partner’s lifetime exemption is lost. That is because it cannot be transferred to the surviving spouse. This can create a problem for larger estates since the surviving spouse only has her or his own exemption value to protect the combined assets.

So, if the lifetime exemption isn’t helpful, you can pursue the credit shelter of an A/B Trust. The credit shelter can eliminate the lifetime estate tax exemption concern, since the total amount of assets left to the surviving spouse under the marital deduction will decrease. It’s best to speak to a financial professional before you pursue trusts in your estate plan, though.

While trusts can allow for flexibility, you may still be concerned about the beneficiary status. If you want to ensure your children or other individuals are the eventual beneficiaries of your estate, you can opt for a QTIP, as discussed earlier.

The Takeaway

The estate tax marital deduction is a useful device for many married couples. However, if it’s not the right fit or used incorrectly, it can end up costing the estate more in the long run. If you and your partner are considering a marital deduction, it’s best that you speak with an estate attorney beforehand. They can break down the process and help you both decide if it’s the right choice for you. Most of all, they can guide you to an estate plan that protects you both and your assets, regardless of what the future may bring.

Estate Planning Tips

  • Consider working with a financial advisor to make sure you are handling your investments and assets are getting the least confiscatory tax treatment. Finding a financial advisor doesn’t have to be hard. SmartAsset’s matching tool can connect you with several in your area within minutes. If you’re ready, get started now.
  • Estate planning comes with a maze of challenges. Unfortunately, getting lost or making a mistake is often costly. If you want to avoid that, check out our guide to the five estate planning mistakes you can’t afford to make.
  • While the trusts mentioned here might not work for you, others could be a perfect fit. If you’re interested, read our report on how other trusts function.
  • Income in America is taxed by the federal government, most state governments and many local governments. The federal income tax system is progressive, so the rate of taxation increases as income increases. A federal income tax calculator can give you a quick read on what you owe Uncle Sam.

Photo credit: © Trade, © Trade, ©

Ashley Chorpenning Ashley Chorpenning is an experienced financial writer currently serving as an investment and insurance expert at SmartAsset. In addition to being a contributing writer at SmartAsset, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.
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