After Jacqueline Kennedy Onassis’ death, there was much press coverage about a tax strategy provision in her will. The will created a special sort of charitable trust, known to estate planners as a charitable lead annuity trust, or CLAT. During the trust’s 24-year life, the trust would pay 8% of its initial value to charities selected by the trustees. Mrs. Onassis’ two children, Caroline and John, were two of the four trustees. After 24 years the trust would end, and the assets would pass to her descendants.

In addition to promoting philanthropy, this sort of trust can dramatically reduce transfer taxes on the family fortune. The estate tax at Mrs. Onassis’ death would be significantly reduced by a charitable deduction for the projected value of the payments to the charities. When the trust ends, and the assets pass to the private heirs, there would be no further estate or gift tax. As the press noted, the charities would benefit, the family would benefit, and the only “loser” was the IRS.

The rest of the story

The press learned of the trust plan because it was implemented with a will, a document that is necessarily in the public record. However, the trust was never funded. Estate planning expert Conrad Teitell recently explained why in Trusts & Estates magazine.
The charitable trust was a back-up estate plan, not the primary plan. Most of Mrs. Onassis’ wealth was held in a living trust. The trust provided that its assets were to be divided between Caroline and John, but it invited them to disclaim their inheritance should their financial circumstances warrant it.
A disclaimer is a renunciation of a gift or bequest. Properly executed, a disclaimer has no adverse tax consequences. After the disclaimer the property passes as if the recipient had already died. In some cases, that means it is divided among other heirs or passes by intestacy. In this case, however, there was an alternate plan in place should there be a disclaimer. This approach gives the heirs the chance to make adjustments to the estate plan based upon contingencies that the plan’s maker could not take account.
As it happened, Caroline and John decided not to disclaim their inheritances. Accordingly, the property passed under their mother’s living trust, instead of under her will.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

When an elderly grandmother leaves all of her assets to a new beau, or Dad leaves everything to the child who visited most in the nursing home, a will challenge may be in the offing. Will contests generally are brought by unhappy family members who feel cheated out of their legacy. If they have something to gain if the will, or offending provisions, are set aside, a battle may ensue.
Will challengers generally have tough legal ground to plow and, as a practical matter, they rarely win in court. Instead, they are often “paid off” by estate representatives who want to minimize burgeoning legal fees and lengthy delays in distributing estate assets. Therefore, having the appearance of a valid claim and threatening to challenge a will may be enough to produce a settlement.
Wealthy people may be particularly susceptible to will challenges because of the assets involved. This possibility should be factored into estate plans and will drafting. As with many things in life, a good offense may be the best defense in reducing the risk of a will challenge.

What is the basis for contesting a will?
Although the unhappiness of disgruntled beneficiaries may be at the heart of a will contest, a legal basis is needed to move forward. These include charges that:
• The will signer (testator) was not mentally competent. To prove mental competence, most states require a person to understand: (1) the nature and extent of his or her assets and (2) his or her family relationships. A testator who cannot identify a spouse, child or a grandchild at the time that the will is executed, probably will lack legal ability to sign the will.
• The testator was overreached by some party who benefits under the will. This claim of “undue influence” may arise, for example, when a caregiver takes advantage of an infirm elderly charge by threatening to leave the individual alone and helpless, unless the caregiver is named in the will.
• The will was executed as a result of fraud or mistake and was not what the person signed or thought was signed. For instance, if a person signs the will at the end of the document, and new pages are inserted in the will after it was signed, the will could be challenged.
• The will was not executed properly. For example, if state law requires two witnesses, and there was only one, the will may not be valid.
• The will being offered for probate is not the decedent’s most recent will or was revoked prior to the decedent’s death.
Each state has its own laws regarding what it takes to execute a valid will. What’s more, state case law will affect determinations regarding mental capacity, undue influence, fraud, duress, mistake and whether a prior will has been revoked.

What can be gained by those challenging a will?
If a challenge is successful, all or part of the will may be disregarded, or a prior will reinstated. If the will is thrown out, and no prior will is revived, the estate is often distributed as if there were no will. These rules, known as laws of intestacy, generally distribute assets among the closest living blood relatives, a spouse and children, for example. More distant relatives (siblings, parents, nieces, nephews, aunts, uncles) may share if no closer relatives are still alive. Consider the following example:
An elderly grandmother, who has outlived her one child, is placed in a nursing home because she suffers from dementia. At her death she is survived by three adult grandchildren. They discover that while in the nursing home, their grandmother had written a new will. Under that will she left all of her property to a floor nurse who tended to her. The grandchildren challenge the will on two grounds: The grandmother either: (1) lacked mental capacity to sign a will or (2) was unduly influenced by the floor nurse. If the will is overthrown entirely, the three grandchildren would share equally in their grandmother’s estate, because they are the closest living blood relatives.

How can a will contest be avoided?
If capacity and undue influence are not at issue, good drafting and planning can go a long way toward avoiding a will contest. For those with significant wealth, wills should not be used as incendiary devices to disinherit relatives or make grand statements that invite discord and challenges. In addition, the more assets that are passed outside of a will (lifetime giving, trusts, etc.), the less there will be to argue about if a challenge arises. Consider the following:
• “Disinheriting” family members can be an outright call to arms for will challengers. For example, if a wealthy parent plans to disinherit two out of three children, or children of a first marriage, and those children likely will fight the result, it may be worth considering the costs of a will contest and whether small legacies make sense instead of outright disinheritance.
• Establish trusts while you’re alive to provide for the transfer of assets to beneficiaries at your death and avoid having substantial assets pass under your will. Because trust beneficiaries generally are not subject to public scrutiny as part of probate, less discord may result. Also, it is more difficult to challenge trusts with independent trustees.
• Insert an “in terrorem” clause in your will. This clause prohibits an heir from challenging the validity of the will. Although these clauses are intended to prevent disgruntled heirs from taking part of an estate, many states will not enforce them because it may put good faith challenges to fraud, duress and undue influence at a disadvantage.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

Planning your estate takes a considerable amount of time and effort.
First, you must inventory what you own and decide how to divide your assets among your loved ones.
Then you meet with your advisers—attorney, accountant, trust officer, insurance agent—to formalize your plans.
Because you are conscientious, you review your estate plan regularly, keeping up with changes in family circumstances, your personal finances and the tax laws. When it becomes necessary, you revise your plans. Everything dotted to the “i” and crossed to the “t.”
Or so you believe.
But despite your clear intentions and your careful planning, your family could still wind up spending a great deal of time and money trying to see that your wishes are carried out—unless you take two simple, but very important, steps.

The first step is to provide for the safekeeping of your will.
Should you keep the original at home? There is always the possibility that it might be unintentionally destroyed or thrown away with other papers by mistake.
Put it in your safe deposit box? There may be some legal proceedings involved in opening the box after your death that could make immediate access difficult.
What about your attorney’s office? If he or she is a single practitioner, there are risks: The attorney could die or move away.
A law firm may be willing to hold your will, but you must remember to retrieve it if you end the relationship and go elsewhere.
If you name a trust institution to serve as an executor, you can deposit the original copy with the institution, keeping unsigned copies with your attorney and in your personal records for future reference.

The second step
Create a document locator, a detailed list that gives your family access to all the information they will need to see that your estate plan is carried out. The locator should include the names, addresses and phone numbers of all the important financial players in your life. You also will want to include information about your debts. Credit card issuers and card numbers and mortgage, auto and other loans should be noted as well.
Be sure to specify the location of your will and other important documents (tax returns, Social Security information, business agreements . . . estate deeds). Note where your safe deposit box is and who has access to it. Provide an inventory of its contents.
Give directions as to where you keep investment records, with names and addresses of all the financial institutions with which you have savings, checking or investment accounts.
This kind of information should be particularly detailed. You should spell out the type of investment that you hold, the account numbers, the names on the account, and the dates on which the accounts were opened. Specify where you keep the account statements, passbooks and securities certificates.
The document locator is also the place to indicate who has spare keys to the house or car and to give other information of that kind. Be sure to remind your survivors to call your employer so that the benefits department can get the proper paperwork started.
You also may want to attach a letter to the document locator specifying your wishes as to funeral and burial arrangements.
Be sure that you have made multiple copies of your document locator. A copy should be given to your executor and appropriate family members. You may want to keep one in your safe deposit box as well.
Finally, remember to update the document locator once a year to ensure its accuracy.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

An overriding concern for the parents of a disabled child is likely to be the child’s care once they are no longer available to offer financial and emotional support. “Care” encompasses a broad spectrum: where the child will live, who will manage his or her financial and personal affairs, as well as who will see to special medical and treatment needs.

Selecting a guardian
Parents are the natural guardians of their children only until they reach majority (generally age 18). The fact that a child is disabled and all decisions regarding the child rest with the parents will not change the fact that upon reaching majority, he or she is presumed to be competent.
Agreements among family members will not give anyone formal authority to act on behalf of a disabled child. Thus, if a child is not self-sufficient, it may be necessary to institute formal guardianship (conservatorship) proceedings.
Parents, of course, are the natural choice to serve as legal guardians. But what about the future? In whose care should the child be left? Sensitivity and the willingness to care for the disabled child should be prime characteristics. But other factors should be considered: the ability of the person chosen to handle financial and legal matters; availability to continue as guardian for the long term; and whether or not the chosen individual can devote the time necessary to care for the child.
There are two kinds of guardians, usually referred to as guardian of the person and guardian of the estate. The former makes decisions as to where the disabled child lives and sees to medical treatment, education, vocational training and other personal matters. The latter is charged with preserving the disabled child’s assets and managing his or her financial matters. Although it is perfectly acceptable to choose one person to act in both capacities, one person may not fit the bill. Naming coguardians is a perfectly acceptable alternative.

Choices: bequests to a disabled child
When drafting their wills, parents have several options in deciding how to provide for the disabled child’s financial future.
Of course, they can choose to make a direct bequest to their child. However, this choice will most likely disqualify the disabled child from receiving government aid. This choice is, for most people, the least desirable—unless they have the wealth available to make certain that there will always be sufficient funds to care for the child without the need to resort to government assistance.
Another choice is to leave the disabled child’s portion to a sibling or other close relative with directions that the portion be used for the child’s care. This approach is viable when there are family members who are close to the disabled child and are capable and willing to use the funds that they receive for the child’s benefit. However, it must be kept in mind that such a bequest in no way obligates the family member to actually use the funds for the child. This kind of bequest establishes, at most, a moral rather than a legal obligation.

Another choice: the special needs trust
Today many parents establish what is commonly referred to as a special needs trust. When properly drafted, a special needs trust may enable parents to establish a trust that can hold an unlimited amount of assets, without these assets being considered for qualification for government programs that are based upon need.
These government programs include Supplemental Security Income (SSI) and Medicaid (sometimes called by other names in certain states). Other government-based benefits include payments for vocational rehabilitation and the provision of subsidized housing. Special needs trusts are intended to supplement, but not to replace, the basic support of the child given by government aid, which is intended to provide, generally, food, shelter and clothing.

Defining “special needs”
A special needs trust can cover a broad array of expenses, most often those that will enhance the child’s life, health and welfare. Here are just a few examples for which distributions may be made from the trust (if not otherwise covered): dental, medical and pharmaceutical expenses; therapy or rehabilitation services; wheelchairs and other special equipment; and psychological services expenses.
The expenses may be made for the disabled child’s pleasure, as well. For instance, the trust may be able to provide funds for travel (including the cost of a companion to accompany the child), summer camp, beach trips, movies and social events, a computer and sports equipment.

Keep these points in mind:
• A disabled child must be “impoverished,” a term of art under federal law. A disabled individual with as little as $2,000 in assets may be disqualified from receiving Medicaid.
• The special needs trust should be established by someone other than the disabled child and managed by a person other than the person with the disability.
• A decision will need to be made whether to establish the trust during the parents’ lifetimes or create it by the parents’ wills, to go into effect after their deaths. A major advantage of the former approach is that it allows other family members (who might not otherwise see the wisdom in making outright gifts or bequests to the disabled child) to make them to the trust.
• Another decision will be whether to make the trust revocable or irrevocable. A revocable trust provides flexibility, allowing parents to add or subtract assets. However, assets in the trust are taxable in the parents’ estates and may be exposed to creditor claims. On the other hand, an irrevocable trust makes it impossible to make changes to any of the provisions in the trust.

A few practical suggestions
Seeking the guidance of professionals with experience in financial planning for the disabled is especially important when considering a special needs trust. Matters often can become very complicated because both federal and state law will come into play.
In addition, it is often recommended that parents write a letter of intent, providing instructions concerning the care of the disabled child. The document should be as detailed as possible. Not only major concerns should be addressed, but also anything that the parents might know and others may not—even such relatively minor things such as the child’s favorite friends, foods and forms of entertainment.
Finally, a successor trustee should be named in the event that any individual originally named as trustee may no longer be able to serve. A corporate fiduciary should be considered. Such a fiduciary can provide for professional management for the assets in the trust, establishing a strategy that is best suited to the child’s needs both for the present and the long term.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.