Anna Nicole Smith: A lesson for all

Supreme Court Rules in Favor of Anna Nicole

The Supreme Court ruled that Anna Nicole can pursue her claims. Whatever the
outcome, what can potential heirs do to protect themselves from these types of
issues in the future? Plenty. Following is an excerpt of Chapter 3 of Inherit
More (John Wiley & Sons, Inc.) that discusses the Smith case and what heirs can
do.

From the opposite perspective, what can a new, younger spouse do to protect
themselves from heirs seeking to prevent them from getting what they were
promised? Document the intended arrangements in a pre-nuptial agreement. If
your benefactor/spouse wishes to become more generous, modify the pre-nuptial
agreement with each of you using separate counsel and observing all the
formality of the initial pre-nuptial agreement. Have your spouse revisit and
resign his or her will on several sequential occasions to establish a patter of
conduct as it pertains to you. Have a trust established while your spouse is
alive for your benefit that parallels the trust in the will to demonstrate the
intent to provide for you. If a trust is established and exists for years
before death the issues raised in the Anna Nicole Smith case as to document
tampering, etc., become less of a risk.

I. Chapter 3: Second (and Later) Spouses Can Destroy Your
Inheritance.

A. Introduction: The Problem.

1. Where’s Beaver and Ward.

The good old times of the Brady Bunch were pretty simple. The show never
addressed estate planning, real financial issues, and the other complexities
which the hybrid family commonly faces today. In the Cleaver family everything
was even more idyllic. There was nothing that Beaver or Wally could do that
Ward, the all-knowing dad, couldn’t solve before shows end. That was the world
your parents inherited and not the one being left for you and your children. In
the era of reality-TV it is more likely that Peter and Jan are fooling around
in the attic, Cindy gets pregnant at sixteen, all six children leave home as
soon as they graduate from high-school and move back in as soon as they
graduate from college, and their parents disinherit them out of pure disgust
leaving everything to Alice and the Sam the butcher. If your parents have
remarried, and there are children of more than one marriage involved, there are
a few common pitfalls to look out for when attempting to protect your
inheritance. But first, your parents need to understand the Cleaver family is
about as relevant as a dinosaur.

2. The Typical Estate Plan Won’t Work Second (or Third) Time
Around.

The typical “estate plan” for a “standard” family of husband, wife and the
average 2.3 kids (have you ever seen a .3 kid?), is to leave everything
out-right (i.e., without any trusts or other restrictions) to the surviving
spouse (unless tax planning creates a need for trusts — which it doesn’t for
most). This is the typical four or five page will most Americans who have
wills, have. Not much by way of planning for a traditional family, and for
second and later families, usually a disaster in the making.

Ward dies first, On the second spouse’s death, say the wife, June Cleaver,
she bequeaths all of the family assets to the joint and only children of the
marriage, Wally and Beaver. Now everyone on the show is happy and Thanksgiving
dinners will continue happily along.

Now what about a tad of American social reality. After Ward’s funeral, June
remarries a lawyer for another town, who doesn’t really care much for Wally,
Beaver, Apple Pie or wholesomeness. What happens if June and her new beau have
children too, how should assets be divided between the various groups of kids?
How can Wally or Beaver, as the child of June’s first marriage, protect their
interests?

The answer is not a simple outright bequest in Dad’s will to Mom. The far
better approach to protect June, and all spouses who remarry, is for the will
of the first spouse to distribute assets in trust to protect those assets for
the benefit of the surviving spouse, and then assure that they are ultimately
distributed to you and other intended heirs (not the new spouse) on you Mom’s
death. The classic estate planning approach of using a by pass and marital
(QTIP) trusts can accomplish this. These techniques are discussed below and in
Chapter 10 on estate tax planning. Even without a tax, the same approaches work
for any estate to protect assets for the intended beneficiaries.

3. Hybrid Families Generate Hybrid Problems.

What if the kids from Dad’s first marriage are in their thirties and have
all completed college, bought houses, and started families and careers, with
much financial support from Dad. Should more of the estate be distributed to
the new child with Dad’s second wife? If the new child is only 4 years old,
common sense dictates that she will need more money to get to the point Dad’s
first kids are already at. So fairness would seem to suggest that more money be
set aside to pay for this younger half-sibling. But how would you, as the older
half-siblings from Dad’s first marriage feel about such “fairness” and would
you endeavor to prevent it?

What if dad died and Mom remarried? Dad had $1 million in life insurance
that Mom received on Dad’s death. How will you, as a child of Mom’s first
marriage, feel about Mom spending money received on account of your father’s
death on Mom’s new Husband, or on children from Mom’s new marriage? Will Mom
care?

The classic scenario faced by children of today, is Dad divorcing first
wife, who is Mom of the children, and marrying the proverbial “Betty Bazoom”
who is perhaps even younger than Dad’s eldest child from Dad’s first
marriage.

What happens next? The New Wife may be a brilliant brunette executive, and
be rather resentful of being looked upon as the blond bimbo after Dad’s money.
When, how and to whom should Dad leave his money in his will?

More surprisingly, what happens if Dad is disabled, who will be in charge of
Dad’s money? Many parents entering second marriages will seek legal guidance
and have a pre-nuptial agreement, and a will taking many of the steps outlined
below to safeguard assets for you and other intended heirs. After all the
careful planning the same parent (even the help of the same lawyer!) may then
sign a typical standard power of attorney designating the new spouse as
financial agent to handle all legal, tax and financial matters in the event Dad
becomes sick or incapacitated. At the first sneeze, the new spouse may set
about systematically transferring all of Dad’s money to her accounts, or
accounts of her children, friends or relatives, in contradiction to the express
intent of the pre-nuptial agreement and will. Your only recourse to help your
parent, or protect your family’s intended inheritance might be a lawsuit. If
there is no pre-nuptial agreement what recourse will you have? If the new
spouse just used the money to care for her self in a rather grand, but not
outrageous lifestyle, what might you be able to prove?

4. Property and Family Law Can Make a Complex Situation Even More
Complex.

The complexities of dealing with second marriages are vast. Did your parent
sign a prenuptial agreement or post-nuptial agreement? Was it done properly?
What laws apply in the state or country where your parent re-married?

Famous Case Studies: Due to the particulars of community property laws in
various locations, celebrities often jump through numerous legal hoops to
circumvent inconvenient regulations. Because of community property laws in
California, Kirstie Alley attempted to declare Maine her primary residence when
she divorced Parker Stevenson. Additionally, because in Britain the key in any
divorce proceeding is the marriage license, Mick Jagger claimed that he and
Jerry Hall were never legally married in all the years they lived together and
raised their family. He declared that the minister who officiated was merely a
friend posing as a minister and was not licensed to perform the marriage
ceremony. This, if true, would negate any obligation Jagger would have toward
Hall and would minimize his obligations to the children they share.

For smaller estate’s different issues apply that may not affect the
celebrities and Life Styles of the Rich and Famous types. If your dad’s new
wife becomes ill, or is incapacitated and requires nursing care, will these
costs deplete his estate and inheritance? Will your father become impoverished
and you end up supporting him? See chapter 9 for medicaid planning ideas and
chapter 4 for other insurance ideas.

To really help your parents protect their assets from a greedy second or
later spouse, or from the problems poor planning with a later spouse can
create, you really need to get your parent professional advice.

B. Anna Nicole Smith.

No story of second and later marriages can be complete without telling the
Anna Nicole Smith story.

Famous Case Study: In 1994, 26 year old Anna Nicole Smith, a former
stripper, Playboy Playmate of the Year and Guess? jeans model, married 89
year-old Texas multi-millionaire J. Howard Marshall. Marshall died a year later
and, in his will, bequeathed everything to the younger of his two sons, E.
Pierce Marshall, leaving nothing to his widow or elder son, J. Howard Marshall
III. Thus was born the battle of the century over an estate with an estimated
worth of anywhere from $46 million to $1.6 billion.

Smith immediately contested the will, claiming that her deceased spouse
lived to fulfill her every wish and had promised her half his estate on more
than one occasion. Pierce Marshall, the sole beneficiary, begged to differ
pointing to seven trusts and six wills prepared by his father, none of them
naming either Smith or Howard III as beneficiaries. Howard III, disinherited
over a business dispute also sued for a portion of the estate. Anna Nicole
filed for bankruptcy and in September of 2000 the Bankruptcy judge awarded her
$474 million of her late husband’s estate. That ruling was overturned by a US
District Court, who in March of 2002, awarded her a total of $88.5 million of
her late husband’s estate in compensatory and punitive damages from Pierce.
This verdict also overturned a 1999 ruling in Texas probate court awarding the
entire estate to Pierce Marshall. After six years of bitter litigation, “Miss
Cleavage” had a second verdict handed down in her favor which Pierce is
expected to appeal. All this costly litigation, however, might have been
minimized if Pierce had seen to it that his father had clearly stated his
intentions to disinherit his spouse and elder son. As it is, his inheritance
was vastly dissipated through legal fees and then awards for damages that could
have been avoided.

If you Dad is about to marry the young gold-digger, or your mom the handsome
young man who is younger than your son, what do you do? If the circumstances
are really outlandish, consult a psychologist to determine how to address the
situation. Ongoing consultations may give you the insight to help your parent
see what they are getting into. If the circumstances are really not so
unreasonable, don’t let them destroy your relationship. Keep close, keep in
touch, and try to be understanding. If you succeed in getting your parent to
open up about their wishes and planning perhaps they would be willing to
consult an attorney so that their wishes can be clarified in their will, as
well as reflected in other planning steps. Always encourage your parent to seek
the advice of an estate specialist when second marriage and other complications
exist.

C. Hybrid Families: Case Histories Illustrate the
Problems.

You don’t have to be famous to face the same difficult problems that
fractionalized or hybrid families create for estate planning. There is perhaps
no circumstance more fraught with difficulties and likely battles than improper
planning for hybrid families.

Case Study: Some families insist on believing the Brady Bunch myth. Logic,
and even professional cautions, can’t persuade them. The Winklers were both
married for the second time, both after rather tough divorces. Each had four
children, and under their wills they decided to set up trusts. Each trust was
to be co-managed by the eldest child from each family: wife’s oldest son with
father’s oldest daughter, and so on! They are entrusting each family to vote
fairly for both families without any mechanism to break a deadlock or argument.
This idealistic Brady Bunch might soon end up looking more like the Hattfields
and McCoys. Only time will tell.

The better approach with hybrid families is to name executors (who manage
the will) and trustees (who manage trusts set up under the will or before death
as separate documents) who are independent and objective. This might include
long time friends, professionals who have advised the family for many years,
institutions, or some combination.

Case Study: Arthur Smith’s wife died. He had rocky relationships with his
children for decades. Then, when he was 81, he met Beatrice. Beatrice wasn’t
quite the Anna Nicole Smith type, she was 79. Beatrice was a true companion and
confidant for Arthur. They became best friends, and about five years after
meeting, began to live together. They both wrote wills. Arthur’s estate had
grown substantially with the stock market (in case you don’t recall, there have
been periods in history when stock prices rose!), and although he had always
lived a rather modest lifestyle, his estate had grown to more than $5 million.
He left half of his estate to Beatrice, his companion, and half to his son, but
nothing to his daughter. The next year, on the advice of an attorney (that
since Beatrice wasn’t his wife estate taxes would take a lot of what he left
her). Arthur and Beatrice married. Arthur’s estate continued to grow to more
than $7 million and soon after marriage he made gifts of more than $1 million
in assets to Beatrice, and changed many of his other accounts to joint
ownership (this gave Beatrice access to the accounts and on Arthur’s death
would assure that those accounts would immediately become hers). A few years
later, Arthur, with the relationship with his children becoming more strained,
revised his will leaving everything to his now wife, Beatrice. About one year
later, Arthur died. Arthur’s children immediately sued their father’s estate,
trying to prevent Beatrice from gaining access to his assets. They claimed that
Arthur was unduly influenced by Beatrice (at age 89 she was after his money!),
the lawyer failed to do her job correctly, and pretty much anything else they
could think of. As the legal battle raged on, Beatrice, at 90, fell ill and
passed away. Her last years were spent watching her companion die, and then
both of their families fighting, depositions, nasty accusations, and so on.

Arthur’s will could have been a bit clearer, but Arthur’s wishes were not a
surprise and were consistent with years of changes. The real problem was the
anger and greed of his children. Had Arthur’s children only been a bit more
understanding of their father’s loneliness, his desire for some warmth and
family unity, instead of the constant positioning and bickering over a business
deal gone bad, his children would have inherited substantially more, and he
would have been far more sensitive to their wishes.

D. Get Your Mom or Dad to Sign a Pre-Nuptial Agreement before they
Re-Marry.

If your mom is going to re-marry, if you can encourage her to consult a
family lawyer about a pre-nuptial agreement to limit her new spouse’s rights to
her assets. The pre-nuptial agreement could assure her of some minimum amount
of support in the event that the new marriage doesn’t work out. The agreement
can list in detail the assets your mother has before remarriage and assure that
her new spouse has no claims on them. If your mom has already remarried without
the benefit of a pre-nuptial agreement, she can still achieve some protection
by entering into a post-nuptial or ante-nuptial agreement. Exercise
considerable caution. You don’t want to offend and upset your parent. Try to
help them understand the potentially adverse financial consequences if they
don’t protect themselves.

E. Get Your Mom or Dad to Sign a Living Together Agreement If They
Have a Significant Other but Won’t Marry.

If your dad, after the death of, or divorce from, your mom, should take up
living with a new companion, without contemplating marriage, a pre-nuptial or
post-nuptial agreement won’t apply. But that doesn’t mean that he cannot take
steps to protect themselves. Your dad could consider entering into a living
together contract with his new roommate or partner to minimize the likelihood
of legal and financial entanglements if the relationship terminates. Such an
agreement can also prevent the new partner from pilfering your future
inheritance without dad’s consent.

Your dad should get a contractual arrangement governing the legal, economic
and perhaps other aspects of his new relationship. “A living together agreement
is important for partners who live together without the formality of a marriage
since they do not have many legal protection married couples have. These
include common law rights of dower and curtesy, the statutory right of election
against an estate, the estate and gift tax marital deduction, and forms of
joint ownership (tenancy by the entirety). The law is generally less clear as
to how the rights between non-married partners will be applied,” cautions
Charles Abut, Esq., based in Fort Lee, New Jersey.

The “living together” agreement attempts to establish the parties’ economic,
legal and other ties during and after dissolution of their relationship.
Unfortunately, there is little assurance how many courts will treat these
contracts. In some states the concept of palimony is recognized in the law,
based on the seminal Lee Marvin case in California. Palimony can require that
an unmarried cohabitant be paid financial support from an unmarried partner, if
the existence of an agreement to provide that support can be established.

F. What If Dad’s New Wife Wants More Money in Her Name.

1. Beware: Tax Laws Encourage Large Gifts.

Gifts made to a spouse, who is a United States citizen, in any amount, are
not subject to gift tax. This means that there are generally no tax
restrictions on your dad giving his new wife any portion of his estate.

There is another, less common, transfer which also qualifies for the marital
deduction (i.e., no tax) is to give one’s spouse a life estate with a general
power of appointment. This means the spouse would have the right to the income
or use of the assets for their life. The spouse will also have the right to
designate who should receive the property following their death. Since this
will likely be her children or family, not you and your family, this isn’t an
ideal option.

There is a better option than either of the above. Your dad can gift assets
to a trust for his new wife, instead of directly to her. If this trust, a
special marital trust (e.g., a QTIP trust) for a spouse, is properly formed
during your dad’s life (inter-vivos), there will not be an adverse tax costs to
the transfer. The best result, however, is that your dad can control who the
ultimate beneficiaries will be. Typically the funds can be given to a trust for
dad’s new wife. She can be given income for her life. On her death, the assets
can be distributed back to your dad’s heirs.

Planning Tip: While this inter-vivos QTIP approach can be great for
everyone, there is a potential leak in the program. And the leak will take more
than a little Dutch boy’s finger to plug. If your dad’s lawyer doesn’t draft
the trust carefully, and if the trustee is indifferent or favors your dad’s new
mate, the powers given to distribute principal of the trust could effectively
put all the assets in your dad’s new wife’s hands. Principal distribution could
be restricted to funds needed to maintain her standard of living after giving
consideration to her other resources, or even less.

G. Have Dad Leave the Second Wife a “Life Estate”.

There are often seemingly simple solutions to complex problems in estate
planning. Simplicity is great; it’s easier to understand and it’s cheaper
to get the will written. The real issue is does it work! A common second
marriage situation concerns the marital home. Mom and Dad raised the kids in
the old Victorian. Dad died and years later Mom remarried and lived together
with the New Husband for ten years in the family home. Mom was getting on in
years and concerned that her New Husband be protected so he could live in the
home, but she wanted to also be sure that on his death the old Victorian would
pass to her children due to their strong attachment to and fond memories of the
house.

One option available to her is a life estate. A life estate means that the
New Husband can live in the home for his lifetime, but on his death it will
pass back to Mom’s children. Life estates are not only used to allow a spouse
to continue living in a home after death, it can be used to give children
residential rights, as well.

Famous Case Study: In Newport, Rhode Island, one of the largest tourist
attractions is The Breakers, the former home of Cornelius Vanderbilt II. The
Breakers is a four story, seventy room summer “cottage” where the Vanderbilts
would summer, together with the rest of the Four Hundred. The cost of running
such a large estate, however, had become prohibitive. Additionally, the
Vanderbilt family wanted to continue in their tradition of supporting the
preservation of art and historic homes in the area. As insurance that a change
of fortune will not mean the deterioration of the family home, and to help
raise funds to preserve other historic homes in the area, in 1972, the
Vanderbilt family sold the home to the Preservation Society of Newport County
with the provision that the Vanderbilt heirs, currently Gloria Vanderbilt, be
allowed to live on the estate. When visiting the house, some of the rooms are
closed to public tours when the family is in residence.

A life estate sounds great. Sounds simple. Unfortunately, it’s not – even if
your place is a bit more modest than the Vanderbilt cottage. While it may be
common and inexpensive to implement, it’s not always the best option when one
is looking to maximize one’s inheritance. Thee are too many ambiguities and
issues left unsettled when implementing a standard life estate. Take a look at
the following simple clause for a will giving the New Husband a life
estate:

Sample Clause: I give, devise and bequeath to New Husband the house located
at 123 Main Street, Anytown, USA to have and to hold the same for and during
New Husband’s lifetime, without the necessity of paying rent or furnishing bond
or other security therefor, but subject to New Husband paying all normal costs
of maintenance and repair in respect thereof. On the death of New Husband, or
upon such life estate beneficiary’s earlier renunciation or disclaimer of the
interest in said property, or on my death if such life estate beneficiary does
not survive me, I give, devise and bequeath said real property to my
children.

The above clause is typical, but so far short of what is necessary to
prevent family problems. Consider the following common issues which the above
clause doesn’t address:

• Does the life estate include any furniture, furnishings, and household
  effects? In other words, do you as Mom’s child have the right to remove
  items from the home as you see fit. This may be particularly significant if
  you have a personal attachment to items in the home or if there are
  valuable antiques or art work you want to sell for reasons as mundane as
  you need the money to pay the bills.
• What about any insurance policies on the house? Would you, Mom’s child
  and executor, have the right to cash them in, leaving the New Husband with
  the responsibility of purchasing new coverage?
• What if Mom sold the house before her death? What if she deeded it to
  you in advance of her death? What happens to the New Husband? Will he sue
  you for the right to live in the house as promised under the will?
• Must you pay all real property and similar taxes, assessments, and/or
  carrying charges on the house or is the burden to be carried by the New
  Husband? How are these to be defined? Do you have the money to carry that
  burden?
• Who pays estate or inheritance taxes on the value of the house that may
  be taxable? Do you or does the New Husband?
• Does the New Husband pay fire and extended coverage insurance premiums
  for the full insurable value of the house? Who determines the value to
  insure? Who determines the type of coverage? What is to stop Mom’s New
  Husband from getting the cheapest coverage available? Keep in mind that if
  there is a fire or other significant damage, it’s really your asset being
  destroyed.
• The above clause requires New Husband to pay “all normal costs of
  maintenance and repair” of the home. How is “normal” and “maintenance and
  repair” defined? Is a new roof normal or a repair? If it’s a capital
  improvement (i.e., not a mere repair) must you as an eventual heir pay? Who
  will ensure the New Husband pays for maintenance and repairs that are
  necessary? If New Husband is 55, how can you limit the amount of payments
  you need to make for a property you may not receive for thirty years. If
  New Husband is in his 80’s, he may not be willing to spend money for
  repairs that would otherwise soon be given to his own children, how do you
  get him to pay? Definitions of each term are key to avoiding disputes.
• What if the life estate beneficiary is disabled and cannot live in the
  house? Should the house sit empty? The above clause is too simplistic. It
  could provide that if in the opinion of two licensed physicians it is
  “unlikely” that the New Husband could foresee returning to live in the home
  it should be sold. What happens, then, if you as a child who was raised in
  that house don’t want to sell it?

A life estate is a great technique when it works, but be sure to review all
possible scenarios and problems with your parent and attorney.

H. Using Trusts to Protect Your Inheritance from You Mom’s New
Beau.

Dad died, or Mom and Dad divorced. Mom is involved with a new Beau who lives
out of his VW Bug when not hanging with your Mom. Beau’s tie-died t-shirts and
peace symbol necklace, and general lifestyle concerns you, but Mom marries him
anyhow. Pre-nuptial agreement you suggest! No says Mom, its true love. Mom
however, becomes sufficiently receptive to meeting with an attorney about an
estate plan. The classic planning step is to recommend that Mom bequeath her
assets into a trust. She can use the trust to benefit her new beau, and also
assure that the assets eventually reach you and other intended heirs.

There’s a common problem. If the new beau mom hooks up with is decades
younger, you might not inherit until you’re in your 70s or later. Just in time
to my more Depends — exactly how you wanted to enjoy your inheritance!
Solutions exist. Your mom could leave a portion of her estate to you and other
children or heirs on her death, not waiting for her new young spouse to die.
Another common approach which can be effective to minimize all these problems
is for mom to buy a large life insurance policy (or perhaps have a trust set up
to own the policy). This can assure that on her death both her natural heirs
(often children from a prior marriage) and new young spouse, are provided for
economically.

I. Setting up a Family Trust.

When planning for a second or later marriage, and the hybrid family
situations discussed in this chapter, a common approach is to set up a trust
for the new spouse in the will. A trust is a contractual relationship created
by your parent under a legal document called a trust, or under their will, in
which case the trust will only become effective following death. The key
concept of a trust is that it can separate legal ownership from beneficial
ownership. The legal owner is a trustee who can be an independent person named
to be in charge of investing trust assets and distributing trust money. The
beneficial owner are the persons intended to benefit from the trust assets.
These can include the new spouse, but importantly, yourself and other natural
heirs. The key benefit of using a trust in a second and later marriage is the
above separation of control and benefit. Your mom can designate the long time
family accountant who has proven himself trustworthy (his name isn’t Arthur)
and independent of the family politics, especially as they concern mom’s new
husband. This independent trustee can be given some flexibility to distribute
assets and income as between the children and other heirs and the new spouse.
This can be an effective way to help all loved ones, with the benefit of
hindsight (i.e., when the trustee knows future circumstances they can use the
trust money as then appropriate).

There are really two types of trusts. The first, called a by pass,
applicable exclusion or credit shelter trust can hold assets up to the amount
which your parent can bequeath estate tax free. This is $1 million in 2002 and
scheduled to increase in future years (unless Congress acts to change the
rules, yet again). This type of trust can include anyone as a beneficiary – new
spouse, children from prior marriage, and others. If your parent’s estate
exceeds this exclusion amount the remainder of the estate should be left to a
trust which qualifies for the estate tax marital deduction. This will enable
your parent to benefit her new spouse, while deferring any estate taxes, and
still assuring that you and the other natural heirs will eventually inherit.
Since a marital trust is so commonly used in second and later marriages to
protect assets, it is discussed in more detail below.

Planning Tip: If you parent or other likely benefactor is or has remarried,
if these types of trusts are not included in their will, you are far less
likely to see any money other than what the will leaves you directly on your
parent’s death. Anything given outright to the new spouse is only per chance
going to make its way to your pocket. If your parent’s will is less than 10
pages, there is a good chance that the trusts are not included, or if included,
don’t have enough legal meat to make them as workable as you’d like.

J. Qualifying for Unlimited Marital Deduction.

When mom want’s to leave assets to benefit and protect her new spouse, and
defer estate taxes, her estate plan should be designed to take advantage of her
ability to leave unlimited assets to a spouse in trust. An unlimited marital
deduction is available for qualifying bequests under your parent’s will to a
trust for his or her spouse. The following requirements must be met:

• The property which is intended to qualify for the marital deduction
  must pass from your parent to their surviving spouse. The property must be
  transferred under a will (or under your state’s laws of intestacy if one
  died without a will), as a result of joint ownership between your parent
  and their spouse or by a beneficiary designation (e.g. on an IRA).
• The rights and property transferred to your parent’s spouse cannot be
  a right which will terminate or fail as the result of the passing of time,
  the occurrence of an event or contingency (until she remarries), or the
  failure of an event or contingency to occur. A life estate (my spouse shall
  have our home for her life) or a bequest for a term of years (my spouse
  shall have my yacht for 15 years) are terminable interests and do not
  qualify for the marital deduction.
• The most common exception to this rule denying a marital deduction for
  property interests which may terminate, however, is the exception called a
  “qualified terminable interest property”, or QTIP, trust. This is the most
  popular marital trust. If the following requirements are met, your
  parent’s estate will qualify for the estate tax marital deduction on
  bequeathing assets to a QTIP trust for the surviving spouse. In addition to
  the marital deduction your parent will maintain control over the use and
  ultimate disposition of the property.
• No person can have the power to appoint the trust assets to any person
  other than the surviving spouse prior to their death.
• Income from the trust must be paid to the surviving spouse at least
  annually.
• The executor of your parent’s will must elect to qualify the trust
  for the marital deduction.
• The property must pass from your parent’s estate to the surviving
  spouse’s trust.
• On the death of the surviving spouse the entire value of the QTIP
  property is included in the surviving spouse’s gross estate. This fact can
  present some thorny tax problems on the death of the new spouse, or in many
  cases, especially if the new spouse has an estate that isn’t taxable, some
  huge benefits.

Example: Dad marries new spouse. Dad has a $2 million estate and the maximum
amount Dad can give away without estate tax is $1 million. Dad uses the classic
second marriage approach outlined above and leaves $1 million in a by pass
trust under his will to benefit all of his children from his prior marriage and
his new spouse. The balance of his estate, the remaining $1 million, is
distributed to a marital or QTIP trust for his new wife. His new wife has no
assets. If she dies a few years later, the $1 million exclusion her estate has
available is unused by her assets and may protect the entire QTIP trust from
taxation. Thus, you and your Dad’s other heirs will save potentially $500,000
in estate taxes as a result of your Dad having used a QTIP trust. Not a bad
savings for waiting a few years for the new spouse to die.

The above example illustrates a really important point. Planning is not
always a zero sum game. You don’t have to loose if the new spouse wins, and
vice versa. Everyone, with careful planning, can benefit. This concept can be a
key selling point to get your parent, your parent’s new spouse, and your
siblings and other family members on board to plan together.

K. Pros and Cons of A Marital Trust.

When in doubt, use the trust. Why? While a trust creates a bit more
complexity and cost, it assures your parent’s control over the assets. It can
prevent a greedy new spouse from pilfering the inheritance intended for you and
other family members. It can protect the new spouse from your siblings and
other’s infringing on her lifestyle. It can work both ways and protect
everyone.

A trust can also provide a number of important tax benefits. Your parent’s
executor, possibly you if you play your cards right, can determine what portion
of the trust should qualify for the marital deduction. This can enable the
executor to use hindsight to preserve some of your parent’s estate tax
exclusion which will ultimately save the family and heirs tax. The executor can
also make decisions to maximize GST tax benefit using the benefit of
hindsight.

As a child of the marriage, it should be an imperative in your mind that
your surviving parent or a beloved step-parent be provided for upon the passing
of their spouse. The cost of caring for an independent elder parent is high,
and if they do not have the funds to meet their own needs you may have to
assume the entire burden for their care. Even if you have twelve siblings, you
have no guarantee they will share the burden of caring for your parent or
step-parent and, unless your parent has sufficient funds to care for themselves
you should expect that you could be the one supporting their needs. Don’t lose
sight of that when helping your parents plan their estate. It’s one thing to
inherit more, it’s another thing to do it at the expense of your surviving
parent.

L. Will Dad’s Trophy Wife Exercise a Right of Election.

1. What is a Spousal Right of Election.

A spousal right of election, particularly as a result of the increases in
second and later marriages, and the growing divorce rate, can be quite
important in determining how any decedent’s assets will ultimately be
distributed, including your parent’s.

The laws of almost every state recognize that the surviving spouse should be
entitled to some minimum portion of the deceased spouse’s estate, or
alternatively that the surviving spouse should be entitled to enough assets to
live on. The rationale for this is that state legislatures believe that it is
in the public’s interest to protect surviving spouses. While many states assure
the surviving spouse at least one-third of the estate, subject to various
conditions, limitations and other requirements, not all do.

The spousal right of election laws of a particular state generally apply to
any married person who dies domiciled in that state. Determining the state of
domicile is quite important since the laws differ considerable from state to
state. domicile is generally defined as a place of permanent residence to which
you ultimately intend to return. The determination as to in which state a
person is domiciled is based on the specific facts in each case.

2. Not Every Trophy Can Get this Benefit.

Not every surviving spouse is entitled to the protection of this rule. A
surviving spouse may be denied the Right of Election where the couple was
living separate and apart in different homes, or where the couple had ceased to
cohabit as husband and wife under circumstances which would give rise to a
cause of action for divorce (or nullification of the marriage) from the
decedent, prior to death. Mere separation does not defeat the right of
election.

Even your parent’s new spouse can take advantage of a spousal right of
election, it is not always obvious what it will amount to. In some states, any
transfer under which the decedent retained the possession or enjoyment of, or
right to income from, the property, at the time of death.

Planning Tip: In a few states if your parent transfers all of her assets to,
a revocable living trust it could limit her new spouse’s right of election. If
you find yourself in a position of advising you parent as to what kind of trust
to set up in your name, investigate your state’s position on elective share
rights and revocable living trusts.

3. What is a Surviving Spouse Typically Entitled To.

A typical state spousal Right of Election law guarantees the surviving
spouse a one-third share of the estate. Not only may the percentage vary from
state to state, but the definitions of what is included in the estate will vary
considerably. Prior gifts may be included in the calculation, there may be
subtractions for assets owned by or given to the surviving spouse, and so on.
If a trust is set up for the surviving spouse under the will (not a “revocable
living trust), such as a marital or QTIP trust under the deceased spouse’s will
for the benefit of the surviving spouse, it may only be partially counted.

Another common Right of Election issue is to what extent property to be held
in Trust for the benefit of the surviving spouse will be counted towards
meeting her Elective Share (the amount the surviving spouse is entitled to). In
many states property in trust is only counted at 50% in value. In some states a
Life Estate (the surviving spouse is given the right to use property, such as a
house, but doesn’t own it, as discussed above) and interests held in a Trust do
not qualify as satisfying the surviving spouse’s Right of Election at all.

Example: Husband dies in 2002 leaving a $2 million estate. $500,000 are
joint assets which pass to the deceased husband’s child from a prior marriage.
The Probate Estate consists of $1.5 million of securities. The Will leaves
$800,000 in a marital trust, a QTIP, for his surviving spouse. The remaining
$700,000 assets are distributed to a by pass trust, protected from estate tax
by the applicable exclusion amount. The surviving spouse and the Husband’s
children from a prior marriage are all beneficiaries of the by pass trust.
Under state law the by pass trust is included in the calculation of the estate
but does not count as an asset paid to the surviving spouse. Under a typical
state statute assets in a QTIP trust will count 50% as meeting the spousal
right of election. If insurance is included in the estate for calculating the
spousal right of election under state law then the surviving spouse has a right
of election against a $2 million estate. A one-third elective share is
$666,666. The only bequest which counts towards satisfying the spousal right of
election is the QTIP trust of $800,000. This only counts at a 50% rate, or as
if the surviving spouse received $400,000. Thus, the surviving spouse would be
entitled to an additional $266,666 [$666,666 – $400,000] if she elects against
the estate.

To prevent an end-run around the spousal Right of Election laws, many state
laws permit the surviving spouse to obtain a percentage of assets given away
just before death. For example, in some states, any transfer if made within two
years of death of the Decedent to the extent that the aggregate transfer to any
one donee in either of the years exceed $3,000. However, if the surviving
spouse gave a written consent to the transfer, or joined in the transfer, the
property transferred may not be reached.

4. Be Certain that the Dad’s New Bimbo (or Mom’s New Beau) Waived
the Right.

When the Testator’s Will is to provide the surviving spouse less than the
amount of the statutory election, it is common and proper that the surviving
spouse be requested to formally sign a legal document giving up the right
(waive his or her right of election). This is done specifically to avoid Mom’s
new honey from using the election to upset the dispositions provided for under
your parent’s will. To be effective, the waiver of the right of election must
meet specified requirements under state law. The rules will vary from state to
state, but might include the following:

• The Waiver must be in the form of a written contract or agreement
  signed by the spouse waving the right.
• The Waiver will only be effective if there is full disclosure. It would
  be unfair for a spouse to be able to effectively waive his or her rights
  under state law without knowing the assets involved. How can you agree to
  forego what you don’t know?
• The Waiver must be both clear and certain. A Waiver in a prenuptial
  agreement or divorce property settlement agreement can often be
  effective.

If you serve as an executor for your parent’s estate, and the new spouse
exerts her right of election, be certain to confirm whether a waiver had ever
been signed.

M. Lessons to Learn.

This Chapter has summarized a number of special situations and problems
which can affect an Estate. If you are serving as Executor and any of the
situations discussed could arise, or even appear to be an issue, be certain to
obtain professional legal advice. Also, be careful since state law differs
considerably from state to state. Be certain to keep the Beneficiaries, other
Fiduciaries, and other persons interested in the Estate apprised of the status
of these situations because they all can add time delays and cost to the
probate process.

In the words of one wealthy individual, when advised to have a pre-nuptial
agreement before his third marriage remarked, “Its not necessary. After this
one, its either the cemetery or the monetary.”

What can be done? Plenty — if your parent or other benefactor is willing.
Most importantly, every step to protect your parent from a new spouse, will
also protect your inheritance. In many situations the goals can be consistent.
Further, in many cases the planning is not a zero sum game. If your parent will
plan creatively, tax, liability and other savings and protection can make
everyone better off, and minimize family feuds. Try to gently guide your parent
to carefully consider all of the ways your family, or the families of your
parent’s new spouse can cause havoc. Try to encourage your parent to seek
professional legal advice to craft a plan that minimizes the likelihood of any
of these problems having a significant adverse impact.

N. For Your Notebook: Sample Waiver of Right of
Election.

I, Jane Doe, spouse of John Doe, for one dollar and other good and valuable
consideration receipt of which is hereby acknowledged, now waive and release
“all rights in the property or estate” of John Doe (“my spouse”) in accordance
with [list appropriate state law reference], specifically the right to elect
against the Last Will and Testament of my spouse executed on September 2, 1998.
I further waive and release any right to elect as against any testamentary
substitute or intestate share to which I would otherwise be entitled under the
provisions of [list appropriate state law reference].

I further acknowledge that I am fully informed of the value of the assets
owned by my spouse, including but not limited to the assets listed on the
balance sheet and related financial information attached hereto as an exhibit,
which I now waive and release and am fully informed of the nature of my rights
in those assets.

I further represent that I have been represented by counsel in the execution
of this document and I am signing this document freely and voluntarily.

Dated:_____________

_____________________

Jane Doe

Subscribed and sworn to before me

this 2th day of June, 2003

______________________________

Notary Public

My Commission expires:______________