A Will or Trust contest can derail a client’s final wishes, rapidly deplete their estate, and tear their loved ones apart. But it doesn’t have to end like this.
What is a Will or Trust Contest?
A Will or Trust contest is a type of lawsuit that is filed to object to the terms, provisions, or validity of a Will or Trust.
If a Will or Trust is successfully contested (i.e., declared invalid), then the court “throws out” the Will or Trust. This places the client’s family in the position it would have been in without the challenged Will or Trust. In many cases, this can result in a disastrous outcome for a client’s intended beneficiaries.
Who Can Contest a Will or Trust?
Only a person who has legal “standing” can file a lawsuit. Standing means that a party involved in a lawsuit will be personally affected by the outcome of the case.
The following people may have standing to question the validity of a Will or Trust:
- Disinherited or disadvantaged heirs at law – Family members who would inherit or would inherit more under applicable state law if the deceased person failed to make a valid Will or Trust
- Disinherited or disadvantaged beneficiaries – Beneficiaries (such as family, friends and charities) named or given a larger bequest in a prior Will or Trust of the decedent
When Can a Will or Trust Contest Be Filed?
The time limit for an interested party to file a pleading opposing the probate of a Will is determined by the law and rules of the state in which the probate case is filed. By filing that pleading, the Will opponent becomes entitled to notice of any probate court filings and hearing dates and has the opportunity to respond to the filings and be heard at the hearings.
With regard to Trusts, the time-frame to contest them varies greatly from state to state. In some states, heirs can be limited to as little as a few months to contest a Trust, while in other states the time-frame can be as long as two years.
What are the Legal Grounds for Contesting a Will or Trust?
In general, there are four (4) grounds to challenge the validity of a Will or Trust:
- The Will or Trust was not signed as required by state law. Each state has specific laws that dictate how a Will or Trust must be signed in order for it to be legally valid.
- The person making the Will or Trust lacked the necessary capacity. The capacity to make a Will means that the person understands: (a) their assets, (b) their family relationships, and (c) the legal effect of signing a Will. Each state has laws that set the threshold that must be overcome to prove that a person lacked sufficient mental capacity to sign a Will or Trust.
- The person making the Will or Trust was unduly influenced into signing it. As clients age and become weaker, both physically and mentally, others may exert influence over the client’s decisions, including how to plan their estate. Undue influence can also be exerted on the young and the not so young. It must be so extreme that it causes the maker to change their estate plan to favor the undue influencer or disfavor someone else.
- The Will or Trust was procured by fraud. A Will or Trust that is signed by someone who thinks they are signing some other type of document or a document with different provisions is one that is procured by fraud.
Planning Tip:
- While it is easy to assume that a Will or Trust that was signed in an attorney’s office is valid, this is not always the case. Attorneys who do not specialize in estate planning may be unfamiliar with the formalities required to make a Will or Trust legally valid in their state. Therefore, it is important for clients to work with an experienced estate planning attorney who is familiar with the laws of their state. Ensuring that an estate plan is protected against these legal grounds is particularly important if clients wish to disinherit or favor one or more members of their family.
How Can Clients Avoid a Will or Trust Contest?
When clients create or update their estate plans, one of their goals should be to ensure that their final wishes are fulfilled. Clients who are concerned about challenges to their plan should consider the following:
- Do not “do-it-yourself”! If the client is concerned about a potential heir contesting their estate plan, only an experienced estate planning attorney will be able to help the client create and implement a plan that will discourage or avoid lawsuits. Also, note that unintended consequences can result from a “do-it- yourself” plan because a software program cannot give legal advice and the do-it-yourselfer neither knows the law nor all terms and provisions which should be included in a comprehensive estate plan.
- Let family members know about the estate plan. It is not necessary to let family members know about all of the intimate details of the estate plan; at the very least they need to know that the client has taken the time to create an estate plan and appoint a competent executor.
- Use discretionary trusts for problem beneficiaries. Instead of completely disinheriting a beneficiary who may squander their inheritance or use it against the client’s wishes, require the beneficiary’s share to be held in a discretionary Trust and appoint a third party, such as a responsble adult and/or trust company, as Trustee. This will allow the client to control when the beneficiary will receive distributions and who will inherit anything that is left when the beneficiary dies.
- Keep the estate plan up-to-date. Estate planning is not a transaction; it is an ongoing process. Therefore, as the law and the client’s family, assets, and circumstances change, so should the client’s estate plan. An up-to-date plan shows that the client took the time to review and revise the plan as their family and financial situations have changed. Updatig the plan will discourage challenges since the plan will encompass the client’s current estate planning goals.
The Bottom Line on Will and Trust Contests
Will and Trust contests are on the rise. Educating clients about how to prevent a Will or Trust contest can go a long way to giving clients and their families peace of mind.
If you are interested in learning more about how to help your clients create and maintain a comprehensive estate plan that will be difficult to attack and overturn, please call our office now to arrange a Complimentary Consultation with trust and estate planning attorney Phil Levin, Esq., AEP.
Checklist for End of Life Matters
Contemplating end of life issues is undoubtedly uncomfortable for many. The best way to make sure your end of life wishes are honored is to commit them to writing and communicate your desires to your loved ones. Although the medical and legal aspects of dying come to mind first, certain personal desires may also be considered.
For example, you may write a personal legacy or story, passing on life lessons, or outlining your hopes and dreams, as well as leaving any helpful advice, for loved ones. You could create a “bucket-list,” stating specific goals or activities to accomplish for yourself.
In the area of more practical information, writing down desires for funeral and burial arrangements is important. Related details include desires for the specific funeral home, pre-paying a funeral, buying a burial plot, which type of memorial service you desire, and if you want to specify a charity or other cause in lieu of flowers. Some people write their obituary ahead of time, or leave key information to include for someone else to write.
For personal property, such as antiques, coins and jewelry, you may create a list of the items with respective beneficiaries stated on a Tangible Personal Property Memorandum.
However, the components of a complete estate plan are more formal, often consisting of a Revocable Living Trust or a Medicaid Asset Protection Trust (MAPT), Last Will and Testament, Financial Power of Attorney, Health-Care Power of Attorney, and Advance Medical Directive.
In a landmark, unanimous decision handed down on June 12, 2014, the United States Supreme Court held that inherited IRAs are not “retirement funds.”
This ruling is important to you and your family because it means you need to take action to ensure your retirement funds are protected when they pass to the next generation – and, perhaps, even to your spouse.
Here’s what happened in the Clark Case:
Ruth Heffron created an IRA, naming her daughter, Heidi Heffron-Clark, as beneficiary. After Ruth died, Heidi transferred the IRA assets (approximately $300,000) into an “Inherited IRA.”
Some nine years later, Heidi and her husband, Brandon, filed bankruptcy and sought to protect the Inherited IRA from their creditors. The couple argued that the inherited IRA assets were protected retirement funds. Both the bankruptcy trustee and the judgment creditors objected.
The case went all the way to the United States Supreme Court, which ruled that funds held within an inherited IRA are not “retirement funds.” And, as a result, those funds have no protection as retirement funds and can be seized to pay off debts to creditors.
The Court reached its conclusion using three (3) elements, which differentiate an inherited IRA from a participant-owned IRA:
- The beneficiary of an inherited IRA cannot make additional contributions to the account, while an IRA owner can make contributions.
- The beneficiary of an inherited IRA must take required minimum distributions from the account, regardless of how far away the beneficiary is from actually retiring, while an IRA owner can defer distributions at least until age 70 ½.
- The beneficiary of an inherited IRA can withdraw all of the funds at any time and for any purpose without a penalty, while an IRA owner must generally wait until age 59 1/2 to take penalty-free distributions from an IRA
This decision and analysis by the U.S. Supreme Court has sent shock waves through the estate planning and financial advisory worlds. The logic of the Court is easily extended to all inherited defined contribution retirement plan accounts, so inherited 401(k) and 403(b) accounts are also affected.
What Can Be Done to Protect Inherited IRAs from Creditors?
In light of the Clark decision, clients must thoughtfully reconsider any outright beneficiary designations. By far, the best option for protecting an inherited IRA is to create a Retirement Plan Trust. When properly drafted, this a Retirement Plan Trust offers the following advantages:
- Protects the inherited IRA from beneficiaries’ creditors, predators, as well as current and future lawsuits
- Ensures that the inherited IRA remains in the family bloodline and out of the hands of a beneficiary’s spouse, or soon-to-be ex-spouse
- Allows for experienced investment management and oversight of the IRA assets by a professional trustee and investment advisor, if desired
- Prevents the beneficiary from squandering away an inherited IRA, allowing IRA distributions to be received over the lifetime of a beneficiary
- Enables proper planning for a special needs beneficiary to avoid disqualification from receipt of valuable government benefits
- Facilitates transfer tax planning to ensure estate taxes are minimized, or potentially eliminated, when inherited IRA assets pass to grandchildren
Could State Law Still Protect Inherited IRAs?
A handful of states – including Alaska, Arizona, Florida, Idaho, Missouri, North Carolina, Ohio and Texas – have either passed laws or had favorable court decisions that specifically protect inherited IRAs under state bankruptcy statutes. If the IRA beneficiary is lucky enough to live in one of these states, then that beneficiary may very well be able to protect their inherited retirement funds by claiming the state law exemption instead of the federal law exemption.
Caution: Caution should be used in relying upon state law to protect a beneficiary’s inherited IRA. In general, people are more mobile than ever and your beneficiary may need to move from state to state to find work, pursue educational goals, or be closer to family members. In addition, federal bankruptcy laws now require a debtor to reside in a state for at least 730 days to use state bankruptcy exemptions. Therefore, long-term planning should not rely on a specific state law but instead should take a broad approach to asset protection planning strategies.
The Bottom Line
If you have significant tax-deferred retirement plan accounts, please call The Levin Law Firm at (610) 977-2443 to arrange a complimentary consultation regarding your particular situation.
We can show you how to protect your tax-deferred assets from your beneficiaries’ creditors, divorcing spouses, frivolous lawsuits, medical crises, and spendthrift tendencies. It is imperative that you take action now to learn about estate planning strategies to protect your IRA assets.
On June 12, 2014, the U.S. Supreme Court unanimously ruled in the Clark decision that funds held in inherited IRAs are NOT “retirement funds” within the meaning of §522(b)(3)(C) of the bankruptcy code and therefore are NOT protected in bankruptcy. The decision can be found here.
Before this Supreme Court decision, it was clear that IRAs were exempt from the claims of creditors in the event of bankruptcy. However, whether an inherited IRA was subject to the same protection had varying precedent throughout the country.
The decision in Clark is another significant reason why designating a qualified trust as beneficiary of an IRA is an important planning strategy for clients who desire asset protection for beneficiaries of their tax-deferred individual retirement accounts.
This decision greatly strengthens our long-standing position that IRAs should be payable to a Retirement Plan Trust when asset protection is desired. Of course, these Trusts need to be adroitly drafted, by competent legal counsel, and include the proper discretionary distribution standards.
Please contact Philip Levin, Esq. at The Levin Law Firm to discuss the benefits of establishing an IRA Inheritance Trust for your selected clients. To arrange a Complimentary Consultation, please call Laura or Jennifer at (610) 977-2443.
A number of our clients have special needs children who are presently receiving public benefits, such as Supplemental Security Income and Medicaid. Other clients have special needs children who may need public benefits later in life.
Public benefit programs have asset limits. Many times, the children who are receiving public benefits become settled in their lifestyles regarding their living arrangements and working requirements. They usually do not want to lose these valuable financial benefits, and have their lifestyles disrupted. However, loss of significant financial benefits often occurs when a special needs child receives an outright inheritance upon the death of their parents or grandparents.
How can parents and grandparents preserve and protect the family wealth, for ALL of their children and grandchildren, WITHOUT disinheriting a child who has special needs?
There is a remedy for this potential dilemma, and the legal solution is to establish a Supplemental Special Needs Trust.
This Trust can be a stand-alone entity, or one that provides specific provisions contained under the terms of a Revocable Living Trust of a parent or grandparent as part of their estate plan. When designed and drafted properly, the share of an inheritance for the special needs child will be distributed to the Supplemental Special Needs Trust, upon the passing of the parent or grandparent, to be utilizing for the benefit of a special needs child.
The overall goal of a Supplemental Special Needs Trust is to provide for the needs of the child, for expenses not being paid for by government benefit programs. As a result, the life of a special needs child can be enhanced by utilizing Trust assets to provide better care, tuition expenses, supplemental medical needs and therapies, recreational opportunities, and other living enhancements.
Utilizing a Supplemental Special Needs Trust, family wealth can thereby be preserved. When the special needs child passes away, any remaining assets in the Trust can be distributed to beneficiaries designated in the Trust agreement, after taking into account any required pay-back requirement to the DPW and Medical Assistance programs.
The language in the Supplemental Special Needs Trust must be very specific and precise in order for the child to retain existing public benefits, and also receive discretionary distributions from the Trust.
First, the child must not be the trustee, and may not have unfettered access to funds in the Trust. Another individual or trust company must be named as trustee. So that public benefits are not disrupted or terminated, the terms of the Trust must direct that any distributions from the Trust must not be for expenses already provided by Supplemental Security Income, Medical Assistance, and other government benefits programs.
At The Levin Law Firm, we work with many clients who desire to provide financial protection for individuals with special needs. We furnish clients with competent and clear legal advice about how a Trust can protect their assets for the benefit of a special needs child, without causing a disabled child to lose substantial monthly benefits which the child is entitled to receive under state and federal laws.
Contact The Levin Law Firm, to arrange a Complimentary Consultation with trust and estate planning attorney Phil Levin. Phil can help you to discover how to plan today to preserve and protect your estate.
To arrange a free consultation, please call Laura or Janet at (610) 977-2443. We look forward to serving the estate planning needs of your family.
