Tag Archives: estate planning

Estate Planning – The Life Estate

Estate Planning - The Life EstateThe life estate is something every first year law student learns about when they study the arcane and often bizarre history of property law that harkens back to the days of English knights, lords and serfs, and the transfer of property through the ceremonial throwing of dirt clods with oaths of duty to accompany. The life estate is about as old as they come as instruments of wealth transfer go and students love it, because it is relatively easy to understand. Apart from what students love and what is easy to remember, however, the life estate still has practical value today in your estate planning and assets management schemes.

The basic idea of the life estate is that a person can be left a piece of property for life, and upon their passing, the property in question can go to whoever is designated to receive that property afterward. The individual or group who receives the property after the life-tenant passes is called the remainderman or remaindermen, which is useful only in that it helps one to remember that the person who remains gets the property. If, for example, one wants to leave a family estate that has been with the family for many generations to their spouse and then have it immediately pass on to their children or another relative who will maintain the estate for the generation to come, then a life estate might be the perfect vehicle to do so. Another example is the same family estate, left to a surviving spouse until the surviving spouse either dies or remarries. Again, the aim is to ensure that the estate stays in family, a contingency which is threatened by the remarriage because that creates a new marital joint-tenancy, absent any other provision. Often the life-estate was used to keep assets, like the family home, headed down a single line of familial ownership.

However, the life estate has other uses, for example, it can leave an asset to be owned by one person until the death of third person. If an older relative has become incapacitated, such that it is difficult for them to make decisions for themselves, then the asset can be left in the care of another for the incapacitated person’s lifetime. An example might be, that Blackacre (the fictitious name for a piece of property used in law schools everywhere) is left in the care of cousin Tilly, until great aunt Nelly’s death. Thus, Tilly is allowed to make Nelly comfortable at Blackacre (the family home) until Nelly passes on. In this instance, Nelly’s life is what is called, the measuring life of the life estate, and Tilly’s ownership ends when Nelly is gone.

On the whole, the life estate may be falling out of use for a number of reasons and being replaced by the much more fluid instrument of the trust. But, the life estate still captures, from time to time, our instincts regarding how property is to pass from one generation to another and that is why it is still relevant even for an estate planner who uses it very rarely. It helps us to ask and to get the answer to very difficult questions, which is part of the act of estate planning. Both the client and the attorney must face tough questions, and the life estate (even if it is sometimes regarded as a legal relic of the past) tells us how people used to answer questions of intra-generational wealth transfer and why. We may use different instruments to bring about our legal ends (or we may not), but even if we do, the life-estate still has relevance in helping us think about the questions that underlie the choices to be made in estate planning.


Will the Real Beneficiary of Your 401(k) Please Stand Up

401(k)If it has been awhile since you last looked at the designation-form for your 401(k), you may be in for a surprise. As the years, since you designated a beneficiary, life has tossed some curves and changes. Without a good review, with a legal advisor, you may find that your retirement savings are going to a person that you’d rather not see them go to. It happens.

The wealthy telemarketer died suddenly last month. His last will and testament said that his estate was to go to his children and his new wife. Much of his money was in his 401(k) retirement plan. The ultimate recipient of those monies isn’t determined by his will and wishes. The recipient is determined by whose name was scrawled on the designation form years ago. His ex-wife of 22 years got all of his money.

It is a situation that happens frequently but is little-understood. A lifetime of putting money away is determined by what you inked on the document years ago when you designated your beneficiaries. If you haven’t updated the paperwork to reflect changes in life, you possibly will not be able to leave your wealth to the heirs of your choice. Instead, you could be leaving them a financial nightmare.

The executive who died could have asked his ex to sign a waiver and then name his children as the recipients of his 401(k). Since he failed to do that, his ex inherits it. By forgetting to update his forms, the executive basically disinherited his children and left his current wife penniless.

Law professors at Benjamin N. Cardoza School of Law in New York released a study which sheds light on the situation. Most Americans think their retirement will be divided along the lines laid out in their will — as are their other assets. Actually, the beneficiary of retirement savings is normally determined by what is said on beneficiary-designation forms that many people have either forgotten or lost.

With $6.5 trillion in IRAs, the amount of money is huge. Another $5.9 trillion in 401(k)s that may — or may not — go to the intended recipient. If you accidentally leave a former spouse designed as the beneficiary of your 401(k), they will be given the money from the fund, even if your will stipulates that those assets are excluded from the divorce settlement.

Lauren Lindsay, financial planning director at Personal Financial Advisors, worked with an insurance executive who had four children. He had given so much money to one child to help her fund a business that he told all of the children, including her, that it would not be fair to give her more. The insurance executive told Ms. Lindsay that he would be changing the designation forms on his 401(k) so the other three would inherit the money. Before he could get a chance to complete the changes, he was killed in an auto accident. His daughter, the one he had helped financially, was given 25 percent of his retirement assets.

It is past time that firms overhaul the rigid and outdated forms. Until they do, you need to double check how you filled those forms out years ago. A good attorney can help spot any discrepancies between your life now and how you saw it then.