Month: July 2013

Dirty Trick #41 to Steal Inheritance: Marry an Incompetent Widow

A recent Wisconsin Supreme Court case, McLeod v. Mudlaff, is among the most recent in court cases with “estates gone wrong” issues. While the Supreme Court’s decision focused upon the validity of the decedent’s marriage, the case arose initially as a probate dispute. The breakdown of the deceased woman’s estate offers some helpful instruction about the potential benefits of living trusts in estate plans.

Ms. Laubenheimer created a will in 1999 leaving most of her estate to her three stepchildren. In early October 2008, Laubenheimer suffered a series of debilitating strokes and was admitted to a nursing facility. On October 11, two doctors signed a “Statement of Incapacitation”, attesting to her condition. Nevertheless, Joseph McLeod, who had been living with the woman, checked her out of her nursing home twice, on Oct. 27 and Nov. 3, to obtain a marriage license and hold a marriage ceremony. The woman died three months later.

A probate dispute ensued when McLeod argued that Laubenheimer’s 1999 will was invalid and that, because he was her husband and the woman never adopted her stepchildren, he was the sole heir of the woman’s $450,000 estate. The stepchildren contended that the woman lacked the mental ability to provided legal consent after her incapacitating strokes, making her marriage to McLeod invalid.

The issue before the Supreme Court focused solely on whether a trial court can invalidate a marriage after one spouse has died; however, Laubenheimer’s case also offers a valuable lesson regarding estate planning. In cases where, as the deceased woman’s stepchildren asserted here, a party seeks to manipulate the system to improperly gain control of another’s assets, a living trust may offer a degree of protection.

How a revocable trust can (and can’t) help

Many revocable living trusts name the trust’s trustor, or creator, as the original trustee. That person has the authority to manage all assets owned by the trust until an event occurs that triggers a transition to the successor trustee, whom the trust creator named at the time of the trust’s creation. Most trusts provide several events that trigger a successor trustee’s assumption of control, including the original trustee’s death or incapacitation. Often, trust documents state that the medical statements of two doctors provide sufficient proof to establish incapacitation. In Laubenheimer’s case, if she had created and funded a living trust with her assets, the two doctors’ October 11 “Statement of Incapacitation” likely would have triggered a transition of trusteeship of her trust from herself to her successor trustee, a person she would have named prior to her loss of mental capacity.

‘Pocket’ Deed : Maybe a Bad Idea

As people seek out ways to avoid the expense and delays that may be associated with probate administration, they may latch onto some “creative” methods for accomplishing this goal. One such method is a technique often called a “vest pocket deed,” or just “pocket deed,” and while it may seem extremely advantageous in terms of both avoiding probate and maintaining total control during one’s lifetime, it is actually filled with serious risks.

A pocket deed is a colloquial term referring to a deed that the property owner executes during their lifetime, but keeps in their figurative (or, in some cases, literal) vest pocket until death, and only after which is the deed recorded with the Register of Deeds. The intent behind such a method is usually two-fold. One, the method will avoid probate, because the owner signed the deed transferring the property within his/her lifetime, the property legally was not part of that person’s estate at the time of death, meaning that property was not subject to probate administration.

Two, the method offers the original owner total control, because no one recorded the deed, the relevant public records continued to show the original owner as the current one, and they could continue to manage and control the property as if the deed did not exist. If the owner changed his mind regarding any aspect of the transfer, he could simply destroy the deed and nullify the transfer.

The method contains may potential dangers, however:

Your continued control may not be guaranteed. If someone discovers and records the deed, then the transfer becomes effective immediately and the person to whom you transferred the property becomes the record owner of the property, and may chose to sell the property, mortgage the property, or evict you.

The pocket deed may cause problem for your loved ones. A possibility exists that the potentially long gap in time between execution, delivery and recordation may create a cloud on the title on the property. That means that title insurance companies may not write insurance for the property which, in turn, makes your transferee’s title to the property not marketable unless they engages in a legal proceeding to clear up the cloud on the title.

The pocket deed may cost your loved ones money. If the person to whom you leave the property ultimately sells it, they will pay more in taxes as a result of the pocket deed. The pocket deed means the transfer was legally one that occurred during your lifetime, not upon your death. As a result, your transferees will not receive a full “step up” in tax basis when they receive the property, which in turn, means that the amount of capital gains taxes they will owe upon the sale of the property will be higher than if they had legally received the property at the time of your death.

The Peril of ‘Adding Someone’ to the Title of Your Wisconsin Real Property as a Means of Estate Planning

Beware the do-it-yourself “simple,” “efficient” estate plan. While simplicity and efficiency are valid objectives, it is important not to create unnecessary risk just so that you can save a few dollars in the short term. One risk that many people take is adding a co-owner to their real property trying to simplify the transfer upon their death. While often relatively fast and easy, this method potentially exposes both them and their loved one to avoidable risk.

When property owners say they want to “add someone” to the deed of their real property in order to create an easy method of passing the property, they often mean that they wish to create a joint tenancy with that other person. In many cases, this process occurs without a hitch. The original owner dies, and the person “added” takes over as the new sole owner of the property.

However, creating a joint tenancy of real property as an estate planning tool has many potentially negative ramifications, especially if the property is your home. This method is a completed transfer under the law, and that carries multiple consequences. One consequence relates to capital gains taxes. Taking ownership through this method, instead of inheriting the property, may cost the loved one a sizable portion of the potential “stepped-up basis” in the property. When he/she sells the property, he/she will owe capital gains taxes. Those could have been completely avoided if the property had been inherited.

Also, if a person “adds” a loved one, and he/she pays nothing, that is a gift. That can have certain impacts when it comes to estate and gift taxes, as well as income taxes for your loved one. Furthermore, if the gift giver needs to apply for Medicaid in the future, this gift may make them ineligible to receive Medicaid benefits for a period of several years, even if they are otherwise poor enough to qualify. As they say, “no good deed goes unpunished.”

Beware that if you “add” someone, that person is a co-owner and has all the legal rights and obligations that you have. They can sell their share or mortgage your house, and if your loved one gets sued successfully, his/her creditors could go after the property. If they declare bankruptcy, the property may need to be sold to pay their creditors.

Using Your Wisconsin Estate Plan to Express Your Funeral Planning Wishes

Burial or cremation? Military honors? “Green” burial? You can control. Whether or not you have an estate plan, there is one aspect of your passing that may be extremely important to you but which you may have overlooked: funeral planning. Without the proper written documentation of your preferences, your family and friends may not know how to proceed, or may not know which of your loved ones you prefer to have act as the primary decision-maker when it comes to making choices about your final arrangements. However, Wisconsin law allows you to take control, and takes away much of the guesswork about your funeral arrangements.

Section 154.30 of the Wisconsin Statutes allows individuals to create a document known as an “authorization for final disposition”. Under this law, final disposition includes: planning for your viewing, your funeral ceremony (or memorial service, graveside service or other last right), as well as the burial, cremation or donation of your body. The statute permits you to name, in writing, the person you desire to carry out your final arrangements.

In the event that you do not name an agent to make your final arrangement decisions, this statute also provides clarity about who holds the right to make those decisions. The first priority in this statutory list goes to your surviving spouse, followed by your children, then parents, and then siblings. If the responsibility falls to your children or siblings, a majority of those relatives must be in agreement in order to act. If no relative steps forward, then these decisions are made by “any individual … who is willing to control the final disposition and who attests in writing that he or she has made a good faith effort, to no avail,” to locate and contact your family.

For certain Wisconsin residents, creating an authorization document is an essential component of estate planning. If you prefer someone other than the relatives named in the statute, then you should strongly consider creating such an authorization. For example, if you are in a non-traditional relationship or have no surviving spouse, and fear that your children will not follow your preferences, an authorization document can offer substantial benefits. Alternately, if you have concerns that a group of your relatives (such as your children or siblings) working together to make final arrangement decisions for you could trigger severe disagreement and infighting, an authorization may provide a helpful pathway to preserving your final arrangements goals, as well as family harmony.

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