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SUCCESS STORY OF THE MONTH – MAKING A SILK PURSE FROM A SOW’S EAR

When someone fails to plan for his or her estate, it means that person is letting the state determine how and to whom assets should pass upon death of that individual. It may or may not be distributed the way the deceased wanted and the difficulty of transferring assets of the deceased will depend on the facts. The facts of this case illustrate that although assets may go to the intended heirs of the deceased, the difficulty and cost could have been avoided by simple planning. It is not unusual that if the deceased failed to have a Will or trust or adequate beneficiary designations, then assets will pass by the laws of intestacy (no Will). This often involves an heirship determination. In addition to the attorney representing an heir in such application, the court would appoint another attorney to represent the unknown heirs to confirm no one else is entitled to a portion of the estate. If an asset such as real estate needs to be sold, court approval may be needed. An annual accounting may be required as well. Due to costs, time delays and other issues, the goal of following story was to avoid this process. The facts are as follows:

Husband is survived by his wife and 2 adult children – one of whom is disabled and receiving valuable means-tested Medicaid benefits (in other words, an outright inheritance by the disabled child could result in loss of eligibility due to excess resources). Husband had no Will. The only assets he owned were a homestead bought with community property funds with his wife, a joint checking with his wife, and an old life insurance policy worth less than $75,000 recently discovered. 

The joint checking account was not a problem since wife survived him and had access to the account. 

The homestead was not really a problem in this case since the children were born of the same marriage (otherwise his home ownership would be divided in accordance with state law under laws of intestacy with the interest depending on whether the property was separate or community) and normally title companies will permit the signing of an Affidavit of Heirship (to avoid the court process of an heirship determination) assuming there are no debts owed by the estate of the deceased (which was the case here) and assuming enough time has passed to give the title company comfort that there are no creditors.        

The main asset that was a problem was the life insurance policy discovered after the death of both husband and wife (who survived her husband but then died). Husband named his mother (who died before him) as his beneficiary, but he failed to name a contingent beneficiary. Since nobody was aware of the policy, it escheated to the state. Although it is possible to get the life insurance proceeds from the state, it was necessary to have a court order to determine to whom the funds belonged (in other words, who are the heirs since husband had no Will). As indicated before, the goal was to avoid the delay, costs etc. of an heirship determination when there is no Will. Here are the problems and solutions to make this case a success:

PROBLEM NO. 1:  How to transfer life insurance policy proceeds (in addition to homestead if there is no Affidavit of Heirship) when there is no named living beneficiary designated and no Will and there is a desire to avoid a court ordered determination of heirship.

Fortunately, there is a cheaper alternative to a determination of heirship if the estate of deceased (exclusive of homestead and certain personal property items) is less than $75,000. This is called a Small Estate Affidavit. However, there are certain requirements including (1) the deceased had no Will; (2) the assets of the deceased were less than $75,000 as indicated above; (3) the assets are more than the debts; and (4) all of the heirs are located and they or their legal representative sign the affidavit along with 2 disinterested witnesses.

PROBLEM NO. 2:   If no personal representative has been appointed for an heir who subsequently passed, the Small Estate Affidavit cannot be used to transfer the proceeds of the life insurance policy. 

In this case, the wife survived her husband but subsequently died prior to the discovery of the life insurance policy. The wife (or her estate) would be entitled to the entire life insurance policy proceeds if the policy was purchased by the husband with community property funds. If the policy was purchased by the husband with separate property funds, the proceeds would be split between the children and the surviving wife (or her estate) under the laws of intestacy. Since the wife died after her husband, there would need to a representative of her estate be appointed. Wife had created a living trust and all of her assets had been re-titled into the name of the trust. A trustee is not considered a representative of the estate. Fortunately, it is common practice to have a “pour-over” Will since it is not unusual that people either make mistakes or subsequently acquire or inherit property and fail to re-title such assets in the name of the trust. In this case, wife did not know about the life insurance policy.  As a result, her “pour-over” Will would need to be probated so that a representative (the executor) would be appointed so that the Small Estate Affidavit could be subsequently filed. If the Will is probated within 4 years (which was the case here), then a representative (the executor) could be appointed by the court.  A court-ordered guardian (her personal representative) had been previously named on behalf of the disabled child- so that was not an issue.

PROBLEM NO. 3: Avoid loss of public benefits of the disabled child due to the inheritance resulting in excess countable resources for Medicaid eligibility.

If the life insurance policy was purchased with community property funds, then the proceeds would be payable to her estate and then would pour into and be distributed in accordance with terms of her living trust. Unlike her husband, the wife properly planned and had created a contingent special needs trust within her living trust so that the funds for daughter could be used for items not covered by Medicaid and would not be considered a countable resource. However, if the life insurance policy was purchased with separate property funds, then the disabled child would inherit a portion of the life insurance proceeds under the laws of intestacy jeopardizing public benefits. The disabled daughter (or the representative acting on her behalf) would then need to either pay existing bills, purchase non-countable resources, fund an ABLE account (up to $15,000 and assuming disability prior to age 26), create her own special needs trust or fund a pooled trust with the inherited funds (assuming the disabled child is under 65).    

This case illustrates how many problems could occur when someone fails to adequately plan. The attorney might be able to use the various tools in the toolbox to make a silk purse from a sow’s ear. Although the desired goal of avoidance of the lengthy heirship determination process was successful, it would have been best if husband had done some simple planning. 

If interested in learning more about this article or other estate planning, Medicaid and public benefits planning, probate, etc., attend one of our free upcoming virtual Estate Planning Essentials workshops by clicking here or calling 214-720-0102.  We make it simple to attend and it is without obligation.

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