Just as spending a day under the summer sun without proper protection can leave you with a painful sunburn, an unfinished or out-of-date estate plan can inflict harm on you and your loved ones. In this newsletter, we explore the importance of creating a comprehensive estate plan to protect your legacy and ensure a smooth transition to future generations.
What Is Your Relationship with Your Parents?
Your relationship with your parents and with your own children is important for several reasons, including developing an effective estate plan. Simply maintaining a loving relationship with a parent does not necessarily guarantee inheritance rights. A legal right to inherit depends largely on the legal relationship between a child and that child’s parent, the existence of a valid estate plan, or if no estate plan exists, the applicable laws of intestacy in a given jurisdiction. Generally, children can inherit from their parents whether their parents are biological or adoptive, but in most jurisdictions, there is no legal right for a child to inherit unless they are a minor or it can be shown that they were accidentally left out of a parent’s estate plan. In some jurisdictions, if there is no estate plan, a child may be entitled to a percentage of the parent’s estate.[1]
Any discussion about estate planning concerns should include a review of the legal relationship between parents and children. In what manner are you a “child” of your parents? Are your children your biological children? Or are they legally adopted? Are they stepchildren? Or is your relationship something else altogether?
When it comes to a child’s legal ability to inherit from parents, there is no difference between adopted children and biological children—they are considered equal in the eyes of the law. However, situations involving stepchildren or presumed parents can be more complicated.
Stepparents. A stepparent is typically someone who is married to or in a civil partnership with one of the biological parents of a child. With few exceptions, stepparents have no legal obligation to provide any legacy to a stepchild or stepchildren. And unless they were legally adopted, stepchildren have no legal right to expect an inheritance from their stepparent.[2] The ability of stepchildren to inherit from stepparents can depend on the laws of the jurisdiction where the parents are located and that jurisdiction’s laws of intestacy. Stepparents can choose to provide for stepchildren in their estate plan, and in that case, the stepchildren would benefit in the same manner as any other beneficiary. If a stepchild is included in a stepparent’s estate plan under their will or trust, that stepchild can inherit money or property in the same manner as biological or adopted children under the same instrument. However, if there is no provision made for stepchildren under an estate plan, they would likely not be entitled to any share of the estate.
Presumed parents. In some cases, a person may be considered a presumed parent, which means that they are legally recognized as the parent of a child, even if they are not the biological or adoptive parent. Legal recognition for presumed parents is based on public policy that certain individuals should be treated as parents because of their relationship with a child and the role they assume in that child’s life.
The criteria for being a presumed parent can vary by jurisdiction, but they often include the following[3]:
- Biological connection. In some jurisdictions, a person who is the biological parent of a child is automatically considered a presumed parent, regardless of their marital or relationship status.
- Birth or adoptive parent. A person who has legally adopted the child or given birth to the child (with their consent) is considered a presumed parent.
- Marriage or domestic partnership. If a person is married to or in a legally recognized domestic partnership with the child’s biological or adoptive parent at the time of the child’s birth or conception, they may be presumed to be a parent.
- Intent to parent. If an individual openly and actively takes on the role of a parent and demonstrates their intent to parent the child, they may be considered a presumed parent. This can include factors such as receiving the child into their home, providing financial support, making important decisions regarding the child’s upbringing, and establishing a parent-child relationship.
- Length of time and stability. The length of time the person has been involved in the child’s life and the stability of their relationship with the child may be considered when determining presumed parenthood.
The relationship between a parent and child can take many forms. It is therefore important that you discuss with your estate planning and financial advisors the need to have an estate plan that clearly identifies your intended beneficiaries and the legal relationship of those beneficiaries to you. Your discussion should also examine relationships with any individuals who may not be immediate or obvious family members. With a well thought-out, comprehensive estate plan, you can rest assured that your wishes regarding inheritance will be clear and properly documented so they can be legally enforced.
Planning Strategies for Your Boat That Are Not Sunk
As summer approaches and open waters beckon, it is important to consider a unique aspect of estate planning that can often be overlooked—your boats and watercraft. These vessels bring you joy and unforgettable memories, but they also warrant special attention when it comes to safeguarding your legacy as part of your comprehensive estate plan.
There are several estate planning strategies that can be tailored specifically to handling boats and other vessels or personal watercraft. By implementing these strategies, you can ensure a seamless transition of ownership, mitigate potential tax burdens, avoid family squabbles, and pave the way for future generations to enjoy the pleasures of being out on the open water.
One planning strategy is to use a trust structure for boat ownership. Setting up a trust can be an effective strategy to maintain control over your boat while simplifying the transfer process. A revocable living trust allows you to retain enjoyment during your lifetime while designating beneficiaries who will inherit the boat upon your passing. This approach helps bypass probate, ensuring a smoother transition plan for managing and distributing the boat after your passing and potentially minimizing costs. It is important to note, however, that holding a boat in a trust may not be ideal from a liability perspective. In case of accidents or damages that result in injury or death, trial lawyers may try to pursue damages beyond liability insurance coverage limits based solely on the fact that the boat is owned by a trust. Additionally, transferring the boat to a trust could potentially incur state or local taxes at the transfer and may increase insurance premiums.
Another planning strategy involves using gifting and lifetime transfers. If you wish to pass on your boat during your lifetime, gifting or lifetime transfers can be viable options. By transferring ownership of a boat to family members or loved ones, you can experience firsthand the joy of gifting it while also potentially reducing estate taxes by removing the boat from your taxable estate. The downsides to this approach are that you may need to file a gift tax return, the boat may become subject to the gift recipient’s creditors, and you will not have any further control over the boat once the gift is completed.
A third planning strategy that is becoming more popular with boat owners is the use of a limited liability company (LLC). Establishing an LLC can offer significant benefits when it comes to managing and transferring boat ownership. By placing a boat into an LLC, you could use a trust to own a membership interest in the LLC. This approach may provide personal liability protection by separating the boat’s ownership from your personal accounts and property. However, it is essential to understand not only how changing ownership will impact insurance premiums but also any other legal and financial considerations specific to your jurisdiction. For example, securing adequate insurance coverage is essential to protect your boat and ensure a smooth transition in the event of an unexpected loss.
Whichever planning strategy you employ, it is crucial that you work closely with a qualified estate planning professional who can tailor these strategies to your specific needs and goals. By proactively addressing the complexities of boat ownership in your estate plan, you can sail through life’s adventures with peace of mind.
Nine Ways Your Estate Plan Could Breed Conflict
Friction between family members can escalate during a scorching summer heatwave. Likewise, a flawed estate plan has the potential to breed conflict, mistrust, and financial turmoil among your beneficiaries in several ways.
Lack of a plan. If you fail to create an estate plan altogether, it can lead to significant disputes and confusion among your family members. Without clear instructions, loved ones could argue over what your intentions were, and state laws will dictate the distribution of your accounts and property in a manner that could be inconsistent with your wishes. This can result in some individuals feeling left out or receiving less than they anticipated.
Vague or generic plan. If your estate plan lacks specificity or fails to address important questions, it can open the door for interpretation and disagreement among your beneficiaries. Detailed instructions and provisions in the plan can help prevent disputes and provide clarity as to how you prefer different situations to be handled. Without clear instructions, disputes may arise regarding how money and property is to be divided, guardianship of minor children, or your intentions. This uncertainty can lead to protracted legal battles, strained relationships, and irreparable family rifts.
Outdated plan. Circumstances change over time, and your estate plan may no longer align with your current wishes or family situation. For example, if a beneficiary named in the plan predeceases you, it is crucial to have contingencies in place. Financial institutions may also be hesitant to accept outdated estate planning documents such as a financial power of attorney. Regularly reviewing and updating your estate plan helps ensure its relevance and effectiveness.
Unequal treatment of beneficiaries. While you have the right to distribute your money and property as you see fit and in the manner you think best, treating beneficiaries unequally can create tension and hurt feelings among family members. Open communication and discussing the reasoning behind your decisions ahead of time can alleviate stress, help manage expectations, and minimize conflicts.
Unclear wishes regarding care and decision-making. Apart from your money and property, your estate plan should also address your wishes for medical and financial decision-making if you become unable to make your own decisions. If you fail to provide clear instructions, it can lead to disagreements among family members who may have different opinions about your care. To prevent conflicts, it is important that you appoint reliable decision-makers and clearly communicate your wishes.
Conflicting decision-makers. Conflicts may arise when multiple individuals, such as children, are given priority to serve as decision-makers. Each person may have different philosophies or opinions about your care, leading to disagreements and potential disputes. It is crucial to consider these dynamics and select decision-makers who can work together harmoniously.
Unexpected tax consequences. Inadequate estate planning can lead to significant tax liabilities that may deplete the wealth you intended to pass on to your loved ones or favorite organizations. By leveraging effective tax planning strategies such as trusts or gifting, you can potentially minimize estate taxes and maximize the financial legacy you leave behind.
Business succession issues. If you own a family business, a lack of succession planning can be particularly detrimental. Without a well-defined plan, conflicts may arise regarding leadership, ownership, and the future direction of the business. This can jeopardize the continuity of the enterprise and strain relationships among family members involved in the business.
Emotional toll on loved ones. A poorly crafted or outdated estate plan can place an immense emotional burden on your loved ones during an already challenging time. Without clear guidance, your family members may be left guessing your wishes, resulting in anxiety, resentment, and fractured familial bonds. By proactively addressing potential conflicts in your estate plan, you can alleviate the emotional strain on your beneficiaries and foster a sense of unity.
To mitigate these potential conflicts, it is advisable to consult with an experienced estate planning attorney to create a comprehensive and up-to-date plan. Regularly reviewing and updating the plan as circumstances change can help ensure that your intentions are clearly communicated, reducing the likelihood of conflicts among your loved ones and protecting your legacy.
[1] However, under certain circumstances, children may be entitled to claim a share of a deceased parent’s property. Inheritance Rights, Nolo, https://www.nolo.com/legal-encyclopedia/inheritance-rights-29607.html (last visited July 4, 2023).
[2] Step-Children and Your Will, Lawyers.com, https://www.lawyers.com/legal-info/trusts-estates/wills-probate/step-children-and-your-will.html (last visited July 4, 2023).
[3] See, e.g., Cal. Fam. Code § 7611 (West 2022).