Although this case is unusual, it shows how life changes can destroy the best of plans or intentions. This case highlights the importance of updating those plans after a life event, such as birth, death, marriage, divorce and remarriage. You should especially heed these lessons if you:
A. are divorced and have reconciled or might reconcile with your former spouse;
B. are single and want to solidify control over your assets in preparation of a future marriage;
or
C. are cohabitating with a significant other.
When Howard Herpich and Svetlana Ozerova married in February 2003, they signed a prenuptial agreement in which each waived his or her rights to property that the other brought into the marriage. This agreement also directed that, "in the event of a separation and reconciliation," the document would remain binding. One month after the wedding, the couple separated. Their divorce was finalized in early 2005. In executing the prenuptial agreement, the couple divided up marital assets accordingly and settled their joint financial affairs. Six months later, the Herpiches reconciled and remarried. When Mr. Herpich died two years later, Mrs. Herpich was appointed personal representative over his estate. Mr. Herpich’s two adult children from his prior marriage sought to prevent their stepmother from controlling any part of his estate, claiming that the prenuptial agreement remained in effect. The trial judge sided with Mr. Herpich’s children, determining that the prenuptial agreement remained valid despite the divorce the separated the couple's first and second marriages.
The judge ruled that the terms "separation and reconciliation" encompassed divorce and remarriage and essentially denied Mrs. Herpich any control to her late husband's estate. Mrs. Herpich appealed, and the appellate court reversed the trial judge's ruling, finding that the “separation and reconciliation" wording in the agreement cannot be considered the same as "divorce and remarriage.” The appellate court ruled that the prenuptial agreement had been effectively terminated by the 2005 divorce and was no longer binding, since the original agreement's language had anticipated only one marriage between the Herpiches, not a divorce and a remarriage.
July 23, 2010
Creditor Proof IRAs
The combination of tax deferral and asset protection is a potent, long-term legal and financial strategy. Whether IRAs and other retirement plans are exempt from the claims of creditors of the IRA's owner varies from state to state. In Arizona, for example, IRAs are generally exempt from such claims. But does the same protection apply to IRAs that are inherited? If an original owner dies, and the IRA is not liquidated but instead is inherited by the beneficiary, will the IRA be protected from the claims of the beneficiary's creditors? Again, In Arizona, the answer is “yes.” However, what if the beneficiary lives in a state other than Arizona when the inheritance occurs? This can be a significant concern for an owner of an IRA – such as a parent or grandparent who wants to leave the IRA to a beneficiary but is worried that it may be seized by a creditor. The key variable: How do the laws of the state where the beneficiary lives at the time he or she inherits the IRA address this issue?
In a Florida case, Robertson v. Deeb, the court decided that inherited IRAs are not protected from creditor claims. The court reasoned that the IRA exemption applied only to the original owner and did not extend to the beneficiary. Texas bankruptcy courts reached the same conclusion in In re Jarboe. In that case, Mom died leaving her IRA to Son. Several years later, Son filed for bankruptcy and claimed that the IRA was exempt under the state property code. The bankruptcy trustee argued that the inherited IRA was not exempt, and the court agreed. Conversely, in a recent Minnesota case (In re: Nessa), the bankruptcy court ruled that an inherited IRA was protected. The key difference in this decision is that Minnesota adopted the federal property exemptions from bankruptcy law, whereas Florida and Texas used state exemptions. So, even though Arizona protects the beneficiary of an inherited IRA, your children or grandchildren might one day move to a state (such as Texas or Florida) that does not.
Solution: an IRA Trust. Don't take chances with your hard-earned retirement money. My general recommendation is to leave IRAs to beneficiaries in a stand-alone IRA trust to ensure maximum protection from creditors. Why use a stand-alone trust and not your living trust? For a trust to be a “designated beneficiary” for IRA and retirement plan purposes, very complex rules must be strictly followed. Failure to follow those rules can result in disastrous unintended consequences. Most living trusts simply are not set up correctly to meet the “designated beneficiary” definition. Make sure your living trust is carefully reviewed, and amended if necessary, if you are thinking of naming it as a beneficiary of an IRA or other retirement plan.
If you die without establishing a stand-alone IRA trust, there may still be other options available. For example, a beneficiary who receives an IRA from anyone other than a spouse and is concerned about the IRA’s exposure to creditors may wish to reinvest the proceeds in exempt assets such as homestead property or life insurance. However, whether a particular kind of asset is exempt from the claims of creditors is determined, again, on a state-by-state basis. As a result, the stand-alone IRA trust is the only sure bet when it comes to protecting inherited IRAs.
In a Florida case, Robertson v. Deeb, the court decided that inherited IRAs are not protected from creditor claims. The court reasoned that the IRA exemption applied only to the original owner and did not extend to the beneficiary. Texas bankruptcy courts reached the same conclusion in In re Jarboe. In that case, Mom died leaving her IRA to Son. Several years later, Son filed for bankruptcy and claimed that the IRA was exempt under the state property code. The bankruptcy trustee argued that the inherited IRA was not exempt, and the court agreed. Conversely, in a recent Minnesota case (In re: Nessa), the bankruptcy court ruled that an inherited IRA was protected. The key difference in this decision is that Minnesota adopted the federal property exemptions from bankruptcy law, whereas Florida and Texas used state exemptions. So, even though Arizona protects the beneficiary of an inherited IRA, your children or grandchildren might one day move to a state (such as Texas or Florida) that does not.
Solution: an IRA Trust. Don't take chances with your hard-earned retirement money. My general recommendation is to leave IRAs to beneficiaries in a stand-alone IRA trust to ensure maximum protection from creditors. Why use a stand-alone trust and not your living trust? For a trust to be a “designated beneficiary” for IRA and retirement plan purposes, very complex rules must be strictly followed. Failure to follow those rules can result in disastrous unintended consequences. Most living trusts simply are not set up correctly to meet the “designated beneficiary” definition. Make sure your living trust is carefully reviewed, and amended if necessary, if you are thinking of naming it as a beneficiary of an IRA or other retirement plan.
If you die without establishing a stand-alone IRA trust, there may still be other options available. For example, a beneficiary who receives an IRA from anyone other than a spouse and is concerned about the IRA’s exposure to creditors may wish to reinvest the proceeds in exempt assets such as homestead property or life insurance. However, whether a particular kind of asset is exempt from the claims of creditors is determined, again, on a state-by-state basis. As a result, the stand-alone IRA trust is the only sure bet when it comes to protecting inherited IRAs.
July 22, 2010
Avoid Confusion in Crisis
More and more Baby Boomers are finding themselves making medical and financial decisions for their aging parents. These decisions often fall to one child, with other siblings out of the loop for reasons of distance, conflicting responsibilities, etc. But some families have a lot of leaders – or at least they have a lot of strong-willed adult children who have opinions on what a parent needs or doesn’t need in terms of long-term care.
Key Question: Who Is in Charge? For example, Dad enters a hospital in need of immediate hip surgery. Unfortunately, he has an allergic reaction to medications. He is hallucinating and incoherent. The doctors need to change his treatment, but they aren’t sure who in his family to turn to for a final decision. Dad’s four adult children disagree as to his treatment, and long-simmering sibling rivalries surface just at the time when Dad most needs his family to unify.
Remember, a family is not a democracy. In most families, managing by consensus just doesn’t work. There’s a reason why Dad or Mom was initially in charge. In a crisis, it often takes too long to get a consensus. Relatives that need to be present can’t be there or can’t be reached on the phone. Or worse, while the majority of adult children are in agreement, they allow a lone dissenter to hold veto power over their decision. Whether the issue is health or money, consensus-building usually won’t work in a time of crisis.
What are the types of tools that are critical? The most powerful assets in crisis situations are Dad’s or Mom’s written instructions and choice of leadership. I recommend that every adult has in place at least these two valuable tools: First, every adult should have a Durable Power of Attorney. This provides financial authority to allow a chosen family member to make financial decisions for Dad if he is incapacitated. Second, every adult should have a Health Care Power of Attorney and Living Will. The laws governing these documents vary somewhat from state to state, but the concept is the same: Someone is charged with making all health care decisions for Dad, including whether to withdraw artificial life support. These written instructions are critical for families. The clearer the instructions, the less speculation, controversy and anxiety await adult children in stepping into their parent’s decision-making position.
Key Question: Who Is in Charge? For example, Dad enters a hospital in need of immediate hip surgery. Unfortunately, he has an allergic reaction to medications. He is hallucinating and incoherent. The doctors need to change his treatment, but they aren’t sure who in his family to turn to for a final decision. Dad’s four adult children disagree as to his treatment, and long-simmering sibling rivalries surface just at the time when Dad most needs his family to unify.
Remember, a family is not a democracy. In most families, managing by consensus just doesn’t work. There’s a reason why Dad or Mom was initially in charge. In a crisis, it often takes too long to get a consensus. Relatives that need to be present can’t be there or can’t be reached on the phone. Or worse, while the majority of adult children are in agreement, they allow a lone dissenter to hold veto power over their decision. Whether the issue is health or money, consensus-building usually won’t work in a time of crisis.
What are the types of tools that are critical? The most powerful assets in crisis situations are Dad’s or Mom’s written instructions and choice of leadership. I recommend that every adult has in place at least these two valuable tools: First, every adult should have a Durable Power of Attorney. This provides financial authority to allow a chosen family member to make financial decisions for Dad if he is incapacitated. Second, every adult should have a Health Care Power of Attorney and Living Will. The laws governing these documents vary somewhat from state to state, but the concept is the same: Someone is charged with making all health care decisions for Dad, including whether to withdraw artificial life support. These written instructions are critical for families. The clearer the instructions, the less speculation, controversy and anxiety await adult children in stepping into their parent’s decision-making position.
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