Today I met with Sam, a widower who created an estate plan 15 years ago with his wife, June. They have children from separate marriages. He came into the marriage with $1,500,000 of assets and June had $300,000. They never had a marriage contract to keep track of who was the owner of each asset. Their plan stated that when the first spouse died, the property owned by that spouse would go directly to his or her children. June died this spring. Sam wants to know what he should give to June’s children.
The first problem is what assets were actually owned by June?
There are two types of property owned by a married couple.
First, there is community property. Idaho law presumes all assets owned by a married couple are community property, regardless of the name on the asset title. The only exception is to prove it is separate property. When a spouse dies, the deceased spouse owns one-half of the community property and can specify where it goes.
Then, there is separate property. Separate property includes anything June owned before the marriage or received as a gift or inheritance to just June during the marriage. Under Idaho law, income from separate property, such as interest, dividend or rental income, is community property. What a mess it is to sort out the community property portion of the separate property. As the years went by after signing their estate planning papers, Sam and June changed the ownership on a $800,000 separate property mutual fund owned by Sam by adding June’s name to the account. Did they intend to convert Sam’s separate property to community property?
Let’s get back to what June owned – was it just the $300,000, her separate property, or do we add $400,000 to her property, which is one-half of the $800,000 account that is now in both names?
If Sam and June’s children are unable to come to an agreement, this death administration will end up in a costly court trial where a Judge will decide what June owned. The answer is not clear.
What could Sam and June have done to eliminate the confusion, heartache and expense left after June’s death?
To have an effective estate plan, the asset titles and beneficiary designations on life insurance, retirement and annuities should be consistent with the estate plan. If Sam and June had at least looked at their assets and plan once a year, they could have eliminated the potential nightmare facing Sam.
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