Estate Planning: October 2008 Archives

October 15, 2008

Who is an heir? What about the transsexual "wife"?

Who is the heir? This is an age-old question. Simply, an heir is the person who inherits a decedent's property if the decedent left no will. (If the decedent left a will, those who inherit are typically called beneficiaries, not heirs.) Throughout history the answer to who is an heir has changed many times.

Keep in mind that statute determines who the heir is. There is no "right" of inheritance. The law has long dealt with family relationships and procreation. Legislatures have passed laws to determine who inherits a decedent's property based on what most people would want. Doctrines have evolved to cover all sorts of situations. Now, due to new medical technologies and changing mores, "times, they are a-changing." New situations are arising.

It used to be that only the first born male inherited under English primogeniture. In the Torah, sons were the primary inheritors with the eldest receiving a double portion. In all of the United States today, children of both sexes inherit and share equally. Under the common law, any child born in wedlock (even a day after the marriage) is presumed to be legitimate. Legitimate for these purposes means entitled to the support of the father and to be an heir of the father. A child born after the death of his father was also presumed legitimate if the child was "en ventre sa mere" - in the womb of his mother - when his father died. So if birth occurred within 9 months of death, the child was deemed an heir of the father even though born posthumously.

In all of the states, without a will, all Dad's children are his equal heirs. However, Dad's step-children get nothing, even if Dad has raised them since infancy. By statute, adopted children came to be considered heirs of the adoptive parents. Similarly, by statute, adopted children are not considered to be heirs of the birth parents. Today, however, infertile couples don't always adopt children to have a family. Sometimes, there are children born from donated sperm or eggs. Is the baby an heir of the sperm donor? Babies are born to surrogate mothers into whose womb a fertilized egg has been implanted. Is the baby an heir of the surrogate mother? Is the baby an heir of the woman who produced the egg? Spouses have not always been entitled to inherit any of their deceased husband or wife's property.

In the United States today, all fifty stated consider a surviving spouse an heir, entitled to a portion of the estate. Common law marriage is a legal concept that evolved to give support and inheritance rights to men and women who live together, holding themselves out as husband and wife, but never having been legally married. (Note:  Pennsylvania no longer has common law marriage.)  (There are also similar doctrines for adoption where a child is taken in by a family and held out as a son or daughter even though there is no legal adoption.)

In addition, society is now looking to answer a new question: what's a spouse? Laws are being shaped that may define spouses to include others than couple consisting of a man and a women, either legally married or in a common-law arrangement.  In Kansas, as reported in the March 4, 2002, issue of Time Magazine, a son is disputing his father's second wife's right to half of the father's estate. Dad's second wife, Mrs. Gardiner, was born a man and had undergone sex re-assignment surgery and then married Dad. Is she (or he) a wife? Entitled to inherit? Or does the son get everything? Dad could have done anything he wanted in a will. But like so many, he died without a will. His heirs are determined by the Kansas intestacy statute which gives half of his property to his surviving spouse. Kansas law prohibits same-sex marriages. Is this a same-sex marriage? Or does someone who undergoes sexual reassignment surgery have a new gender? What is gender? In May, an appellate panel considering a similar case overturned a February 2000 Federal District Court ruling that sex is determined at birth and can never be changed. The panel, considering statistics that showed that 275,000 to 2.5 million people in the United States were born with a mix of chromosomes, genitalia and hormones that made them neither clearly male nor female, outlined a formula for determining sex based on a mix of psychological and physiological factors. At their core, these cases revolve around the question of what makes a man a man and a woman a woman. If you'd rather not have your estate subject to changing intestate laws, make a will. Your will, which takes precedence over the intestate laws discussed above, will assure that your property will be distributed according to your wishes.

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October 8, 2008

MAKE GIFTS NOW WHILE VALUES ARE LOW

'Tis an ill wind that blows nobody any good.

Someone profits by every loss; someone is benefitted by every misfortune.

The decline in the stock market, despite its cause, presents us with a tremendous estate planning opportunity. Make gifts now!

The most basic reason for estate planning is to provide for those you love, and gifts are the simplest estate planning technique. They are easy to understand and easy to implement. Keep in mind the goals of all tax planning: Lower taxes. Higher future wealth. Either way you look at it, the current depressed values of many stocks represent a tremendous opportunity to make gifts.

Much of estate planning is devoted to reducing the value of assets, so that more leverage can be obtained, by making gifts using the $12,000 per year annual exclusion and the currently available $1 million exemption from the gift tax. Now the markets have done this for us. Now is the perfect time to be making gifts of securities.

Don't wait until the end of the year. Make your gifts now. Don't wait for the market to recover. Make your gifts now. Give away the assets that are at the lowest values. Give away the ones that sank to the bottom. Use this opportunity to get future appreciation in the value of stocks out of your estate.

Most people would agree that the value of an asset 25 years from now will be the same despite the current market decline. If you assume that $1 invested in an S&P 500 index fund would increase in value at the rate of 10% per year, 25 years from now, that dollar would be worth $10.83. If a married couple made gifts using their unified credits last year, they would have made gifts of $2,000,000. In 25 years this would be worth $21,660,000. Today, however, last years $1 invested is worth about $0.65. If it will still be worth $10.83 in 2025, that implies an average rate of return of 12.4% over the next 24 years.

Using more sophisticated techniques, the already reduced value of stocks can be reduced even further for transfer tax purposes. This is the perfect time to make a Family Limited Partnership and make gifts of the limited partnership interests. It is the perfect time to create Grantor Retained Annuity Trusts (GRAT's). It is the optimum moment to make a Dynasty Trust. These techniques offer even more leverage and make the estate tax savings even more dramatic.

Seize the opportunity.

Joshua Kennon, writing for About.com puts it in perspective: Remember that the real goal of prosperity is to provide a better life for yourself, your family, and everyone you come in contact with. Our blessings, gifts, and finances only realize their true value when you give them. The guaranteed way to feel wealthier is to give what you already have. You see the joy it can bring others, and you realize that you have a lot more where it came from. The feeling of generosity and happiness that comes with giving is the true kind of wealth we are pursuing - and it's something that money can't buy.

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