For many decades, when the estate tax exemption was much lower, a common perception was that estate planning centered on tax planning, reduction, and avoidance. This was never quite true: estate planning was always about the interaction between families, taxes, money, and (sometimes) the family business.
Nonetheless, as the "taxes" element fades a little, the "family" issue is coming to the forefront.
It's quite common today for a married couple not to have the same descendants, or the same beneficiaries in each spouse's estate plan. This can happen because of divorce and remarriage, or because a couple does not have children.
Many state legislatures (including Kentucky's) long ago created "elective share statutes" that present traps many families don't even realize they're in, no matter how happy a marriage is.
An elective share statute typically gives a surviving spouse the right to "elect against" the will of the deceased spouse -- choosing to receive a percentage of the spouse's property rather than whatever he or she was due to receive under the will.
Simply put, a surviving spouse is given a statutory right to reject a will, and take up to half of their deceased spouse's estate, no matter what the deceased spouse had decided to do and written into his or her will.
Sometimes, even though a surviving spouse has a statutory elective share right, no problems present. Other times they do, and the nature of the elective share statute is that when the problems do arise, it's too late to fix them.
It's always easier (and more fun) to explore legal issues with case studies, so let's revisit our friends the Draper family to explore how Kentucky's elective share statutes can be a trap for the unwary.
Suppose that Don and Megan somehow beat the odds, stayed married to each other, and moved from New York to Kentucky when Don took a retirement job as a marketing consultant to the Kentucky Derby Festival. We know that Don has his three familiar children, Sally, Eugene, and Bobby. Megan doesn't have children, but let's assume she does have two nieces.
Don had his Korean War buddy write him a will as a return favor for good wagering tips and a few bottles of nice Scotch. The will leaves Megan all of Don's money in trust for her lifetime, with remainder in equal shares outright to Don's three children.
Don dies in 2015 a very old and very rich relic of the late, great American Century, survived by Megan, who plays bridge with a friend, Babs, who is the wife of a retired trust and estates lawyer, Ned.
A few weeks after Don's funeral, when the children have left town, Megan is lunching with Babs and Ned at a small club near the river, when Ned cautiously inquires whether Megan will be all set for funds.
Megan had visited Don's trust company a few days earlier, and they were explaining to her how the trust under will Don had set up for her would work. It all seemed okay, and the bank had good investment expertise to offer.
But she'd hoped to receive some money outright, so that her nieces would have something to inherit one day.
Ned feels guilty about stirring the pot, but he knows Babs knows about the elective share statute, and Babs will be mad at him if he doesn't mention it to Megan. So as the coffee is served, Ned lets Megan know that KRS 392.080 gives her the right to renounce what she'd receive under Don's will, and instead receive one-third of the real estate he owned at the date of his death, along with half of his personal property.
The issues Ned has opened up aren't only legal -- they also involve finance and strategy.
Megan has to choose between taking a smaller amount of wealth, with the opportunity to spend more faster, and to leave some behind for her nieces, or to have all of Don's wealth held in trust -- possibly protecting her for longer, but then going to Bobby, Sally, and Eugene (none of whom she likes all that much - if she's honest with herself).
As she watches the barges drift downstream on the Ohio, Megan realizes she has a lot to think about.
In part 2, we'll explore important factors for Megan to consider in deciding whether to renounce Don's will.
Image above Â© AMC TV. Fair use rationale: critical discussion of the Mad Men television series. For detailed rationale, see here.