King & Wood, P.A.

What Is a No-Contest Clause, and Do They Work?

“Between 1% and 3% of wills are contested in the United States each year, research shows.”

While the number of wills being contested may sound small, this number doesn’t include the many wills not contested because of strategies used to discourage litigation. If your family includes people likely to battle over your estate plan, you’ll want to know about no-contest clauses. A recent article from Think Advisor, “How to ‘Bulletproof’ a Will With a No-Contest Clause,” explains how to protect your wishes.

Tens of thousands of wills are impacted by contested wills yearly, and even the closest families can find themselves fighting over inheritances. One way to prevent this is with no-contest clauses, also known as the in-terrorem clauses, placed in wills and trusts to discourage heirs from voiding their claims to any part of the overall estate if they challenge the will in court proceedings.

Estate battle reasons vary, from sibling rivalry to intergenerational power struggles. The outcome of using a no-contest clause depends on state statutes, evolving case law and how much the warring parties can or want to invest in estate litigation.

Encouraging discussion between all stakeholders in advance of the passing of the parent or grandparent can give time for everyone to work through any disagreements before courts become involved. However, even with the best of intentions, clear communication doesn’t always resolve the issues.

Almost every jurisdiction has addressed whether or not no-contest clauses can be enforced, either by law or by case law. Vermont doesn’t have any laws about enforcement, and Indiana and Florida do not allow the use of no-contest clauses.

A no-contest clause is relatively simple. However, there are limitations to be aware of. No-contest clauses work only for named beneficiaries who have a claim in the will, and they must be given a sufficient interest under the will or trust for the no-contest clause to be useful. Someone who has been cut out of a will entirely has nothing to lose by taking family members to court for their perceived deserved inheritance, while someone who stands to inherit something, albeit a smaller amount than they would have wished, could lose everything if the no-contest clause is enforced.

Many estate litigation matters involve individuals who receive significant interests. However, feel they that did not receive what they see as unequal or non-controlling interests. In these cases, the enforcement may be relatively straightforward.

Challengers who file actions because they believe someone unduly influenced the testator can be problematic. Few people understand how undue influence works in a legal setting. Undue influence can be found when a person makes bad or unfair choices because of an alleged wrongdoer’s behavior towards them, causing the victim to placate the person. However, proving undue influence is not easy.

There are strategies to overcome no-contest clauses, so estate plans must be prepared with these in mind. In some instances, estate administration is challenged, including actions over improper investments, or raising interpretations of ambiguities.

An estate planning attorney with experience will know how to use a no-contest clause and create an estate plan to stand up to challenges from dissatisfied family members or others who feel they have been treated unfairly.

Reference: Think Advisor (Jan. 16, 2025) “How to ‘Bulletproof’ a Will With a No-Contest Clause”

Planning to Protect Your Children’s Inheritance: Asset Protection

“You've worked hard for your wealth. Don't let it fall into the wrong hands. Consider prenups, trusts and other protections to safeguard your family legacy.”

No one likes to think about the possibility of losing a lifetime of earnings through unfortunate events like divorce, spendthrift heirs, or litigation. However, ignoring these risks won’t prevent them. A recent article from Kiplinger, “Want Your Kids to Inherit? You Need an Asset Protection Plan, ” explains several asset protection strategies used to protect wealth from disappearing in nefarious ways.

Prenuptial agreements aren’t the most welcoming topic when your adult child announces their engagement. Still, this should be discussed and encouraged no matter how much you love your prospective new family member. A prenuptial agreement or prenup is a contract between two adults agreeing on how they will distribute assets in case of divorce. This legally binding document addresses assets, debts, spousal support, alimony, gifts and inheritances. It’s also helpful as a supporting document if one of the spouses should die unexpectedly. However, the couple should have a will, power of attorney and other estate planning documents created as soon as they are married.

Depending on the state, there may be laws concerning when the prenup is signed for it to be valid. Signing a prenup under duress could make it invalid, so this needs to be addressed in a timely manner.

Another option is to create a postnuptial agreement (postnup). Spouses may contractually agree to terms outlining the distribution of assets in the event of a divorce after the wedding.

Asset protection includes determining and formalizing how assets will be passed on to heirs. Parents should consider creating trusts as part of their estate plan. Trusts allow grantors (the person creating the trust) a much higher degree of control over who receives the assets in the trust and takes them out of the probate estate.

For example, the trust may call for a beneficiary to receive a portion of their inheritance at ages 30 and 40 and the balance at age 50. An heir with a drug dependency might be required to complete a rehabilitation program or maintain employment over a steady period of time before the trustee can distribute some or all of the assets in the trust.

If assets are left through a will, a number of vulnerabilities are created. First, they are part of the probate estate and subject to federal and state taxes. Second, the will becomes a public document when it goes through probate, so creditors can learn if someone is receiving an inheritance. Creditors may include ex-spouses, credit card companies and financial institutions.

An experienced estate planning attorney is familiar with the tools used to protect assets and ensure that they pass to the next generation according to your wishes. Protecting a lifetime of hard work is a worthy endeavor, creating a legacy and providing security for those you love.

Reference: Kiplinger (Nov. 9, 2024) “Want Your Kids to Inherit? You Need an Asset Protection Plan”

Top Myths of Estate Planning

“Having a plan in place ensures that your finances and health care are handled by someone you trust.”

There are far more than five myths about estate planning. However, the article “5 common myths about estate planning, debunked” from Utah Business examines the most common ones. Estate planning is crucial to safeguarding your financial future and asset disposition and ensuring that the right people are involved in caring for you in case of incapacity. Estate planning is for your life and your legacy.

Biggest myth of all: You only need a Will for estate planning. Your estate plan begins with a Last Will and Testament. However, a comprehensive estate plan addresses more than the distribution of assets. Trusts are used to ensure that assets are transferred to the right beneficiaries in a timelier manner than they would be if passed through your will. Your estate plan should include a Power of Attorney, Health Care Directive and a Living Will.

Myth 2: Only seniors need estate plans. Anyone of legal age who has a family and owns property needs a will. Young families need an estate plan to protect their children and ensure that the parent’s assets and any life insurance proceeds are managed and distributed to their children according to the parent’s wishes. Parent’s wills need to include naming a guardian to raise children in the unlikely event of both parents dying while the children are still minors. Without naming a guardian, a court decision will determine who raises your children.

Myth 3: Only rich people need wills. An argument could be made that estate planning is more critical for people who aren’t rich, protecting and growing more modest estates. A well-crafted estate plan will protect the estate from creditors, deter litigation between family members and minimize tax liabilities so wealth can be passed to the next generation.

Myth 4: Estate planning is only about what happens after death. Estate planning addresses what should happen in case of incapacity because of illness or an accident. If you can’t communicate your wishes, these documents allow others to act on your behalf. A Power of Attorney appoints someone to handle your financial and legal matters. Standard POAs aren’t the best option, since they may allow someone too much or insufficient control. You’ll also want a Health Care Power of Attorney so someone you name can take over your medical care and talk with your doctors and health insurance company. Another reason for placing assets into a trust is that the successor trustee may manage assets in the trust if you are incapacitated.

Myth 5: Once your estate plan is created, you’re all set. Your car and home require ongoing maintenance—and so does your estate plan. Life and laws change, and your estate plan won’t work if it’s outdated. Triggering events like marriage, divorce, birth, relocating, or big changes to your financial situation require a review of your estate plan.

Consult an experienced estate planning attorney to create or review your estate plan. You’ll breathe easier knowing you’ve taken steps to protect yourself and your loved ones.

Reference: Utah Business (June 12, 2024) “5 common myths about estate planning, debunked”

Should I have an Irrevocable Trust?

“An irrevocable trust must be carefully funded, structured and managed to achieve both asset protection and tax planning.”

You may have heard the terms “revocable trusts” and “irrevocable trusts.” Both are created to hold assets for different purposes. The differences are explained in a recent article from Kiplinger, “With Irrevocable Trusts, It’s All About Who Has Control.”

Both types of trusts are separate legal entities created through contracts. They name a trustee who is in charge of the trust and its assets. The trustee is a fiduciary, having a legal obligation to manage the assets in the trust for the beneficiaries. Depending on how the trust is structured, these are the people who will receive assets or income generated by the assets in the trust.

With the revocable trust, the grantor—the person who creates the trust—can be a trustee and maintain total control of the trust. They can change the terms of the trust, beneficiaries, and successor trustees at any time. In exchange for this level of control, however, come some downsides. The revocable trust doesn’t have the same level of protection as an irrevocable trust while the grantor is living.

The irrevocable trust trades control for benefits. The grantor of an irrevocable trust can’t change the trust once it’s been created, nor can they move assets in and out of the trust at will. Beneficiaries may not be changed either. However, when the irrevocable trust is properly created with an experienced estate planning attorney, they achieve many estate and tax goals.

Your estate planning attorney will be able to explain which irrevocable trust suits your situation, as there are many different kinds.

An irrevocable trust where the grantor is also the beneficiary is referred to as a Domestic Asset Protection Trust or DAPT. The grantor is allowed to be the beneficiary of the trust, but it has to be created in one of the 20 jurisdictions where the grantor is allowed to be the beneficiary. You can have a trust created in a jurisdiction other than your own.

The first step is to determine how to fund an irrevocable trust, where assets are transferred into the trust. There are fine points here. For instance, you can’t fund an irrevocable trust if there are issues with the IRS or the threat of litigation from a creditor. If the dispute goes to court, a judge can set aside the transfers into the trust as they were made with the intent to circumvent a creditor’s claim under fraudulent transfer laws.

Creating irrevocable trusts, like much of estate planning, needs to be completed before issues arise. Decisions about naming trustees, successor trustees, beneficiaries, and funding sources should be discussed with an experienced estate planning attorney first.

Reference: Kiplinger (April 28, 2024) “With Irrevocable Trusts, It’s All About Who Has Control”

Who is Legally Able to Amend a Trust?

“The conditions for amending a trust, including who has the authority, is usually set out in the document.”

Procrastination is the most common mistake in estate planning when people don’t create a will and trusts and when documents are not updated. For one family, a revocable trust created when both parents are living presents some complex problems now, when the surviving wife wants to make changes but is suffering from serious health issues.

As described in the article “Estate Planning: Who can amend the trust” from NWI Times, this scenario requires a careful review of the trust document, which should contain instructions about how it can be amended and who has the authority to do so. An estate planning attorney must review the trust to ensure it can be amended.

If the trust allows the surviving settlor to amend the trust, the authority to amend it may only be given to the surviving settlor. The mother may be permitted to amend the trust. However, it can’t be anyone acting on her behalf.

If the language in the trust makes the power to amend personal, a guardian or an attorney-in-fact likely won’t be able to amend the trust. Likewise, if the mother is incapacitated and cannot do this herself, the trust may not be amendable while she is ill or disabled.

However, if the trust allows the surviving settlor to amend the trust and the power is not personal, a legal representative, such as a guardian or an attorney-in-fact, may be able to amend the trust for her, if they have the authority to do so under the terms of the trust.

Anyone contemplating this amendment must be aware of any “self-dealing” issues. The legal representative will be restricted to making changes only for the benefit of the beneficiaries and should be mindful before attempting to amend the trust.

Suppose the authority to amend doesn’t exist or other restrictions make it impossible, depending on the state’s laws. In that case, it may be possible to docket the trust with the court and obtain a court order authorizing the trustee to depart from the terms of the trust or even amend the document.

Accomplishing this is far easier if all involved agree with the changes to be made. Unfortunately, if any interested parties object, it may lead to litigation.

Depending upon the desired change, entering into a family settlement agreement may be possible after the mother dies. If everyone is willing to sign off, an agreement can be written authorizing the trustee to deviate from the terms of the trust. This will also require the guidance of an estate planning attorney to ensure that the agreement follows the state’s laws.

If family members disagree with the change, the trustee can refuse to accept the settlement agreement to protect themselves from potential liability.

Reference: NWI Times (May 7, 2023) “Estate Planning: Who can amend the trust”

Can You Prevent Family Fights over Inheritance?

“In early 2022, Bloomberg News reported that Americans can expect to inherit $72.6 trillion over the next quarter century—more than twice as much as a decade ago. With so much potential generational wealth on the line, there is always a risk that it will become the subject of a dispute.”

Inheritance battles can create new conflicts, inflame long-standing resentments and squander assets intended to make heir’s lives better. What can families do to prevent estate battles when a loved one’s intentions aren’t accepted is the question asked by the recent article, “Warning Signs Of Estate Disputes—And Ways to Avoid Them,” from mondaq.com.

Here are the more common scenarios leading to family estate battles:

• Siblings who are always fighting over something
• Second or third marriages
• Disparate treatment of children, whether real or perceived
• Mental illness or additional issues
• Isolation or estrangement
• Economic hardship

There are steps to take to minimize, if not eliminate the likelihood of estate battles. The most important is to have an estate plan in place, including all the necessary documents to clearly indicate your wishes. You may want to include a letter of intent, which is not a legally enforceable document. However, it can support the wishes expressed in estate planning documents.

Update the Estate Plan. Does your estate plan still achieve the desired outcome? This is especially important if the family has experienced big changes to finances or relationships. An estate plan from ten years ago may not reflect current circumstances.

Make Distributions Now. For some families, giving with “warm hands” is a gratifying experience and can remove wealth from the estate to avoid battles as everything’s already been given away. The pleasure of seeing families enjoy the fruits of your labor is not to be underestimated, like a granddaughter who is able to buy a home of her own or an entrepreneurial loved one getting help in a business venture.

Appoint a Non-Family Member as a Trustee. Warring factions within a family are not likely to resolve things on their own, especially when cash is at stake. Appointing a family member as a trustee could cause them to become a lightning rod for all of the family’s tensions. Without the confidence of beneficiaries, accusations of self-dealing or an innocent mistake could lead to litigation. Removing the emotions by having a non-family member serve as a professional trustee can lessen suspicion and decrease the chances of legal disputes.

Communicate, with a facilitator, if necessary. Families with a history of disputes often do better when a professional is involved. Depending on the severity of the dynamics, this could range from annual meetings with an estate planning attorney to explain how the estate plan works and have discussions about the parent’s wishes to monthly meetings with a family counselor.

A No-Contest Clause. For some families, a no-contest clause in the will can head off any issues from the start. If people are especially litigious, however, this may not be enough to stop them from pursuing a case. An experienced estate planning attorney will be able to recommend the use of this provision, based on knowing the family and how much wealth is involved.

Addressing the problem now. The biggest mistake is to sweep the issue under the proverbial rug and “let them fight over it when I’m gone.” A better legacy is to address the problem of the family squabbles and know you’ve done the right thing.

As we head into the holiday season, efforts to bring families together and prepare for the future will allow parents, children and grandchildren to enjoy their time together.

Reference: mondaq.com (Nov. 4, 2022) “Warning Signs Of Estate Disputes—And Ways to Avoid Them”

Problems Created When No Will Is Available

“People who have had a serious case of COVID-19 are 66% more likely to engage in estate planning, and 32% of adults under 35 said they wrote a will because of the pandemic.”

Ask any estate planning attorney how much material they have for a book, or a movie based on the drama they see from family squabbles when someone dies without a will. There’s plenty—but a legal requirement of confidentiality and professionalism keeps those stories from circulating as widely as they might. This may be why more people aren’t as aware as they should be of how badly things go for loved ones when there’s no will, or the will is improperly drafted.

Disputes range from one parent favoring one child or children engaged in fierce fighting over personal possessions when there’s no will specifying who should get what, or providing a system for distribution, according to a recent article titled “Estate planning: 68% of Americans lack a will” from New Orleans City Business.

People don’t consider estate planning as an urgent matter. The pace of life has become so hectic as to push estate planning appointments to the next week, and the next. They also don’t believe their estates have enough value to need to have a will, but without a will, a modest estate could evaporate far faster than if an estate plan were in place.

The number of people having a will has actually decreased in the last twenty years. A few sources report the number keeps dipping from 50% in 2005, 44% in 2016 and 32% in 2022. In 2020, more Americans searched the term “online will” than in any other time since 2011.

Younger people seem to be making changes. Before the pandemic, only 16% of Americans ages 18-34 had a will. Today caring.com reports 24% of these young adults have a will. Maybe they know something their elders don’t!

One thing to be considered when having a will drafted is the “no contest clause.” Anyone who challenges the will is immediately cut out of the will. While this may not deter the person who is bound and determined to fight, it presents a reason to think twice before engaging in litigation.

Many people don’t know they can include trust provisions in their wills to manage family inheritances. Trusts are not just for super wealthy families but are good planning tools used to protect assets. They are used to control distributions, including setting terms and conditions for when heirs receive bequests.

Today’s will must also address digital assets. The transfer and administration of digital assets includes emails, electronic access to bank accounts, retirement accounts, credit cards, cryptocurrency, reward program accounts, streaming services and more. Even if the executor has access to log-in information, they may be precluded from accessing digital accounts because of federal or state laws. Wills are evolving to address these concerns and plan for the practicalities of digital assets.

Reference: New Orleans City Business (Sep. 8, 2022) “Estate planning: 68% of Americans lack a will”

What Happens to Digital Assets After Death?

“Regardless of the preferred record-keeping mode, most people have some sort of digital footprint, making it important to know who would have access to your digital assets if you became incapacitated and how those assets would be distributed in the event you pass away.”

What is a digital asset? This is the question asked in a recent article “Estate Planning for Digital Assets” from Westchester & Fairfield County Business Journals. Any type of electronic data you have the right to access is considered a digital asset, although they come in a variety of forms.

A digital asset now includes email accounts, social media, online banking, online subscriptions, e-commerce, photo stream, cell phone apps, gaming accounts and everything having to do with cryptocurrency. Don’t leave out airline miles or other loyalty program points.

When so much of our lives is online, we need to address estate planning for this new class of assets.

They are as important, and some might argue, even more important than traditional assets. They may have financial or sentimental value. If neglected, they are an easy entryway for hackers prying into financial accounts.

Consider your family photos. Most of us have these stored on the cloud, hoping they never disappear. However, when they do, they can be gone forever. The same could easily happen for accounts of gamers who are spending traditional money on games and building up online assets with monetary value.

Can you protect and organize digital assets?

Yes, absolutely. Start with a list of all digital accounts including URLs, usernames and passwords. You should also note whether access requires third-party authentication—a verification code from a phone number or an email address to log in.

Create some kind of list, whether on a spreadsheet (encrypted for security), using an online password manager or a digital asset app. Paper also works, as long as it’s kept in a secure location.

How do digital assets get incorporated into my estate plan?

In most states, your executor can be given the right to access online accounts through your will, or you can include digital asset access in a Power of Attorney. However, it’s not that simple. Certain digital platforms only allow the original user access, even with passwords and authentication codes. Each has a Terms of Service Agreement to protect your privacy and the platform.

Some platforms offer the ability to name a legacy contact who can gain access to your account and either delete it or memorialize it after you die. However, not all do. You’ll need to go through all of your digital accounts to determine which ones permit a legacy contact and the limitations given to the legacy contact.

To support any litigation arising from a platform refusing to allow access, leave specific instructions in for your executor or agent instructing them as to what you want done with your digital assets. This directive may give your executor or agent the support they need to go up against big data. Your estate planning attorney will know the laws in your state and help create a plan.

Reference: Westchester & Fairfield County Business Journals (July 18, 2022) “Estate Planning for Digital Assets”

Are Testamentary Trusts a Good Idea?

“A testamentary trust can control your assets after death. However, there may be a better option available, experts say.”

Not everyone wants to leave everything to their heirs without restrictions. Some want to protect money inherited from their own parents for their children or want to keep an irresponsible child from squandering an inheritance. For people who want more control over their assets, a testamentary trust might be useful, according to the recent article “What Is a Testamentary Trust and How Do I Create One? from U.S. News & World Report. A testamentary trust can also be used to leave assets to minor children, who may not legally inherit wealth directly.

However, your estate planning attorney may have some other, better tools for you.

A testamentary trust is a trust created to hold assets created in a last will and testament. It does not become active until after a person dies and the will has been validated by probate court. Once this has happened, the trust is activated and the decedent’s assets are placed into the trust. At this point, the trustee is in charge of the trust’s management and asset distribution.

A testamentary trust is different from a living trust. The living trust, also known as a revocable trust, is created while the grantor (the person making the trust) is still living. When the person dies, the trust doesn’t go through probate and assets are distributed according to the directions in the trust.

Both testamentary and living or revocable trusts are used in estate planning. However, the living trust may have far more flexibility and be easier to manage for a very simple reason: testamentary trusts are part of the probate process, administered through probate for as long as they are in effect.

There are advantages and disadvantages to both kinds of trusts. The testamentary trust is often used to manage assets for minor children. It’s also a good tool if you’re worried about an adult child getting divorced and keeping the family money in the family. The long-term court oversight is more protective, which may be desirable, but it can also be more expensive.

The best reason for a testamentary estate? When someone involved in the person’s estate loves to get tangled up in litigation. Having to deal with probate court in addition to civil court might make a litigious family member a little less likely to bring a lawsuit.

Your will must contain specific directions for what assets go into the testamentary trust. Assets with beneficiary designations, such as life insurance policies and retirement accounts, don’t go into any trusts, unless a trust is designated as the beneficiary of the policy or account. They are instead distributed directly to beneficiaries outside of the probate estate.

Changing or annulling a testamentary trust is relatively easy while you are living—simply update your will to reflect your new wishes.  However, once you have passed, the testamentary trust becomes irrevocable and may not be changed.

Which is best for your situation? Your estate planning attorney will evaluate these and other estate planning tools to find the best solutions to protect you and your family.

Reference: U.S. News & World Report (July 14, 2022) “What Is a Testamentary Trust and How Do I Create One?

How are Capital Gains in Irrevocable Trust Taxed?

“Investors use irrevocable trusts to protect their assets from creditors, lawsuits and estate taxes. However, when you sell a home in an irrevocable trust, that can complicate your tax situation.”

Putting a home in an irrevocable trust may be done to protect the house from estate taxes, explains a recent article from Yahoo! Life titled “Do Irrevocable Trusts Pay the Capital Gains Tax?” However, what effect does this have on capital gains taxes?

An irrevocable trust is used to protect assets. Unlike a revocable trust, once an asset is placed within the trust, it’s difficult to have the asset returned to the original owner. The trust is a separate legal entity and has its own taxpayer identification number.

Assets moved into a trust are permanently owned by the trust, until the trustee distributes assets to named beneficiaries or their heirs. Irrevocable trusts are often used to protect assets from litigation.

Capital gains taxes are the tax liabilities created when assets are sold. Typical assets subject to capital gains taxes include stocks, homes, businesses and collectibles. Capital gains taxes are usually lower than earned income taxes. For example, the top federal income tax rate is 37%, and the top capital gains tax rate is 20%. A single investor might pay no capital gains taxes if their taxable income is $41,675 or less (in 2022). Married copies filing joining also pay 0% capital gains if their taxable income is $83,350 or less.

Irrevocable trusts are the owners of assets in the trust until those assets are distributed, including any earned income. While it would seem that the irrevocable trust should pay taxes on earned income, this is not necessarily the case. If irrevocable trusts are required to distribute income to beneficiaries every year, then that makes the trust a pass-through entity. Beneficiaries pay taxes on the income they receive from the trust.

Capital gains are not considered income to such an irrevocable trust. Instead, any capital gains are treated as contributions to principal. Therefore, when a trust sells an asset and realizes a gain, and the gain is not distributed to beneficiaries, the trust pays capital gains taxes.

One of the tax benefits of home ownership is the ability to avoid the first $250,000 in capital gains profits on the sale of the home. For married couples filing jointly, the exemption is $500,000. The home must be a primary residence for two of the last five years.

What happens if you transfer your home to an irrevocable trust as part of your estate planning? Who pays the capital gains tax on the sale of a home in an irrevocable trust? Remember, the trust is a legal entity and not a person. The trust does not receive the $250,000 exemption.

Placing a home into an irrevocable trust can protect it from creditors and litigation, but when the home is sold, someone will have to pay the capital gains on the sale. Although irrevocable trusts are great for distributing assets to beneficiaries, they are also responsible for paying capital gains taxes.

An experienced estate planning attorney will help you to determine which is more important for your unique situation: protecting the home through the use of an irrevocable trust or getting the tax exemption benefit if the home sells.

Reference: Yahoo! Life (July 7, 2022) “Do Irrevocable Trusts Pay the Capital Gains Tax?”