Contract To Plan
Protecting Your Heirs From Disinheritance
The 21st Century Tool for 21st Century Problems
Even if the parents have seemingly appropriate wills and trusts, children are frequently disinherited. How does this happen? If a married couple’s assets pass outright to the surviving spouse, absent any agreement to the contrary, that surviving spouse can leave not only that surviving spouse’s own assets, but also the deceased spouse’s assets, to anyone the survivor desires, or even to others unintentionally. Thus, children can be disinherited, intentionally or otherwise.
Let’s look at a few examples:
Example #1: Bill and Carol had been married for over forty years and had three children. Their estate was not large, consisting of their home, IRAs, and a few investments. Their wills left everything to each other, and on the second death, equally to their children.
A few years after Carol died, Bill remarried. Bill and his new wife sold their homes and purchased a new home in joint tenancy. Before long, Bill named his new spouse as the beneficiary of his IRA.
When Bill died several years later, all or most of Bill’s assets passed to his new wife. Assets in joint tenancy or with named beneficiaries were not controlled by Bill’s old will. When the new wife died several years later, her assets, including what Bill left to her, went to her family, and not to Bill and Carol’s children.
Example #2: John and Mary have been married for more than 25 years. Each has two children from a previous marriage. All of the children were adults when John and Mary were married.
Like Bill and Carol, John and Mary’s estate consisted of a home in joint tenancy, IRAs which named each other as beneficiary, and a few other assets. Also like Bill and Carol, John and Mary’s primary goal is to provide for each other, and only thereafter for all four of their children.
John and Mary realized that without a will, on the survivor’s death all of their assets would pass to the survivor’s children. So John and Mary prepared wills that left their estate to the surviving spouse, and after they are both gone, equally to all four children.
Several years after John dies, Mary’s relationship with John’s children has deteriorated. She rarely hears from them and feels certain that John would have disinherited them under these circumstances.
Before long she signs a new will that leaves her estate (which now includes John’s estate) to her two children and nothing to John’s children. Result: John’s children inherit nothing!
But even if Mary hadn’t changed her will, if on Mary’s death the original of her will can’t be found (perhaps her children destroyed it?), the result is the same: By state law, without a will only Mary’s children inherit. John’s children get nothing!
Even if Mary does not change her will and the original will is probated, what if Mary names her two children as the beneficiaries on most of her assets? Again, little or nothing passes to John’s children on Mary’s death, as such assets pass outside of the will. If Mary remarries and puts everything in joint tenancy with her new husband, again John’s children get nothing!
Married couples often don’t understand that, absent a specific agreement or irrevocable trust arrangement, children can be disinherited, sometimes even unintentionally.
Example 3: Several years after her husband died, Kathy opened a small checking account with her brother. Shortly thereafter, she had us prepare a beneficiary deed on her home so it would go to her children on her death outside of probate.
A few years thereafter, when she sold her house, she deposited the check into that checking account and died shortly thereafter. The proceeds from the sale of her home went to the brother, and her children had no legal right to it.
In each of these examples, had the couple signed a Contract to Plan, the children would have had a legal, right to all or at least a portion of the estate. But without the Contract to Plan, these children would have no legal rights in these situations.
It is important to note that under the laws of most states, the fact that a couple signed essentially identical wills and/or trusts does not constitute an agreement by either spouse not to change or revoke his or her Will/Trust at any time.
Most Planning Tools Don’t Solve the Problem
Self-help and online programs, and even some attorneys, often do not advise couples of this potential problem. However, even if so advised, many couples comment that they trust each other not to disinherit their children. But as we discussed above, that isn’t what always happens on the second death, intentionally or otherwise.
What can be done to provide for the surviving spouse, yet still give the children of the first to die the legal right to receive an inheritance when that surviving spouse dies?
The Unacceptable Trust Solution: Many of our clients are moving away from separate trusts by merging two trusts into one joint trust which stays revocable until the death of the second spouse to die. The trust often provides that upon the death of the survivor, the remaining trust assets can pass to the children – often using Personal Asset Trust™ provisions to protect against problems the children may encounter after inheriting, such as divorce, lawsuits, bankruptcy, tax liens and estate taxes.
At first glance, this trust solution sounds attractive. A joint revocable trust simplifies administration after the first spouse passes and can provide significant income tax benefits to the family through a 100% step up in basis on trust owned assets at the death of both spouses. But to be effective couples need to retitle their assets into the name of their trust – a simple but critical process that shouldn’t be overlooked. And due to the fact that the trust remains amendable and revocable after the death of the first spouse to die, protection for the children becomes critical, since the surviving spouse might change the ultimate beneficiary to a new spouse, a caretaker or some other party sue to undue influence.
To guarantee that retirement plans pass the same way couples also need to name the trust and not each other as the beneficiary of their retirement plans such as IRAs, 401(k)s and 403Bs – a step which our firm will rarely recommend and which often has an enormously negative impact on the next generation through loss of the “stretch-out”. Consequently, retirement plans are one of the most important assets the Contract to Plan can protect.
Not surprisingly, many families find solely relying on their revocable trust to be a “compromise”. Isn’t there a better way to provide for each other yet have the children of the first to die be legally entitled to a reasonable share of the survivor’s estate?
A Better Answer – The “Contract to Plan”
The “Contract to Plan” is a separate document that can be used to address the problem of a surviving spouse changing his or her estate plan, or at least disinheriting the children of the first to die. Not only can this document be useful for couples like John and Mary in a second marriage, but also for couples like Bill and Carol who have common children, but who are concerned that the survivor might remarry and leave most of their estate to a new spouse.
The Contract to Plan, unlike the trust arrangement discussed above, may provide couples with greater flexibility and greater assurance that all of the children will be entitled to at least a portion of the survivor’s estate.
Authorized by the Law in many States
Although a contract to make a will is not inferred by signing similar Wills, the Uniform Probate Code essentially provides: “A contract to make a will may be established by a writing evidencing the contract and signed by the decedent.” In Massachusetts statutory authority to use a Contract to Plan is found at MGL ch 190B § 2-514. Similarly, Florida authorizes a Contract to Plan at FLA. STAT. § 732.701 (2018).
A Contract to Plan is also supported by case law. In one case, the Court not only found the agreement to be enforceable, but also extended such enforceability to include the survivor’s non-probate estate. In this case, the court concluded that the agreement implied good faith to include not only the survivor’s probate estate, but also the non-probate transfers. The court also concluded that such good faith permits the survivor to use the property for reasonable living expenses and even to make reasonable gifts during the survivor’s lifetime, but not to transfer the bulk of the estate in a manner contrary to the terms of the agreement.
A well-drafted contract to Plan can cover such things as non-probate assets and gifts attempting to defeat the couple’s joint intent.
Do percentages have to be equal? No, the percentages of the estate required to be left to the children do not have be equal. John and Mary may want to provide the survivor with the flexibility to leave a little more to the survivor’s children or even a new spouse. For example, John and Mary may find it acceptable to require the survivor to leave only 40% to the two children of the first to die.
The Contract to Plan does not automatically change the percentages stated in their existing wills. It merely says that the survivor can make changes later on, as long as those changes still provide at least the stated percentages to the children of the first to die.
Even many “first marriage” couples find the requirement to leave at least 80% to their children acceptable.
An Effective Deterrent
The advantage of legal documents is not only that they are enforceable, but also that the parties involved are encouraged to act in compliance therewith.
Once clients sign a Contract to Plan, they may be less likely to try to avoid their obligations thereunder. In that regard, the Contract to Plan offers families the desired flexibility, together with the moral and legal commitment not to disinherit a deceased spouse’s children.
The “Contract to Plan” is becoming more widely used for a number of reasons. There are far more “blended families” today than there were, say, 30 years ago. We are living longer and estates are larger due to inflation, retirement plans, and the like.
“My attorney never mentioned the Contract to Plan”
Unfortunately, many attorneys in Massachusetts are not yet familiar with the Contract to Plan. That is probably because the Uniform Probate Code, the law which codified the technique, is relatively new law in Massachusetts and the Contract to Plan is a somewhat non-traditional planning technique.
Nevertheless, the Contract to Plan can play a vital role in protecting the ultimate beneficiaries of your estate. And use of this technique can benefit not only those couples with children from prior marriages, but also couples in their only marriage.
Couples should still use a revocable living trust to avoid probate and for other reasons (like asset protection and income and estate tax reduction), and the Contract to Plan merely compliments such planning.
It is important to note: Assets may be excluded from the Agreement. The Contract to Plan can be drafted to exclude specified property or to limit its scope to the value of the property to be controlled by the agreement, and can even exclude charitable gifts if desired.
Also, contracts, unlike a Will, can provide that mere destruction of the contract does not void the contract, but that it can be revoked only by a document signed by both spouses.
Multiple copies of the contract can be signed and provided to each side of the family (perhaps in a sealed envelope) so that the children will know that they have enforceable rights upon the death of the surviving spouse.
A New Spouse: It’s not the survivor’s remarriage that concerns couples as much as the possibility that all of their assets will end up passing to that new spouse (and his or her children) on survivor’s death. The Contract to Plan may also encourage the surviving spouse to obtain a prenuptial agreement upon remarriage.
The Contract to Plan is a relatively new estate planning document that is attractive to both blended families and first marriage families. It provides a cost effective solution to providing the surviving spouse with the maximum control and flexibility while still protecting against children being disinherited on the surviving spouse’s death.
Please contact us if you would like to explore how a Contract to Plan can be drafted to meet your estate planning goals.
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