Key Points:

1. Estate planning applies to modest-sized estates, too
2. Estate taxes can take about half…but a lawsuit can take it all
3. Proactive planning provides permanent protection

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After everything she had been through for the last year, culminating with the death of her husband Bill, Mary had received a finally some good news.

A modest estate

Bill had always been such a generous man. After meeting their very reasonable living expenses, nearly all of his earnings had gone to their children’s college education, to their church, and to help whomever he saw in need. All Mary and Bill had when he died was a small farm worth about $1,200,000, their savings of $150,000, Bill’s life insurance of $200,000, and their modest personal effects. Mary had inherited the farm from her parents, Tom and Barb.

Tragedy strikes

Mary had been through so much with Bill’s illness. After almost a year, it had taken him from her. Then came the accident. On one of those awful, blurred days after the funeral, as Mary turned off the main highway she was struck by a young driver whose car went over an embankment. His serious injury seemed to be entirely his own fault, until a lawsuit convinced a jury that Mary’s turn signals were not working properly, shifting legal liability to her. The resulting claim far exceeded her auto insurance limits, and even after he insurance paid $1,000,000 to the injured driver, she was staring at a court judgment of more than $800,000. According to her lawyer, their savings and Bill’s life insurance proceeds were going to be wiped out, and a lien would be placed against any real estate she owned.

An unfortunate twist

To add to her agony, Mary learned that some of the experimental treatment Bill had pursued at the advice of his doctor had upon review been “denied” for coverage under their health insurance. As a result, nearly $650,000 in unpaid medical bills were being presented to her for payment. The accident lawyer ruefully explained: “Under Illinois law, a spouse is legally liable for medical expenses incurred by the other spouse, even when the treated spouse dies. Even your ‘separate property’ like the farm you inherited can be taken by this claim.”

Between the lawsuit and this unexpected medical bill, Mary was looking at bankruptcy. But finally, she learned the good news.

Thinking ahead

Bill and Mary had sought legal advice when they first learned of his illness. The first lawyer they spoke with said they did not need estate planning, because their estate was worth less than the estate tax exemption. He told them to put everything in joint tenancy, because “that is a simple and avoids probate.” But they weren’t comfortable with that advice, so they sought advice from Dennis, a counseling oriented attorney. Dennis took time to learn more about them, their estate, and their goals.

One of Bill’s key objectives was to protect whatever he could for Mary when he died. As Mary went back to counsel with Dennis in winding up Bill’s affairs, she came to realize that Dennis had helped Bill plan so that upon his death, their savings and his life insurance would not come directly to Mary in her own name, but would be paid to Mary in trust. That trust would be under Mary’s control, but it would protect the funds from claims made against Mary after his death. Although he had no idea what claims might arise, Bill’s foresight was now going to really pay off.

Visiting with Dennis, Mary also learned that Tom and Barb had also shown great foresight. When giving the 240-acre farm to her so many years ago, they were cautious. Bill and Mary had only been married a couple of years. Tom asked their estate planning attorney if they could help assure that the farm would be safe in case of divorce. “A gift is separate property, should be safe from divorce,” the attorney advised. “But what if Mary puts Bill’s name on the deed?” they asked. “Then it would become marital property, and could be split in the divorce. You can give it to her in trust to prevent that.” So that is what they did.

For practical purposes, Mary had felt she owned the property for all the years since. She managed it, made all the decisions as the land owner would, and Bill actually farmed the ground. Of course there had never been a divorce. But Dennis explained that this trust established by her parents would now protect the farm from the medical liability and the accident lawsuit!

Mary had sometimes wondered whether the planning Bill and her parents did was worth the hassle. All doubts were gone now!

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Article authored by Curt W. Ferguson and originally published in the Prairie Farmer magazine, August 2008 issue