How to Lawsuit-Proof Your Estate Plan in Alabama?
Most people don't realize this when planning their estate here in Alabama. Still, there's a significant difference between an estate plan and a rock-solid estate plan. We'll spare you the suspense by telling you now that a rock-solid estate plan is well protected (legally) from anyone and anything that can come and lay claim on your assets once you've passed.
Think about it this way: You spend most of your life accumulating assets that translate to wealth. Whether you have a family or not, you want to do all you can to ensure that your assets are secure when the time comes. If you have a family, your estate plan must be bulletproof to ensure they're protected.
Consider this a crash course in how to lawsuit-proof your estate plan in Alabama. Keep reading to learn more.
Why Your Estate Plan Needs Protection
While you can get sued at any time in your life, it's most common for a person's estate to end up in litigation after they've passed for familial, business, or debt-related reasons. It's also important to remember that while the state of Alabama does not impose an estate tax, the federal government does. That's why the first thing your Huntsville attorney will want to do is minimize any tax implications and other expenses as much as possible.
Let's discuss the three primary reasons why you need to ensure your estate is lawsuit-proof:
Probate Court
In the general sense, the probate court is associated with a significant amount of fees and time. While the state aims to keep your family's best interest in mind, they will take their cut for the work they have to do concerning asset evaluation. This is especially true if you were to die intestate (without a last will) and your assets are left up to Alabama's Intestate Succession laws.
Aside from the time it takes to appoint an executor and comb through your estate, potentially holding your family's financial support in limbo, probate court comes with another inherent risk: It turns your estate into a matter of public record. This means that any assets you haven't legally protected using various trusts — even the assets in your will — can be looked up by anyone with an interest in your estate.
What's more, your estate becoming a matter of public record means that anyone can find out who your beneficiaries are and exactly what their inheritance will be. Therefore, they may not come after your estate but your beneficiaries, causing legal issues down the road for your family.
Creditors and Other Liens
In the chain of events that could potentially follow after your estate becomes a matter of public record, some of the individuals that come knocking on your door (so to speak) will be creditors and other liens. That's why you need to ensure that your estate plan includes a method of settling any debts so they don't carry over to your estate and family.
You also may not realize this now, but there are actually a lot of scenarios that lead to your assets becoming attached or garnished. For example, if you file for bankruptcy or get a divorce. Civil suits are also incredibly common, and certain individuals will come for your assets whether you're alive or have passed. They may even try both — that's why it's important to have a solid estate plan in place while you're still alive.
Think about it — you have a teenager that ended up at fault for a motor vehicle accident. Or someone passing through sustained an injury on your property. The next thing you know, a lawyer is trying to figure out your total net worth and what type of insurance you have. Moreover, they can easily resurface after you've passed if they weren't satisfied with their first settlement while you were still alive.
Primary Heirs and Estranged Family Members
Your Huntsville attorney will warn you that the biggest threat to your estate are your own heirs. This is because when beneficiaries disagree over an estate, it can lead to a very long, arduous, and often public court battle. It can also result in a loss of assets due to the high attorney and court fees and many familial conflicts.
The same goes for any estranged family members that may crop up out of the woodwork once your estate has been made public. Your heirs may agree with your last wishes, but anyone who feels you owe them something may not — and they'll do what they can to contest your will and other legal documents to get what they want. This could also lead to a loss of assets. It could put your family through even more grief as litigation carries on longer than intended.
How to Create the Perfect Estate Plan
Creating a perfect estate plan does take a lot of time and effort. However, once it's completed correctly, you'll have the peace of mind that will allow you to enjoy time with your family without worrying about all the "what ifs?"
Now, let's talk about what you need to create a lawsuit-proof estate plan:
Create as Many Trusts as Needed
There are several different types of trusts out there, and many of them have the option of being revocable or irrevocable. However, the primary purpose of all trusts is mostly the same: To relinquish asset ownership by transferring that ownership to a beneficiary when the time comes.
This essentially does three very important things. First, it "devalues" your estate by transferring asset ownership, which minimizes any tax implications or fees later. Second, it keeps your assets and beneficiaries of those assets private, so no one can see who is getting what or have any idea of these assets' existence. Third, since trusts transfer the ownership of the assets — meaning they no longer legally belong to you — they're automatically protected from creditors, liens, and estranged family members.
When you set up trusts for your individual heirs or familial trusts, you're ensuring that the assets you allocate to those trusts are received by your named beneficiaries, no one else. It's also near impossible to contest a trust as it would require proof that you were under duress or not of sound mind when creating it.
Get Specific
One of the most overlooked components of creating an estate plan is its specificity. When it comes to expressing your last wishes in regard to all of your assets, the last thing you want to do is leave anything open to interpretation. This is especially true for your will, because interpretation can lead to confusion which can lead to lawsuits.
So, don't just ask that your assets be divided up fairly among your heirs. Instead, take the time to decide who will inherit what and put that in writing. You can even consider making some gifts throughout your lifetime — just make sure that each document explicitly states the who, what, and where of each asset to eliminate any issues. It's also a good idea to talk to your appointed executor or another family member about who will get what when the time comes.
Write an Estate Plan Letter of Instruction
Speaking of getting specific, you'll also need to write out an estate plan letter of instruction. This is primarily meant to be given to your executor and Huntsville attorney to ensure they appropriately distribute the assets within your estate.
In your estate planning letter of instruction, you'll want to include the following:
The location of your safe-deposit box and its key
The password to your computer and any online accounts or folders
Any subscription services that would need to be canceled (cable, lawn services, newspaper, etc.)
How your extended family members can be contacted for notification of your death
How you'd like your personal effects to be divided among family members (which should also be stated in your will)
Your estate planning letter of instruction is also incredibly important in avoiding potential disputes since it can be used to explain why you made certain estate planning decisions. For example, you can use it to explain why you want your family to "pull the plug" rather than leave you in a coma or why your children are being left certain assets.
A letter of instruction will also help reduce the risk of an estranged family member or arguing heirs to contest any of your decisions.
Consider a "No Contest" Clause
Also known as an in terrorem clause, a no-contest clause is a provision that can be added to wills or trusts — or both. This provision declares that any beneficiary who chooses to contest the will or trust's validity automatically forfeits their interest in the estate.
While these clauses are valid — and a great way to discourage lawsuits among your heirs — there are still ways that a beneficiary can contest the administration of your estate without invoking the no contest clause. For example, if the executor of your will or the trustee of a trust is mismanaging the funds of your estate or assets in a trust, your beneficiaries would be able to contest his or her administration without losing their inheritances.
Before adding a no contest clause in your will and trusts, you'll want to speak with your Huntsville attorney about Alabama's state laws regarding these types of clauses.
Talk to Your Heirs
While leaving a letter of instruction is necessary for preventing disputes over your estate plan, it's also necessary to sit down with your family and discuss your estate planning decisions. This will eliminate any confusion or poor feelings towards your choices, especially if your heirs aren't exactly receiving equal assets.
Aside from ensuring that everyone is on the same page for when the time comes, you'll also want to try and leave equal amounts for everyone in your estate as much as possible. If you don't or can't, be sure to explain why. For example, maybe you're leaving your youngest child more money to help with college while your older child is getting a share of the family business. Or, maybe the money you're leaving in a trust is specifically for the mortgage or renovations to ensure your family always has a home rather than a few bucks to spend.
What you leave behind depends entirely on the assets you've accumulated over time and what's in your family's best interest. Just make sure they understand that.
Separate Your Business from Your Family
Suppose you own and run a family business that involves relatives. In that case, it can become a point of contention in your estate plan. Also, if your business is a sole proprietorship or general partnership, then your personal and business assets get lumped together. As a result, if a business-related dispute arises, you could end up losing all of your personal assets.
When it comes to keeping your business in the family, it's a good idea to pass your business on via contract selling rather than gifting it in a trust or will. As for keeping your personal and business assets separate, you'll want to consider other business entities such as a corporation, limited liability company (LLC), or a limited partnership.
Both of these things will help your family avoid disputes later on while protecting your personal assets against any liens through your business.
Consider Anyone You May Need to Disinherit
Disinherit is an ugly word, but it's often necessary. For example, you may have a financially irresponsible child or an ex-spouse in the picture receiving alimony or other benefits from you or an untrustworthy spouse in the picture. However, you cannot simply disinherit a spouse or a child by leaving them out of your will.
Remember that there are some family members you won't be able to disinherit, such as a spouse in a prenuptial agreement or minor children. However, effectively disinheriting others outside of those two caveats requires stating that there will be no provisions for them in your will. By mentioning anyone you're disinheriting in this legal document, you're making it clear to the probate court and your executor that you intend to leave them out instead of simply forgetting to include them.
Keep Track of Any Loans or Advances
Let's say you create a trust providing each of your children $200,000 in cash at the time of your death. However, just before you pass away, you help purchase a house for one of your children in the amount of a $150,000 down payment.
Is it a loan? An inheritance advance? Or is it simply a gift? You'll also need to consider how your other beneficiaries would view the situation.
To avoid disputes over gifts or loans, it's necessary to keep written records of whether these purchases are loans taken out of an individual inheritance or are just gifts with no repayment plans.
Establish Your Mental Competency
One of the main ways people attempt to challenge an estate plan is by declaring that the individual who created the estate plan lacked the mental capacity or competency to finalize the documents.
When signing off on a will, the testator (that would be you) must have what is called "testamentary capacity." This translates to the testator having a firm understanding of the following:
The quality and quantity of his or her estate. This is also referred to as the "bounty" and includes knowing what you have actual legal ownership of
The natural assets within your bounty and who should logically inherit those assets
The legal meaning of signing the document
Suppose you don't have a good understanding of what any of this means. In that case, you could be considered lacking in testamentary capacity. This would render your estate plan invalid.
The best way to avoid incompetence or incapacity claims is to evaluate your mental state before signing your estate plan documents. This would involve getting an examination by your regular physician and even a geriatric psychiatrist for good measure, depending on your age at the time.
Consult With a Huntsville Attorney
This is arguably the most important part of ensuring your estate plan is lawsuit-proof: Make sure you consult with an experienced Huntsville attorney to ensure that all of your bases are covered. Using a DIY estate planning template may be tempting to save time and money; however, that's just asking for issues down the road.
Tackling your estate plan on your own guarantees that you'll leave out a lot of important provisions. It also almost always guarantees something will become invalid since these DIY templates and programs aren't tailored specifically to your state and personal situation. A Huntsville attorney will ensure that your estate plan covers everything it needs to and that nothing is left up to interpretation or can be easily contested.
You can also appoint your attorney as the executor of your will to ensure that the administration of your estate runs smoothly.
There's a lot to learn about estate planning, including keeping your estate plan up to date for the best possible outcomes. So, call us and set up a consultation with Sarah S. Shepard or another experienced Huntsville attorney to get your affairs in order today!