Murphy practices estate planning law with Miller, Johnson, Snell & Cummiskey. She also focuses in her work on special needs trusts for the disabled, probate avoidance and what one might call estate litigation prevention.
The Business Journal queried her about planning for the transfer of estates in one often controversial area: the increasingly common blended family, a setting in which children of separate marriages may challenge each other and step parents over estate distributions.
Murphy, a graduate of Aquinas College and Notre Dame Law School, said two devices can help keep the heirs in a blended family from taking each other to court: prenuptial agreements, which can settle most issues in advance, and QTIP (Qualified Terminable Interest Property) trusts.
“A prenuptial agreement,” she said, “can set forth everybody’s expectations on the front end rather than trying to deal with those when either one of the spouses is dead or incapacitated or a divorce comes about.”
She stressed that prenuptial agreements are enforceable in Michigan.
“Now that doesn’t mean you won’t have fights over them, because you can always fight about what ‘is’ is,” Murphy said. “But a prenuptial agreement really does a pretty good job.
“Sometimes it keeps litigation from even happening,” she added, “because it establishes the heirs’ expectations right there in the document.”
But if, say, children of a first marriage go into court arguing that a deceased father wanted them to receive the entire estate and the stepmother to receive nothing, Murphy said a prenup would make it an uphill battle.
“If the prenup says Dad wanted to give her a third of the estate,” Murphy said, “it’s pretty hard for the kids to make that argument. They can argue about what the prenup meant by ‘estate,’ but they can’t argue that he meant for her to get nothing.
The so-called QTIP, she said, is a device used in estate planning which protects the interests both of a surviving spouse and of the children.
“It’s the idea that I want to take care of my trophy husband until he dies, Murphy said, “but that when he dies, I don’t want the money going to his kids, I want them going to my kids.”
She said a QTIP is highly flexible. Assume, she said, that a mother and a father are divorced from previous spouses, have married each other and each has a sets of children.
“The QTIP is perfect in this case,” Murphy said.
“Mom would have a QTIP with her money in it. Dad would have a QTIP with his money in it. Dad dies. His QTIP says ‘Give Mom all the income from the trust if her money turns out not to be enough to take care of her, but aside from using money for her health, support and maintenance, she can’t get at the principal.’
“So we’re making sure she’s being taken care of,” Murphy said. “But when she dies, her interest terminates, and the principal goes to Dad’s kids.”
She said the same device often is used in situations where a wife, for instance, may receive a big family inheritance and is worried that if she dies, her husband might remarry and give the inheritance to his new wife instead of to their children.
“It’s a way to make darn sure that money goes back to where you wanted it to,” Murphy said.
“And it’s the kind of thing that shows you that you’d better get professional advice in considering these issues. Dont go on-line for your legal advice.”
She said such prudence is just as important to people with small estates as to the very wealthy.
“Actually, routinely upgrading estate planning is as important to people with smaller estates as it is to the very wealth, because that’s all the money they have to pass on to their heirs. And today isn’t an environment where you threw your will in a drawer 20 years ago and forgot about it.”
She said the intervivos trust — also called the revocable living trust — is a very handy device for younger families. It enables them to avoid probate entirely and gives them a great deal of flexibility in managing money for children.
“It’s a way to avoid seeing a child’s inheritance wind up in a fast red car.”
But said she one of the most important issues for many families is the worry about caring for a child with a serious mental or physical disability.
“One of the big issues here is than when disabled children turn 18, they become eligible for Medicaid and for SSI (Social Security Income) — but only if they have less than $2,000 in assets and essentially have no income.
“Well, if I die and have a $100,000 house in the estate — I mean, we’re not talking rich people, here — then the child is disqualified from receiving SSE. I’m wondering ‘What if my kid ends up in some horrendous adult foster care facility with no funds and nobody to look after him.’”
Murphy said a special needs trust can preserve the child’s SSI eligibility. “It provides that I’m going to rely on the government to provide basic medical and education and a stream of income, and the trust will then provide for the things the government won’t. You write the trust carefully and says it’s to be used for anything that the government won’t provide.”
Such a trust, she added, also can perpetuate eligibility by serving as a vehicle to receive new money from, say, accident settlements.
She cited a situation where a disabled person might receive a $40,000 settlement from an auto accident injury. “So the child receives $40,000 directly and that disqualifies him from Medicaid and SSI even though he’s got $90,000 in medical bills.”
But if the funds are poured instead into the child’s special needs trust, SSI and Medicaid benefits are preserved.
When the child dies, she added, any funds remaining in the trust then reverts to the government to defray its expenses.