Not so long ago, the "typical" estate planning situation was of a married couple of moderate income with children. But increasingly, there is no typical American living arrangement. Plenty of us require special arrangements in our will, trust, or other parts of our estate plan.

If you're one member of a couple in which both you and your spouse have children from a previous marriage, you might want to arrange things so your own money goes to your own children, and your spouse's money goes to his or her children. If those children are well off and earning their own incomes, then you might consider leaving more to your surviving spouse, or to other family members, such as by setting up a trust for your grandchildren. Here is a brief discussion of some of the transfer techniques.

QTIP trusts--for heirs, not ears. Providing for children from different marriages may conflict with tax planning. The marital deduction allows spouses to leave their entire estates to each other without paying taxes. What if you and your spouse have children (especially grown children) from other marriages? You might naturally prefer that your biological children receive more of your estate than your spouse's children from a previous marriage. If you leave your entire estate to your spouse, he or she might not agree--but has the final decision after you're gone.

That's why some "patchwork" families are using QTIPs. The Qualified Terminable Interest Property Trust allows you to leave your property in trust for your spouse, but then it goes to whomever you wish after your spouse dies. You still get the marital deduction, your spouse gets to live off the income from the trust, and your children get the property upon his death. The problem: no one else can benefit from the assets in the trust until your spouse dies, which might not leave other family members enough money for their comfort until then. Insurance can ease the blow. If you have a large enough estate, you can leave up to $675,000 (tax free under current law) to your children or into a trust for their benefit on your death, and put the rest into the QTIP trust.

Mutual wills. Mutual wills provide another option where children from different marriages (or anyone else that you want to inherit some of your property) are involved. Each spouse leaves all property to the survivor, who after death will leave specified property to the friends or relatives the other designates. Warning: use of mutual wills might jeopardize the marital tax deduction and also involves issues of contract law that vary among states. Get professional advice before using this strategy.

Don't confuse mutual wills (two separate wills that refer to each other and are trying to accomplish the same purpose) with a joint will, which is one will that attempts, usually unsuccessfully, to cover two people.

Life estates. What if you want your surviving spouse to be able to live in the family home, but want to make sure that the house will ultimately pass to your children? A life estate is an option. A life estate means that the recipient only gets to use the property for as long as he or she lives, then it is passed to a third party (or occasionally reverts to your estate). It can't be sold or substantially modified by the life tenant. Your will can include this provision, but check with a lawyer before trying such property conveyances; they can be quite complex. A better method is to leave it in trust for your spouse so long as he or she is able and desires to occupy it.

Life insurance. Life insurance is another tool you can use to distribute assets among children from different marriages. You can set up an irrevocable trust for your children that will be ultimately funded from the proceeds of a life insurance policy. The trust pays the premiums and actually owns the policy. When you die, your children receive the benefits from the trust, while your spouse gets the rest of your estate.

Trusts. The versatility of trusts makes them useful instruments for allocating assets among different families, because you can set up a separate trust for the children of different marriages, or even for each family member.

Prenuptial or postnuptial agreements. If you're an older person with grown children from another marriage, you should strongly consider asking your lawyer, as part of your estate plan, to prepare a pre- or postnuptial agreement

that specifies that the separate property of each party remains separate at death. Then your wills or will substitutes can leave your assets directly to your respective children on your death. They're already adults, and it's unlikely your spouse will survive you long enough to require large amounts of money from your estate to live on.

Contracts to make a will. Such a contract prevents your spouse from changing arrangements in his or her will without your knowledge and consent. These can supersede any updated will, and can be written so that they expire if the marriage officially ends in divorce or annulment. In effect, such a contract guarantees that each person will stick to the jointly agreed estate plan, instead of changing a will without the other's knowledge. Their obvious drawback is that since they cannot be changed without the other person's permission no matter how much your circumstances change, they surrender the flexibility that a will provides. These contracts are usually prepared in anticipation that some conflict will occur; therefore, it may be a good idea that each party be represented by a lawyer.

One thing to keep in mind: patchwork families are a prime category for will contests, as children from different marriages may be more likely to

disagree about the distribution of estate assets. People in this category should be especially careful that their wills, prenuptial/postnuptial agreements, or contracts to make a will, are properly prepared.

Joint tenancy. If your combined estate falls under the $675,000 limit, and you don't expect it to exceed that amount by the time the second spouse dies, it's sometimes simpler just to leave all the property in joint tenancy, because then the surviving spouse receives all the assets without worrying about estate tax and there's no probate. However, you still need to take into account the drawbacks of joint tenancy: the fear that the surviving spouse will squander the money instead of spending it on the children, or will remarry and leave all the money to the new family. Since joint tenancy doesn't let you control the distribution of your money after you die, you will have to use a trust or will if you want the money to go to anyone but your spouse.

Are you a business owner setting up a retirement plan for yourself and your employers? The law give you a lot of attractive options.

• SIMPLE (Savings Incentive Match Plans for Employees) and SEP (Simplified Employee Pension) are statutory plans, which means their requirements are established specifically by the Internal Revenue Code.
• Profit Sharing, 401(k), and Money Purchase Pension, are forms of Defined Contribution Plans, where you (and your employees) put in a certain percentage of income, but benefits depend on how the investments you make with this money work
• The final category is Defined Benefit Plans, which pay you and your employees a certain amount depending on the number of years worked. These are the traditional pension plans of big corporations and government. They're not as common in small businesses, but they're an option too.

Here’s a quick idea of the smorgasbord of possibilities. With a little effort, you'll find something that's right for you—but don't make that decision alone. You'd be well advised to consult your attorney with retirement planning experience. This is one of those times when expertise really pays off.

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• lend any part of the plan’s income or principal to an owner-employee
• pay any compensation to the owner-employee for services rendered to the plan
• acquire any property from an owner-employee or sell any property to an owner-employee

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The statutory plans have little flexibility, since the law specifies their eligibility and vesting requirements.

• SEP. A SEP allows you to contribute to an IRA for each of your employees. You do not have to make a contribution to the plan every year.
• SIMPLE. If you go the SIMPLE route, you can adopt the plan as an IRA or as a 401(k) (a type of defined contribution plan that's available as a separate option). One bad part of SIMPLE plans is that you have to contribute to them every year regardless of your financial success for that year. (There are two types of SIMPLE plans, and one lets you reduce your contribution to 1% of payroll if you have a bad financial year and have chosen to adopt a SIMPLE IRA.) If you choose to set up a SIMPLE IRA, funds are held in an IRA, while the funds contributed to a 401(k) are held in a qualified trust.

A possible problem is that many part-time and seasonal workers will be eligible under the statutory plans. With defined contribution or defined benefit plans, you can focus coverage on employees more central to your business’s success.

One more problem is that, with the SIMPLE and SEP, any contributions made to the plan are 100% vested, meaning that the employee is entitled to receive 100% of the funds in his or her account regardless of length of service with your business.

With defined contribution and defined benefit plans, on the other hand, you can establish a schedule so that your employees may become gradually vested in their accounts over a period of years. This encourages employees to stay with you, and rewards employees who've been with the company longer. A beneficial side effect of a gradual vesting schedule is that when an employee leaves and his or her account is not 100% vested, the remaining amount is forfeited. The forfeited amount is then redistributed to the accounts of the remaining employees.

Besides their vesting and eligibility flexibility, these plans are attractive to small businesses because they are inexpensive and easy to administer. With a defined contribution plan you must keep a separate account within a qualified trust for each individual employee, so that at any time the employee may know the account balance in his or her account. Defined contribution plans are easy to "sell" to employees because they can see how much money they have in their individual accounts. However, because of this account segregation, the investment risk falls on the employee.

Profit sharing plans and money purchase pension plans are types of defined contribution plans.

• Profit Sharing Plan. With a profit sharing plan, you make a yearly contribution to the plan to be allocated to the employees based on their compensation for the year. If you have a bad financial year, you will not have to make a contribution to the plan. Of course, since you're an employee too, you're also eligible to participate in the plan, and your share of the profit sharing would depend on what percentage of the payroll your contribution was. For example, if your payroll was $100,000 and you made $50,000, you would be entitled to 50% of the profit-sharing contribution. If you (the business) contributed $10,000 to profit sharing that year, you (the employee) would be entitled to $5,000.
• Money Purchase Pension Plan. By contrast, if you elect a money purchase pension plan, you will make a fixed percentage contribution each year. If you choose to make a 3% contribution it will be 3% of compensation to all employees. For example, if you made $50,000 during the year, you would receive $1,500. One advantage of a money purchase pension plan over a profit sharing plan is that you can contribute 25% of total compensation to the plan. With a profit sharing plan you are limited to 15%. Often, employers choose to pair a profit sharing plan with a money purchase pension plan in order to take advantage of both.

A defined benefit plan is just like it says. In a defined contribution plan, the employer defines the amount of contribution it will make each year, but in a defined benefit plan, the ultimate benefit the employee will receive on retirement is stated. An actuarial calculation has to be made to determine the amount the employer must contribute today in order for the employee to receive that stated amount on retirement. Because of this setup, the investment risk falls on the employer and not the employees. Because of the calculation, a defined benefit plan is more expensive to administer.

Also, benefits in a defined benefit plan are guaranteed. The employer pays an insurance premium to the Pension Benefit Guarantee Corporation (PBGC), which insures the funds in the plan at a certain level. If the plan or the employer goes belly up, the employees will be entitled to receive payments from the PBGC, though not their full entitlement.

• A car that is stalled on a freeway is hit from behind, and a minor accident is turned into a disaster when the gas tank explodes and severely burns the driver.
• Many persons report serious health consequences, including heart and lung trouble, from taking a popular diet drug;
• Thousands claim serious illness, including cancer, from exposure to asbestos.

Nothing can reverse these injuries, but the law can compensate the victims and assess damages against the companies that produced the defective products.

Cases such as this involve "product liability." Like other kinds of personal injury cases, the basic purpose of product liability lawsuits is to permit victims to seek money damages for injuries they have suffered. Such cases also give manufacturers and sellers of such products incentives to avoid doing harm, and so help make our society safer.

The federal Consumer Product Safety Commission has reported that more than 28,000 Americans are killed annually and 33 million injured in accidents involving consumer products.

These accidents have many causes (including carelessness by the victims), but many are due to defective products.

In most personal injury cases, the victims must show that they were injured by someone’s negligence. In product liability cases, however courts in almost all states impose "strict liability." That means the victim need not specifically show negligence, but must only show that the injury was caused by a product that was defective in some way.

Possible defects include:

• design flaws (the product lacks safety features, as alleged in controversial suits against gun manufacturers for not including trigger locks as a standard feature, or is faulty in design, like a computer that causes fires because of design defects in the wiring);
• manufacturing defects (the product is well designed, but an error in how it was produced—departing from the design—makes it dangerous);
• inadequate instructions on the proper use of the product, or inadequate warnings of possible dangers that could have reduced or avoided foreseeable risks; and
• faulty packaging (for example, a dangerous household product sold without child-proof packaging might expose the manufacturer to liability).

The law gives manufacturers and commercial sellers a number of defenses to product liability suits. Besides the obvious ones—the person suing wasn’t really injured by the product, etc.—they include:

1. The product was altered in some unforeseeable way after it left the factory. If the product was significantly altered by the shipper, seller, or customer, and that alteration helped cause the injury, the manufacturer may be able to escape liability. (But there is an exception if the product had to be adapted before it could be used—as in the case of products the customer has to assemble.)
2. The product was used in an unforeseeable way. Courts have held that chair manufacturers should foresee that sometimes people will stand on chairs to change a light bulb, and so should make them strong enough to be used for this purpose. However, a gun manufacturer probably would not have to foresee that someone would use a pistol as a hammer.
3. The victim assumed the risk of using a dangerous product. Certain products are inherently dangerous, and you can be hurt if you are careless. Knives and axes would be useless if they weren’t sharp enough to cut. But that doesn’t excuse a manufacturer from a defect which made the product dangerous in an unforeseeable way, such as an axe blade separating from its handle.
4. The danger was so obvious that special warnings were not needed. Everyone knows that guns shoot deadly bullets, so cautions are not legally necessary (though manufacturers give them anyway).

5. The statute of limitations expired. Victims have only a limited time in which to sue for damages. In many states it is a year or two from when the injury occurred. In some states, it is figured from when the product was sold to the first purchaser (not to the victim).

The list of potentially dangerous products is long, ranging from motor vehicles to ladders, industrial equipment, pesticides and other chemicals, tools, medications, breast implants, toys, and child safety products.

If you think you’ve been injured by a defective product—or if you’re a business person trying to avoid problems making or selling defective products—your lawyer will be able to explain your options and recommend a course of action.

Whenever you or someone in your family has been injured by a defective product or in another way, some basic steps apply. After seeking medical help, try to make as complete a factual record as possible:

1. Keep the evidence. If a heating fixture ruptures and injures someone in your family, keep as many pieces of the equipment as you can find disturb the site as little as you can.
2. Make not of the name of the manufacturer, model, and serial number. Keep any packaging or instructions. Keep any receipts showing when and where the product was purchased.
3. Take photos of the site and of the injury.
4. Make a record of exactly when the incident occurred and under what circumstances.
5. Be sure you have accurate names and addresses for all doctors and hospitals that have treated the victim.

You should consult your lawyer as soon as possible. All of this information will be very helpful in assessing a possible suit on the victim’s behalf.

Legal Update

Homeowner Protection Act Makes It Easier to Save on PMI

A federal law that went into effect last summer helps consumers understand when they no longer need to pay private mortgage insurance (PMI)—and thus save thousands of dollars over the length of a home loan.

You probably were required to pay PMI if, like 30% or more of homeowners, you got a mortgage without putting down at least a 20% down payment. Lenders make PMI a condition of the loan, to protect themselves in case borrowers default on loans and they have to sell the property for less than the outstanding balance. On a $90,000 loan at 7.5% interest, PMI would be over $350 a year.

However, once you’ve build up at last 20% equity in the home—meaning that the money owed is less than 80% of the home’s value—the lender is no longer at risk, and you can ask that the insurance be cancelled.

Under the new federal law, the lender must cancel the insurance when the mortgage balance falls below 78% of the home’s original purchase price. However, because homes usually appreciate in value, you may be able to cancel it earlier—and federal law now requires the lender to tell you annually that you have the right to cancel if you meet certain criteria, such as rising home values increasing your equity.

More Couples Signing Postnuptial Agreements

Prenuptial agreements are becoming more and more common, as couples contemplating marriage agree in advance on their rights to property and financial support in the event of divorce or the death of one of them. Now it appears that already-married couples are getting into the act with similar agreements.

As with prenuptial agreements, agreements after the marriage help clarify the parties’ expectations and rights for the future. They reduce uncertainty and fear about how a divorce court might divide property and decide spousal support. And, like prenuptial agreements, they are not necessarily binding regarding child custody and support—a court will decide those issues according to the best interest of the child.

Most states permit them, though courts in some states will not uphold them at all or only under certain circumstances. As with prenuptial agreements, it is very desirable that each party be represented by legal counsel to assure that the agreement is drafted properly and that the parties are making an informed decision.

The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.

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