Angela heard the dreaded sound of a flat tire as she was driving down the highway with her children. Angela managed to safely get to the shoulder of the highway but discovered that her spare tire was also flat. Angela didn’t have a cell phone with her so she decided to walk back to the emergency phone they had passed a few minutes ago. Angela decided to leave her two children in the car because it was too hot to have them walk with her. Besides, her daughter was 14 and old enough to watch her 10-year-old brother.
While walking, Angela started thinking about her children and her upcoming divorce. Angela was thinking about how happy she was that she was able to get full custody of the children but was sad that she had to give up the right to so much property in order to get custody. Angela was anxious for the divorce to be finalized so that she and her children could move on.
Out of the blue, a car swerved off the highway and hit Angela. Angela never saw the car and was killed instantly. Angela’s family did not have money for a funeral and burial. The insurance company of the driver that killed Angela told the family that the driver took responsibility for killing Angela and they were prepared to write a check immediately. The insurance company had the problem that they did not know who the check would need to be written out to due to the pending divorce and Angela not having an updated will naming an executor. The insurance money would typically go to the spouse but the pending divorce made the situation unclear so the insurance company waited to release the check until it was clear who was entitled to the money.
The story above, while details have been changed to protect the family, is true. Eventually, the insurance money and Angela’s property from the divorce went to her children in the form of a trust that was held by the children’s father and Angela’s soon to be ex-husband until they turned 18. Many things need to be done during a divorce in order for it to be done correctly. Part of the divorce should always include estate planning, just in case the spouse dies.
Many married couples do not estate plan because if one spouse dies, everything goes to the other spouse. The estate planning would focus on what would happen to the estate in the event that both spouses die at the same time. When going through a divorce, it is very important that you and your attorney are discussing all aspects of the divorce. They should be asking you what you want, putting all your wants and desires into writing, and making sure that the marital property is reflected accurately in the planning. The same steps that are taken during your divorce should be done with estate planning at the same time. Your attorney should talk with you about what you want to happen in case of death, they should put all your wishes in writing and make sure that your estate and assets really reflect what your plan is.
What Do You Really Want?
Estate planning is a lot like planning a trip. When going on a trip, you can’t just hop in the car and drive. A trip requires both planning and an end destination. Estate planning also requires both planning and an end destination. You should expect your estate planning attorney to really listen to goals and opinions and then suggest a course of action to achieve those goals.
It is important that the plan developed for your estate reflects your wishes and goals. Often, attorneys will steer their client into standardized forms that are based on the net worth of client instead of personalizing the plan to meet the client’s wishes.
What about a beneficiary that is under the age of 18 at the time of your death? One of the most important decisions to be made is what age the child should be when they are able to get control over their inheritance. If no age is specified in the will, the child will inherit when they turn 18 years old.
Imagine back to when you were 18 and think about how you might have handled being given $100,000. What is typically seen is that an 18-year-old will waste the money on high dollar luxury items instead of being used for more practical purposes like college, down payment for house, or investments. Many attorneys recommend a minimum age of 25 for control of inheritance.
Generally, most people feel that 25 would be a minimum age for control of an inheritance. But, the concern with a higher age for control of the inheritance is the worry that funds will not be available to pay for college or a minimum standard of living. To alleviate those worries, a trustee can be named to oversee the inheritance.
The role of a trustee is to oversee all the property and investments for a beneficiary that is not old enough to be in control of their inheritance. A trustee is named by the deceased in their will. The trustee can be anyone that the deceased individual trusts to handle the property, especially given that most would not want their former spouse to be the one in charge of the inheritance.
There is no requirement that a trustee be an attorney or financial advisor. A trustee should be competent to make decisions about what money should be spent on and be willing to work with a financial advisor about investing money from the inheritance.
- Other areas that should be discussed with individuals that are in the process of being divorced or divorced are the following:
- A person to be the guardian for any minor children
- How do you want to handle medical decisions if you are no longer able to communicate those wishes?
- Do you have any specific burial or cremation wishes?
- In case you are in a situation where you are in a persistent vegetative state or have a terminal and incurable disease, would you want to remain on life support?
When creating your estate plan, you and your attorney should review your wishes and create a plan with all the necessary documents to ensure those wishes are carried out. When estate planning, your plan should contain the following documents at a minimum:
- Revocable Living Trust
- Healthcare Power of Attorney
- Living Will
- Financial Power of Attorney
- Last Will and Testament
It is important that the correct tools are being used when creating an estate plan in order to ensure that the estate correctly outlines your wishes.
A Last Will and Testament is the most common form of estate planning. The will outlines your wishes on how you want your property distributed. It will also name an executor to the will and any trustees needed, it will set up trusts, set age restrictions on trust funds, and lists guardians for minor children. A thorough will makes the wishes of the deceased clear, which is very important, but especially important for someone that is divorced or in the process of being divorced. But, there are other options in estate planning that could be more effective than your traditional will.
A Revocable Living Trust should be used when no one will be contesting the will. The revocable living trust can be used to distribute all your assets, name trustees, and set up any other necessary conditions for the distribution of the assets. The revocable living trust is easier, quicker, and cheaper than a will.
A Healthcare Power of Attorney and a Living Will are used together when medical issues arise and you are not able to communicate your wishes. The first item is the living will. Here, you go over all the different medical scenarios that would have to do with life support and artificial feeding if you are in a situation where the doctors are discussing removing life support. The doctor would not ask your family to make those medical decisions because they are already spelled out in your living will. The healthcare power of attorney assigns a specific person to make any other medical decisions for you if you are not able to.
When going through a divorce, it is extremely important that a healthcare power of attorney is completed because until the divorce is finalized, the soon to be ex is still considered your spouse and next of kin. This means that they would be the person making medical decisions for you. It would be less than ideal to have the person you are divorcing be the one to make those decisions on your behalf.
The Financial Power of Attorney is also known as durable power of attorney. In the event that you are not able to handle your own estate and affairs, the financial power attorney allows another individual of your choosing to manage your financial accounts and property. It is also possible to have a guardian appointed by the court to handle your estate but many individuals prefer to pick someone.
Minimizing Legal Hassles
When you do a Last Will and Testament, the will goes through probate in court. Probate has additional court costs associated with it; it also includes inventorying your property, required meetings, and sometimes delays in completing probate. It is not unusual for 3-8% of the assets to be wasted during the probate process and for delays to happen before probate is completed; up to 16 months. Because of the additional costs associated with probate, the meetings, the inventory process, and delays, many people are opting for the Revocable Living Trust.
The Revocable Living Trust allows for the deceased’s wishes to be followed without all the complications and financial burdens that come with the court being involved. A Revocable Living Trust also keeps your estate plan from being a public document that anyone can see.
Having a Last Will and Testament is still very important in estate planning. A Last Will and Testament can be written together with a Revocable Living Trust, making it much simpler. The Will, called a Pour Over Will, is written in case any property ends up in probate. The Will names the Trust as the sole beneficiary of any of the property that ends up in probate; it lists your burial and cremation wishes, and also spells out who you would want to be the guardian of your minor children.
The biggest benefit to the Pour Over Will is that if the estate does end up in probate, the trust is named as the sole beneficiary. This means that all the beneficiary information would not be made public. The public would see that the trust is receiving a specific amount of property but nothing about who will receive the trust.
Changing Assets to Reflect Your Plan
Your estate is only truly effective if all the details are handled properly. When important details like incorrect beneficiary designations, and property that is not titled properly happen, an estate plan is no longer effective. Additionally, Wills and Trusts do not address life insurance policies that already have a beneficiary named. If you want someone new to receive your life insurance, you need to make sure you change the insurance policy to match the Will or Revocable Living Trust.
Imagine the following scenario: your estate is worth $1 million in the form of a life insurance policy. Your wishes are that the money stays in a trust until your daughter turns 30 and that the money before then can only be used to pay for education expenses and basic living expenses. The insurance policy lists your daughter as the beneficiary and the Revocable Living Trust details your wishes for the money to be held in trust. In this scenario, your daughter would get the $1 million immediately.
The following assets also have listed beneficiaries that you need to check to make sure the person listed is really the person you want to inherit that asset. These assets include IRAs, 401(k)s, homes, mutual funds, life insurance, and annuities. With these assets, the estate planning attorney needs to spell out exactly how each asset should be titled and who should be listed as the beneficiary due to various legal and tax purposes.
Thinking about estate planning can be overwhelming for most people. Because of this, people are constantly put off estate planning for another day, especially when they are going through a divorce. A good divorce attorney and estate planning attorney can work together with you to make sure you are protected and that your wishes are known in case of the unexpected. It is always better to safe than sorry.