Protecting Money from a Child’s Divorce

Families with concerns about a child’s marriage are often interested in protecting money from a child’s divorce.   This often arises in situations where a parent wishes to give away assets to her children and grandchildren.  Giving assets directly to a child with an unstable marriage can put those assets in jeopardy, and this problem can be solved with the use of estate planning strategies, according to the article “Husband should keep inheritance in separate account” from The Reporter.

Everything a spouse earns while married is considered community property or marital property in most states.  However, a gift or inheritance is usually considered separate property or separate from the marriage, which is articulated differently depending on what state you are in.  If the gift or inheritance is not kept totally separate, that protection can be easily lost.

An inheritance or gift should not only be kept in a separate account from the spouse, but it might be a good idea to keep it at an entirely different financial institution. Since accounts within financial institutions are usually accessed online, it would be very easy for a spouse to gain access to an account, since they have likely already arranged for access to all accounts.

No other assets should be placed into this separate account, or the separation of the account will be lost and some or all of the inheritance or gift will be considered belonging to both spouses.  There may be other considerations about the income generated by that money, but check with your local estate planning attorney on that issue.

The problem comes when the money from the gift or inheritance is mixed or commingled with the other assets of the marriage.  Depending on what the assets are, they might be able to be untangled.  More likely, the mixing will “poison the well” and make all of it subject to the divorce.  Here is another issue: if the child does not believe that the spouse is a problem or if the child is being pressured by the spouse to put the money into a joint account, they may need some help from a family member to ensure protecting the money from the child’s divorce.

This “help” comes in the form of the parent putting the gift or inheritance in an irrevocable trust.  Everyone concerned with protecting money from a child’s divorce should consider one.

This trust will keep the money separate and will be administered under its terms.  The trust can benefit the child, but will keep the money owned by the trust from being commingled and therefore, separate property.  That way, if they divorce later, the money in the trust is protected.  Many clients love this option and include it as part of their estate plan, especially as trusts of this type have similar benefits with the child’s creditors.

The best solution is for the parent to meet with an estate planning attorney who can work with her on protecting the money from the child’s divorce.

People often attempt to find simple workarounds to complex estate planning issues, and these DIY solutions usually backfire. It is smarter to speak with an experienced attorney, who can help both parent and child in protecting the money from a child’s divorce.

Reference: The Reporter (Dec. 20, 2020) “Husband should keep inheritance in separate account”

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Trusts Aren’t Just for Billionaires: Reasons for a Trust

Occasionally clients are hesitant to utilize trusts in their estate plan because they “just have a simple estate” or believe they need substantial assets to warrant a trust.   In fact, trusts are for everyone and solve a variety of purposes in estate planning.  According to an article entitled “3 Reasons a trust may make sense for your family even though your name isn’t Trump, Gates or Rockefeller” from Market Watch, trusts give great flexibility in how assets are divided after your death, no matter how modest or massive the size of your estate. Using trusts in your estate plan is a smart move, for many reasons.

There are two basic types of trust. A Revocable Trust is flexible and can be changed at any time by the person who creates the trust.  This person is known by many different names based upon the convention of where the trust is established, but is often known as the “grantor” or “trustor” or something similar.   These are commonly used because they allow a high degree of control while you are living, especially if your goal is to avoid probate while being able to revise your plan in the future.  The idea is that if your trust is the owner of an asset or properly receives the assets at your death, there will be no need for a Will to be probated through the court system.

Once the trust is created, homes, bank and investment accounts and any other asset you want to be owned by the trust are retitled in the name of the trust or directed to it upon death, depending on the type of asset and what your goals are. This is a step that sometimes gets forgotten, with terrible consequences. Once that’s done, then any documents that need to be signed regarding the trust are signed by you as the trustee, not as yourself. You can continue to sell or manage the assets as you did before they were moved into the trust.

See here for a more robust discussion of how a trust works versus a will.  https://www.galliganmanning.com/will-vs-living-trust-a-quick-and-simple-reference-guide/

There are many kinds of trusts for particular situations. A Special Needs Trust, or “SNT,” is used to help a disabled person, without making them ineligible for government benefits. A Charitable Trust is used to leave money to a favorite charity, while providing income to a family member during their lifetime.

Assets that are placed in trusts do not go through the probate process and can control how your assets are distributed to heirs, both in timing and conditions.

An Irrevocable Trust is permanent and once created, cannot be changed subject to a few caveats. This type of trust is often used to save on estate taxes, by taking the asset out of your taxable estate. Funds you want to take out of your estate and bequeath to grandchildren are often placed in an irrevocable trust.  These types of trust are becoming more and more useful as the estate tax exemption is expected to go down leaving more and more clients exposed to potential estate taxes.

If you have relationships, properties or goals that are not straightforward, talk with your estate planning attorney about how trusts might benefit you and your family. Here’s a few reasons for a trust and why this makes sense:

Reducing estate taxes. While the federal exemption is $11.58 million in 2020 and $11.7 million in 2021, state estate tax exemptions are far lower. New York excludes $6 million, Massachusetts exempts $1 million, Texas has none at all.  Some states are even more complicated in having inheritance tax (taxes are applied against the exact amount transferred).  Further, it is widely accepted that the federal estate tax exemption will be lowered as well.  An estate planning attorney in your state will know what your state’s estate taxes are, and how trusts can be used to protect your assets.  You can also see here for a recent article I wrote on life insurance trusts as a good example of a common trust used to reduce estate tax exposure.  https://www.galliganmanning.com/the-irrevocable-life-insurance-trust-why-should-you-have-one/ 

If you own property in a second or third state, your heirs will face a second or third round of probate and estate taxes. If the properties are placed in a trust, there’s less management, paperwork and costs to settling your estate.

Avoiding family battles. Families are a bit more complicated now than in the past. There are second and third marriages, children born to parents who don’t feel the need to marry and long-term relationships that serve couples without being married. Trusts can be established for estate planning goals in a way that traditional wills do not. For instance, stepchildren do not enjoy any legal protection when it comes to estate law. If you die when your children are young, a trust can be set up so your children will receive income and/or principal at whatever age you determine. Otherwise, with a will, the child will receive their full inheritance when they reach the legal age set by the state. An 18- or 21-year-old is rarely mature enough to manage a sudden influx of money. You can control how the money is distributed.

Protect your assets while you are living. Having a trust in place prepares you and your family for the changes that often accompany aging, like Alzheimer’s disease. A trust also protects aging adults from predators who seek to take advantage of them. Elder financial abuse is an enormous problem, when trusting adults give money to unscrupulous people—even family members.

Talk with an estate planning attorney about your wishes and your worries. They will be able to create an estate plan and trusts that will protect you, your family and your legacy.

Reference: Market Watch (Dec. 4, 2020) “3 Reasons a trust may make sense for your family even though your name isn’t Trump, Gates or Rockefeller”

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Long Distance Caregiving During These Difficult Times

A well thought out plan is the key to effective long distance caregiving.
A well thought out plan is the key to effective long distance caregiving.

Trying to coordinate long distance caregiving is a challenge for many. Add COVID-19 into the mix, and the situation becomes even more difficult, reports the article “When your parent is far away and you are trying to care for them” from the Pittsburgh Post-Gazette.

If you are in the position of having to care for a loved one long distance, the starting point is to have the person you are caring for give you legal authorization to act on their behalf to make financial and medical decisions for them. A financial power of attorney (known as a Statutory Durable Power of Attorney in Texas) naming you as agent will allow you to help manage your loved one’s financial affairs.  It is also important that the person give you a HIPAA Release. HIPAA (Health Insurance Portability and Accountability Act) is the law that governs the use, disclosure and protection of sensitive patient information. With a HIPAA Release you will be able to receive medical information relating to the person you are caring for and to discuss matters with the person’s health care providers.

Next, find out where all of their important documents are, including insurance policies (long-term care, health, life, auto, home), Social Security and Medicare cards. You’ll also want to be able to access tax documents which will provide you with information on retirement accounts, bank accounts and investments. Don’t forget to ask your loved one for family documents, including birth, death, and marriage certificates, which may be necessary to claim benefits. Make copies of these documents so that you can make appropriate decisions for your loved one, even from a long distance.

Ask your family member whether he or she has completed their estate planning, and whether they want to make any changes. You may wish to review with your loved one changes that indicate when an estate plan should be updated. See https://www.galliganmanning.com/when-to-update-your-estate-plan/.

Put all of this information into a binder, so you have access to it easily.

Consider setting up a care plan for your family member to take care of things that come up when you can’t be there. Think about what kind of care do they have in place right now, and what do you anticipate they may need in the near future? There should also be a contingency plan for emergencies, which seem to occur when they are least expected and which make long distance caregiving especially difficult.

A geriatric care manager or a social worker who can do a needs assessment can help coordinate services, including shopping for groceries, administering medication and help with food preparation, bathing and dressing. If possible, develop a list of neighbors, friends or fellow worshippers who might create a local support system that compliments your long distance caregiving.

Keeping in touch is very important. These days, many are doing regular video calls with their family members. Conference calls with caregivers and your loved one is another way keep everyone in touch.

Long distance caregiving is difficult, but a well-thought out plan and preparing for all situations will make your loved one safer.

Reference: Pittsburgh Post-Gazette (Sep. 28, 2020) “When your parent is far away and you are trying to care for them”

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