Estate Planning after Divorce

Divorce changes your estate plan, so make sure to update it and your beneficiary designations after the divorce.

Estate planning after divorce takes careful consideration.  Without a spouse as the center of an estate plan, the executors, trustees, guardians or agents under a power of attorney and health care proxies will have to be chosen from a more diverse pool of those that are connected to you.

Wealth Advisor’s recent article entitled “How to Revise Your Estate Plan After Divorce” explains that beneficiary forms tied to an IRA, 401(k), 403(b) and life insurance will need to be updated to show the dissolution of the marriage.

There are usually estate planning terms that are included in agreements created during the separation and divorce. These may call for the removal of both spouses from each other’s estate planning documents, assets, bank and retirement accounts. For example, in Texas, bequests to an ex-spouse in a will prepared during the marriage are voided after the divorce. Even though the old will is still valid, a new will has the benefit of realigning the estate assets with the intended recipients and avoiding difficulties in probating the will.

However, any trust created while married is treated differently. Revocable trusts can be revoked, and the assets held by those trusts can be part of the divorce. Irrevocable trusts involving marital property are less likely to be dissolved, and after the death of the grantor, distributions may be made to an ex-spouse as directed by the trust.

A big task in the post-divorce estate planning process is changing beneficiaries. Ask for change of beneficiary forms for all retirement accounts. Without a stipulation in the divorce decree ending their interest, an ex-spouse still listed as beneficiary of an IRA or life insurance policy may still receive the proceeds at your death.  Sometimes beneficiary designations or retitling of assets occur during the divorce process, but often they occur after resolving the divorce and aren’t complete by the time an estate planning attorney needs to be involved.

Divorce makes children assume responsibility at an earlier age. Adult children in their 20s or early 30s typically assume the place of the ex-spouse as fiduciaries and health care proxies, as well as agents under powers of attorney, executors and trustees.  Many clients often try to coordinate their estate plans with their ex-spouses to ensure their mutual children are provided for.

If the divorcing parents have minor children, they must choose a guardian to care for the children, in the event that both parents pass away.  This was always true, but the need for it is heightened if parents aren’t on the same page.

Ask an experienced estate planning attorney to help you with the issues that are involved in estate planning after a divorce.

Reference: Wealth Advisor (July 7, 2020) “How to Revise Your Estate Plan After Divorce”

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Can I Protect My Estate with Life Insurance?

Life insurance is a powerful estate planning tool which protects the estate by providing liquidity to preserve assets and to pay estate taxes and expenses.

With proper planning, insurance money can pay expenses, such as estate tax and keep other assets intact, says FedWeek’s article entitled “Protect Your Estate With Life Insurance.”

The article provides the story of “Bill” as an example. He dies and leaves a large estate to his daughter Julia. There are significant estate taxes due. However, most of Bill’s assets are tied up in real estate and an IRA. Julia may not want to hurry into a forced sale of the real estate. If she taps the inherited IRA to raise cash, she’ll be forced to pay income tax on the withdrawal and lose a valuable opportunity for extended tax deferral.

A wise move for Bill would be to purchase life insurance on his own life. The policy’s proceeds could be used to pay the estate tax bill. Julia will then be able to keep the real estate, while taking only the Required Minimum Distributions (RMDs) from the inherited IRA. It might make sense if Julia owns the insurance policy or it’s owned by a trust as well.  See here for more details on how that might work for you.  https://www.galliganmanning.com/trust-owned-life-insurance-in-your-estate-plan/

However, there are a few common life insurance errors that can damage an estate plan:

Designating the estate as beneficiary. If you make this move, you put the policy proceeds in your estate, where the money will be exposed to estate tax and your creditors. Your executor will also have additional paperwork, if your estate is the beneficiary. Instead, be certain to name the appropriate beneficiaries.

Designating a single beneficiary. Name at least two “backup” or contingency beneficiaries. This will eliminate some confusion in the event the primary beneficiary should predecease you.

Designating your revocable trust.  If estate taxes aren’t a concern and you use a trust-based estate plan, sometimes designating your trust as a beneficiary is a great idea as it provides liquidity to your family for estate expenses.

Placing your life insurance in the “file and forget” file. Be sure to review your policies at least once every three years. If the beneficiary is an ex-spouse or someone who has passed away, you need to make the appropriate change and get a confirmation, in writing, from your life insurance company.

Inadequate insurance. You may not have enough life insurance. If you have a young child, it may require hundreds of thousands of dollars to pay all of his or her expenses, such as college tuition and expenses, in the event of your untimely death. Skimping on insurance may hurt your surviving family. You also don’t need to be so thrifty, because today’s term insurance costs are very low.

As you can see, life insurance may be a powerful estate tool.  Speak with your advisor and your estate planning attorney on how best to incorporate life insurance in your estate plan.

Reference: FedWeek (June 11, 2020) “Protect Your Estate With Life Insurance”

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Dividing Personal Items After Death

Many executors wonder how to distribute personal items after a family member's death.
Many executors wonder how to distribute personal items after a family member’s death.

Sometimes, deciding how to divide a family member’s personal items after death can lead to more conflict and bad feelings than dividing up cash and other property.  Many executors wonder how they can do this without causing rifts in the family.

Minneapolis Tribune’s article entitled “A clever way to divvy up items after a parent’s death” describes an unusual plan one family had to divide their mother’s personal property after her death.

According to the article, after their mother’s death at age 93, the co-executors, a brother and a sister, created an inventory of 724 items in her estate that had monetary or sentimental value. These included things like furniture, artwork, oriental rugs, cutlery, china, a piano and a car. They didn’t include their mother’s jewelry, books or linens, or her silver, gold and collectible coins. The four siblings (including the co-executors) all agreed to sell the coins and to deal with the many books, linens,  jewelry, and other items more informally.

The family decided not to follow the usual process of taking turns to choose items they wanted. With so many items, that could take a while. Instead, the co-executors gave each sibling an inventory of their mother’s personal property, with the request that each sibling indicate on the inventory the items he or she wanted. This resulted in the 724 items of personal property being divided into three groups: (a) items in which no one had an interest; (b) items in which only one person had an interest; and (c) those desired by two or more siblings. The items in which no one had an interest were sold or given away. The items wanted by only one person went to that person.

The co-executors then distributed to the siblings a list of the items in which more than one of them had expressed an interest. Each sibling was “given” 500 virtual poker chips that he or she could use to bid for the contested items. However, prior to the bidding deadline, the siblings could talk with one another about their intentions and whether they could come to an agreement regarding specific items. Several of the siblings had bid for items in a general category, such as family pictures, bookcases and oriental rugs. They were able to agree among themselves who would receive which items from those general categories, thus preserving their virtual poker chips for what they really wanted.

After the final bids were in, the co-executors announced who won each item, but, to avoid possible conflict or disagreement on values, they did not reveal how much was bid for each item.

Finally, when all the allocations were determined, the co-executors calculated the value of all the items of personal property received by the siblings and readjusted the estate’s cash distributions to ensure that everyone came out in the same place financially. The most valuable items were a 1919 Steinway drawing room grand piano valued at $25,000; a 2005 Toyota Camry valued at $4,500; and some oriental rugs with a total value of $13,975. Those who got the more valuable items had to pay their siblings something for them, with a total of $17,500 trading hands.

Though it was time-consuming, the process avoided the tensions that sometimes result when personal property is distributed. The siblings involved believed their system was fair and even brought them closer together.

One thing to remember is that you don’t have to leave it to your executor to decide how to divide your personal property. You can leave your executor written instructions on how you wish certain items of sentimental value to be distributed. See https://www.galliganmanning.com/how-a-letter-to-your-executor-or-trustee-conveys-your-wishes/

Reference: Minneapolis Tribune (Feb. 25, 2020) “A clever way to divvy up items after a parent’s death” 

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