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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That Last Step: Trust Funding

A trust only controls the assets it owns, so don’t forget the critical last step in a trust estate plan: properly funding the trust.

Neglecting to fund trusts is a surprisingly common mistake, and one that can undo the best estate plans. Many people put it on the back burner, then forget about it, says the article “Don’t Overlook Your Trust Funding” from Forbes.

If you read our blogs routinely, you’ll know we are fans of trust planning.  Done properly with appropriate trust funding, a trust helps avoid probate, provides for you and your family in the event of incapacity and streamlines the estate process.

Creating a revocable trust gives you control. With a revocable trust, you can make changes to the trust while you are living, including funding. Think of a trust like an empty box—you can put assets in it now, or after you pass. If you transfer assets to the trust now, however, your executor won’t have to do it when you die.

Note that if you don’t put assets in the trust while you are living, those assets may go through the probate process. While the executor will have the authority to transfer assets, they’ll have to get court to appoint them as executor first. That takes time and costs money. It is much better if you do it yourself while you are living.

A trust helps if you become incapacitated. You may be managing the trust while you are living, but what happens if you die or become too sick to manage your own affairs? If the trust is funded and a successor trustee has been named, the successor trustee will be able to manage your assets and take care of you and your family. If the successor trustee has control of an empty, unfunded trust, it may not do very much good.  Instead, an agent under a power of attorney, or if none, a court-appointed guardian may have to be appointed.

Move the right assets to the right trust. It’s very important that any assets you transfer to the trust are aligned with your estate plan. I cannot stress this enough, but you should speak with an attorney regarding how to fund your specific trust.  Not all plans and assets are the same, and different plans call for different trust funding.   That said, taxable brokerage accounts, bank accounts and real estate are usually transferred into a trust either immediately during lifetime or upon death via a beneficiary designation. Some tangible assets may be transferred into the trust, as well as business interests.  Some assets, such as life insurance and retirement funds may designate the trust in some manner by beneficiary designation, but in light of the Secure Act changes you’ll definitely want to discuss that with your attorney.   See here for more:  https://www.galliganmanning.com/how-the-secure-act-impacts-your-estate-plan/

Your estate planning attorney, financial advisor and insurance broker should be consulted to avoid making expensive mistakes. You should also consider trust funding when you review your estate plan to ensure it is updated with new assets.

You’ve worked hard to accumulate assets and protecting them with a trust is a good idea. Just don’t forget the final step of funding the trust.

Reference: Forbes (July 13, 2020) “Don’t Overlook Your Trust Funding”

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Five Estate Planning Mistakes to Avoid

Five common estate planning mistakes are easy to avoid with the right information and support, as well as a little creativity.

While it’s true that no estate is completely bulletproof, there are mistakes that people make that are big enough to walk through, while others are more like a slow drip, making things harder in a slow but steady process. There are common estate planning mistakes that can be easily avoided, reports Comstock Magazine in the article “Five Mistakes to Avoid When Planning Your Estate.”

  1. Misunderstanding Estate Law. Some people are so thrown by the idea of an estate plan, that they can’t get past the word “estate.” You don’t need a mansion to have an estate. An “estate” does not mean extreme wealth.  The term is actually used to refer to any and all property that a person owns, regardless of debts. Even people with modest estates need a plan to help beneficiaries avoid unnecessary costs and stress, and typically estate planning is even more critical for such individuals. Talk with an estate planning attorney to learn what your needs are, from a will to trusts to incapacity planning. Make sure that this is the attorney’s key practice area.  A real estate attorney, family law attorney or the friend or family member who is a lawyer won’t have the same knowledge and experience.
  2. Getting Bad or Incomplete Advice. It takes a team to create a strong estate plan. That means an estate planning attorney, a financial advisor and an accountant. Look for a firm that will tailor an estate plan specifically to your goals. The is no one size fits all approach, and many tools are needed for a complete estate plan. Buying an insurance policy or an annuity is not an estate plan, but may helps achieve those goals.
  3. Naming Yourself as a Sole Trustee without a Back-up. Naming yourself as a sole trustee puts you and your estate in a precarious position. What if you develop Alzheimer’s or are injured in an accident? A trusted individual, a family member, a longstanding friend or even a professional trustee, needs to be named to protect your interests, if you should become incapacitated.  This is also why you should have Durable Financial Powers of Attorney and Healthcare Powers of Attorney, among other documents, to ensure someone you trust may act on your behalf if you cannot.
  4. Losing Track of Assets. Without a complete list of all assets, it’s nearly impossible for someone to know what you own and who your heirs may be. Some assets, including retirement funds, life insurance policies, or investment accounts, have named beneficiaries. Those people will inherit these assets, regardless of what is in your estate plan. If your heirs can’t find the assets, they may be lost or there may be a long delay in obtaining them. If you don’t update your beneficiaries, they may go to unintended heirs—like children of prior relationships, someone other than your spouse and so on.
  5. Deciding on Options Without Being Fully Informed. When it comes to estate planning, the natural tendency is to go with what we think is the right thing. For example, people often say “I just need a will,” but learn later that the will requires probate, or doesn’t address the disability of a child.  However, unless you are an estate planning attorney, chances are you don’t know what the right thing is. For tax reasons, for instance, it may make sense to transfer assets, while you are still living. However, that might also be a terrible idea, if you choose the wrong person to hold your assets or don’t put them in the right kind of trust.  It may also make sense to leave income taxable assets to charities, and non-income taxable assets such as life insurance, to individuals.  You don’t know what you don’t know, so it is important to work with an estate planning attorney to craft the plan that’s right for you.   See here for some estate planning frequently asked questions to get you started.  https://www.galliganmanning.com/estate-planning-questions/

Estate planning is still a highly personal process that depends upon every person’s unique experience. Your family situation is different than anyone else’s. An experienced estate planning attorney will be able to create a plan and help you to avoid the big, most commonly made mistakes.  Please contact our office to discuss how your plan can avoid these estate planning mistakes.

Reference: Comstock Magazine (Dec. 2019) “Five Mistakes to Avoid When Planning Your Estate”

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