Protecting Inheritance from Child’s Divorce

Parents are often (maybe not always) excited when their children marry.  It’s exciting to see their adult child find a spouse, build a home, settle down and maybe think about grandchildren down the road.  However, even if the parent adores the person their child loves, it’s wise to prepare to protect our children with our plans now, says a recent article titled “Worried about Your Child’s Inheritance If They Divorce? A Trust Can Be Your Answer” from Kiplinger.  After all, things happen and sometimes relationships don’t go the way we expect.  Protecting inheritance through prudent planning will keep the inheritance with your child if they divorce.

With the federal estate tax exemptions so high (although that may change in the very near future), planners were able to focus on other concerns in estate plans, not just taxes.  A more applicable concern for most people was how well your children will do, if and when they receive their inheritance.

Some people recognize that their children are at risk. They worry about potential divorces or a spendthrift spouse. The answer is estate planning, and more specifically, a well-designed trust. By establishing a trust as part of an estate plan, you can better protect inheritance.

If an adult child receives an inheritance and commingles it with assets owned jointly with their spouse—like a joint bank account—depending upon the state where they live, the inheritance may become a marital asset and subject to marital property division, if the couple divorces.  This is the reason these types of trusts are so important. It’s like putting the toothpaste back into the tube, you put these assets back into a protected trust once it’s owned by the child.

If the inheritance remains in a trust account, or if the trust funds are used to pay for assets that are only owned in the child’s name, the inherited wealth can be protected. This permits the child to have assets as a financial cushion, if a divorce should happen.

Placing an inheritance in a trust is often done after a first divorce, when the family learns the hard way how combined assets are treated. Wiser still is to have a trust created when the child marries. In that way, there’s less of a learning curve (not to mention more assets to preserve).

Here are three typical situations for protecting inheritance:

Minor children. Children who are 18 or younger cannot inherit assets. However, when they reach the age of majority, they legally can. A sudden and large inheritance is best placed in the hands of a trustee, who can guide them to make smart decisions and has the ability to deny requests that may seem entirely reasonable to an 18-year-old, but ridiculous to a more mature adult.  You can also set a more reasonable age for the beneficiary to take over their trust, such as 25 or 30.

Newlyweds. Most couples are divinely happy in the early years of a marriage. However, when life becomes more complicated, as it inevitably does, the marriage may be tested and might not work out. Setting up a trust after the couple has been together for five or ten years is an option.

Marriage moves into the middle years. After five or ten years, it’s likely you’ll have a clearer understanding of your child’s spouse and how their marriage is faring. If you have any doubts, talk with an estate planning attorney, and set up a trust for your child.

Estate plans should be reviewed few years, as circumstances, relationships and tax laws change. A periodic review with your estate planning attorney allows you to ensure that your estate plan reflects your wishes and that it is protecting inheritance for your loved ones.

Reference: Kiplinger (April 16, 2021) “Worried about Your Child’s Inheritance If They Divorce? A Trust Can Be Your Answer”

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When to Update your Estate Plan?

Waiting too long to update an estate plan may lead to bad plans and hurt families. Here are some milestones when you should consider changes.

Many people say that they’ve been meaning to update their estate plan for years but never got around to doing it.   Our office is located near the hospital system, so we get a lot of calls for last minute changes, which is difficult, and sometimes not possible.  Worst of all, we occasionally have to probate out of date wills or administer old trusts that left complicated, unnecessary tax planning, unsuitable executors or trustees, or in some cases, beneficiaries the client meant to change, but never did.

As a way to avoid those scenarios, this blog will talk about when you need to review your estate plan.  This isn’t exhaustive and the best approach is to review the plan every few years, but these major life events often indicate a need to change your plan.  The list as follows comes from Kiplinger’s article entitled “12 Different Times When You Should Update Your Will” and gives us a dozen times you should think about changing your estate plan, as well as a few more of my own:

  1. You’re expecting your first child. The birth or adoption of a first child is typically when many people draft their first estate plan. In Texas the designation of a guardian for the child happens outside a will, but it is still important to provide a trust and trustee for that child in your estate plan as well.
  2. You may divorce. Update your estate plan before you file for divorce, because once you file for divorce, your estate plan and assets may not be able to change until the divorce is finalized. Doing this before you file for divorce ensures that your spouse won’t get all of your money if you die before the divorce is final.
  3. You just divorced. After your divorce, your ex no longer has any rights to your estate (unless it’s part of the terms of the divorce). However, even if you don’t change your estate plan, most states have laws that invalidate any distributive provisions to your ex-spouse in that old will. Nonetheless, update your estate plan as soon as you can, so your new beneficiaries are clearly identified and that any obligations created in the divorce are fulfilled.
  4. Your child gets married. Your current estate plan may speak to issues that applied when your child was a minor, so it may not address your child’s possible divorce. You may be able to ease the lack of a prenuptial agreement by creating a trust for your child in your estate plan to keep those assets out of the marriage.
  5. A beneficiary has issues. Estate plans frequently leave money directly to a beneficiary. However, if that person has an addiction or credit issues, update your estate plan to include a trust that allows a trustee to only distribute funds under specific circumstances.  It is often a good idea to create such a trust anyway in case issues arise in the future.
  6. Your executor or a beneficiary die or are incapacitated. If your estate plan named individuals to manage your estate or receive any remaining funds, but they’re no longer alive or suffering bad health, you should update your entire estate plan (especially powers of attorney).
  7. Your child turns 18. Your current estate plan may designate your spouse or a parent as your executor, trustee or other fiduciary, but years later, these people may be gone or not suitable. Consider naming a younger family member to handle your estate affairs.
  8. A new tax or probate law is enacted. Congress may pass a bill that wrecks your estate plan. Review your plan with an experienced estate planning attorney every few years to see if there have been any new laws relevant to your estate planning.  It is also a good idea to keep reading blogs like this one as we try to address significant changes that might affect you.
  9. You receive a financial windfall or loss. If you finally get a big lottery win or inherit money from a distant relative, update your estate plan so you can address the right tax planning. You also may want to change when and the amount of money you leave to certain individuals or charities.  Similarly, a significant financial loss may mean you can jettison unnecessary tax planning and can simplify your plan.  I find many people change their minds on beneficiaries if they think they will leave less money as well.
  10. You can’t find your original estate plan. This happens more than people realize.  If you cannot find your original Will or other estate planning documents, you should consider executing a new one.  First, if you can’t find it that typically indicates it’s so old it needs updating anyway, but in the case of wills you should probate the original.  It is sometimes possible to probate a copy, but that isn’t a given and you should avoid that scenario.
  11. You purchase property in another country or move overseas. Some countries have treaties with the U.S. that permit reciprocity of wills, but how well that works is another matter.  Transferring property in one country may be delayed, if the will must be probated in the other country first. Ask your estate planning attorney about how to address property in multiple counties.
  12. You relocate to a new state.  Estate plans don’t always need to change when you relocate, but there are nuances to each state’s estate and tax laws, so you should consult with a local attorney after you move.  For example, Texas is a community property state that changes how property is owned going forward for married couples and has no estate tax.  A new resident coming from a common law property state with a state estate tax like New York might benefit from a new plan.
  13. Your feelings change for someone in your estate plan. If there’s animosity between people named in your estate plan, you may want to disinherit someone or change your estate plan. You might ask your estate planning attorney about a No Contest Clause that will disinherit the aggressive family member, if he or she attempts to question your intentions in the estate plan.
  14. You get married (or remarried).  One milestone I like to point out that a surprising number of people don’t consider, is updating your estate plan after you get married or in the event you remarry.  Many people assume that their spouse becomes an automatic beneficiary of their estate plan, which isn’t true, although all states give some rights to the new spouse.  It is far better, especially in a second marriage where step children are involved, to update your estate plan to exactly what you want for you and your loved ones.
  15. Your own bad health.  One milestone I’m particularly sensitive to is your own bad health, especially cognitive health such as dementia or Alzheimer’s.  Many clients prepare plans when they are young that aren’t considering long term care, Medicaid or other planning, so that should be complete before incapacity prevents it.

Reference: Kiplinger (May 26, 2020) “12 Different Times When You Should Update Your Will”

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Twelve Reasons to Update your Estate Plan

Clients know they are supposed to review their estate plans, but don’t know when to do it. Here are twelve times when it makes sense to review your plan.

Estate planning lawyers hear it all the time—people meaning to update their estate plan, but somehow never getting around to actually getting it done. The only group larger than the ones who mean to “someday,” are the ones who don’t think they ever need to update their documents, says the article “12 Different Times When You Should Update Your Will” from Kiplinger. The problems become abundantly clear when people die, and survivors learn that their will or trust is so out-of-date that it creates a world of problems for a grieving family.  For the purposes of this article I’ll focus on property planning, meaning wills and trusts, but there are lots of other reasons to review and update your entire estate plan.

There are some wills and trusts that do stand the test of time, but they are far and few between. An obvious example is that some people shift from wills to trusts as their primary estate planning vehicle.  Families also undergo all kinds of changes, and those changes should be reflected in the will or trust. Here are twelve times in life when wills and trusts need to be reviewed:

Welcoming a child to the family. The focus is on naming a guardian and a trustee to oversee their finances. The will and trust should be flexible to accommodate additional children in the future.  In some cases, a new child may disrupt the estate plan if no provisions are made for them.

Divorce is a possibility. Don’t wait until the divorce is underway to make changes. Do it beforehand. If you die before the divorce is finalized, your spouse will have marital rights to your property. Once you file for divorce, in many states you are not permitted to change your estate plan, until the divorce is finalized. Make no moves here, however, without the advice of your attorney.

Your divorce has been finalized. If you didn’t do it before, update your estate plan now. Don’t neglect updating beneficiaries on life insurance and any other accounts that may have named your ex as a beneficiary.

When your child(ren) marry. You may be able to mitigate the lack of a prenuptial agreement, by creating trusts for your beneficiary, so anything you leave your child will be protected in the case of their divorce.

Your beneficiary has problems with drugs or money. Money left directly to a beneficiary is at risk of being attached by creditors or dissolving into a drug habit. Updating your estate plan to includes trusts that allow a trustee to only distribute funds under optimal circumstances protects your beneficiary and their inheritance for both themselves and for later beneficiaries.

Named executor, trustee or beneficiary dies. Your old will or trust may have a contingency plan for what should happen if a beneficiary, executor or trustee dies, but you should probably revisit the plan. Many times, clients have one answer for what happens if a fiduciary or beneficiary die while it is hypothetical, but feel differently once it happens.  If a named executor or trustee dies and you don’t update the estate plan, then what happens if the second dies?

A young family member grows up. Most people name a parent as their executor or trustee, then a spouse or trusted sibling. Two or three decades go by. An adult child may now be ready to take on the task of handling your estate.  This is one of the most obvious and common reasons for a younger client to update their estate plan.

New laws go into effect. In recent months, there have been many big changes to the law that impact estate planning, from the SECURE Act to the CARES act. Ask your estate planning attorney every few years, if there have been new laws that are relevant to your estate plan.  It is also a great idea to subscribe to legal blogs (like this one) to stay up to date on changes.

An inheritance, windfall or downfall. If you come into a significant amount of money, your tax liability changes. You’ll want to update your will, so you can do efficient tax planning as part of your estate plan.

Can’t find your will and/or trust? If you can’t find the original documents, especially with the will, then you need new documents. Copies of wills may only be probated with extra steps, so it is far better to redo the documents which will also serve to update it legally.

Buying property in another country or moving to another country. Some countries have reciprocity with America. However, transferring property to an heir in one country may be delayed, if the will needs to be probated in another country. Ask your estate planning attorney, if you need wills for each country in which you own property.  It is also worth considering changes if you acquire real property in a new state which may require probating in two states.

Family and friends are enemies. Friends have no rights when it comes to your estate plan. If you suspect that your family may push back to any bequests to friends, consider adding a “No Contest” clause to disinherit family members who try to elbow your friends out of the estate.

In all cases, it is important to review your estate plan every few years, but looking for these reasons to update our estate plan will help.  Changing your estate plan is also not as involved as one might think.  Changes to wills often require a new will, changes to trusts take a variety of forms (see here https://www.galliganmanning.com/amending-a-trust-what-are-your-options/) but are often not very involved.

If you haven’t reviewed your estate plan recently or need assistance with a review or updates, please call our office today.

Reference: Kiplinger (May 26, 2020) “12 Different Times When You Should Update Your Will”

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