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Estate Planning after a Divorce

Estate-planning-after-divorceIf you're in the process of getting a divorce, money issues are likely to be a key point of discussion. Whether you're the spouse of a billionaire or part of a working class couple trying to divide up the bills, money is contentious. That's the central point of a new book, The New Love Deal, written by Chicago divorce attorney Gemma Allen, and Judge Michele Lowrance who spent 20 years handling domestic relations cases in divorce court and is now a divorce mediator.

Even after a divorce or separation, one can encounter money problems that stem from your relationship unless your agreement covers these issues, which can run from intertwined debt obligations (like a mortgage or credit card balances) to future support and the division of property. A recent article in the The Huffington Post, titled “Divorce and Money,”says that you should always listen to your attorney about the applicable laws in your state. In addition, the article says that you should also look at the following issues.

The division of property in a divorce is typically not taxable to either party. However, if instead of dividing marital property, one spouse agrees to monthly maintenance (alimony), this will be taxed as ordinary income. And it’s deductible to the paying spouse. The original article also notes that the spouse receiving the maintenance checks must make a quarterly estimated federal and state tax payment, so you need to plan accordingly.

There aren’t really any tax issues associated with child support payments, except for deciding who claims the children as dependents on their tax return. However, as you can imagine, these financial decisions for the children carry the potential for some problems down the road. Usually the parties agree as to who will fund college costs. Yet, when college tuition needs to be paid, that parent just might have a new family and new responsibilities. One option to avoid this headache is to set up a 529 college savings plan now to begin saving for that day.

Many divorce agreements include life insurance to fund future promises of payments. The spouse receiving the death benefit should be the owner and beneficiary of the policy with the ex-spouse making the premium payments. Without this arrangement, there’s nothing to keep an angry ex from changing the beneficiary on that policy.

Another critical issue after a divorce is estate planning. Once you're divorced you should create a new estate plan right away. This can include a will or revocable living trust, a healthcare power of attorney, and a living will. The court will have the ultimate say over the guardianship of your children; however, in a contested divorce, the court will take your written wishes into account. Consult an experienced estate planning attorney and make sure he or she takes you through a discussion on all of your options.

It isn't easy getting divorced, but when it’s over, you'll need to rebuild. Think about these areas as part of your divorce documentation.

For more information about estate planning, please visit my estate planning website.

Reference: The Huffington Post (March 18, 2015) “Divorce and Money”

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How to Pay for the Kids’ College

6881499716_e8f46fa096_bGiven the rising cost of most college tuitions, the complexity of college loan agreements and the difficulty for most middle-income families in simply maintaining their budget for ordinary daily household expenses, planning for your children’s college education is an important topic to consider at the earliest possible stages of a child's development. Fortunately, an established method of helping to accomplish this goal is the 529 college savings plan.

The Legal Intelligencers recent article titled “529 College Savings Plans: How They Work explains that the 529 college savings plan is a way to save and set aside money specifically for the purpose of funding higher education. It’s a tax advantaged investment program that’s designed to help you fund future qualified education expenses. The benefits are that it offers flexibility, control, and tax advantages—plus it’s available to anyone who wants to make contributions for qualifying higher-education expenses without income limits (like Grandma or a favorite uncle!).

The 529 owner keeps control of the assets and is allowed to choose how much and when money can be withdrawn. The owner can also change the beneficiary to a different family member related to the original beneficiary (see your estate planning attorney for the rules on this) whenever they like, and the investment allocation can be adjusted once a year.

You can also enjoy some federal income tax savings with a 529 plan because the account can grow tax free. But contributions are not deductible. Any withdrawals from the 529 made expressly for qualified higher-education expenses are also federal income tax free, but non-qualified withdrawals will be hit with regular federal income tax plus a 10% penalty.

One other feature of a 529 plan is that it can also be effective in estate planning. A 529 savings plan can decrease future estate taxes, as up to $14,000 of the annual gift tax exclusion per contributor can be taken when transferring assets to a child or grandchild (or up to $70,000 with a five-year election). When the assets are deposited in the 529 plan, the law says they are viewed as being removed from the account owner's estate, even though that owner still has control over the distribution of the plan itself.

Talk with an experienced estate planning attorney because there are many options available and your participation in a 529 plan doesn’t guarantee that the contributions and investment returns will be enough to cover higher education expenses. Contributors assume all investment risk, including the potential for loss of principal, and any penalties for non-educational withdrawals. Your state may offer state tax advantages to residents who participate in the in-state plan.

Again, speak to an experienced estate planning attorney to find out more.

For more information about estate planning, please visit my estate planning website.

Reference: The Legal Intelligencer (March 3, 2015) 529 College Savings Plans: How They Work

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