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Protecting Trust Assets from Child’s Divorce (or Divorces)

Young couple with gift“If you don’t want money you’ve worked hard for to pass down to your son’s or daughter’s ex, then consider a trust.”

The federal estate tax exemption in 2017 is about $5.5 million per person or $11 million for married couples. As a result, creating a trust to save on taxes for your family when you pass away doesn’t have the attraction that it once did.

On the other hand, now more folks are considering a trust. This is because they’re concerned about their adult child losing their inheritance due to a failed marriage. When you establish a trust as part of a will or revocable living trust, you can help protect your child’s inheritance in a divorce settlement.

A recent Kiplinger’s article, “A Trust Can Protect Your Adult Child’s Assets from a Failed Marriage, takes a look at how this works.

It’s not uncommon for a child to get an inheritance and to combine it with assets he or she owns jointly with their spouse, like a bank account, car or house. Depending upon the state in where they reside, the inheritance may become marital property subject to division in the event of a divorce.

If the child’s inheritance stays in a trust account, the inherited wealth can be shielded from a divorce. Some people will leave their children’s inheritance in a trust after a first divorce, because of concerns that their hard-earned dollars might end up in the wrong pockets if he or she remarries. If a child marries again and it doesn’t work, the second ex-spouse will not get those trust assets.

 It is true that creating a trust can be more complicated and more expensive than an outright distribution. However, many people are willing to pay the price to protect their child’s wealth. Consider the following alternatives regarding the parents’ decision to leave assets in trust for their children:

  1. Children under age 18. If your child is under 18, you’re probably not considering his or her marriage or divorce. However, leaving assets in trust for a child may be a good plan. This is because a trustee will oversee the child’s assets and guide them in their decision-making with the funds. The trustee can also deny any financial requests. This is a valuable power, if a child is immature or easily influenced.
  2. A newly married child. After the honeymoon, the journey can get bumpy as life becomes more stressful and complex. They may have to deal with issues such as a job lay-off, health issues, financial worries or the stress of rearing children. Rather than creating a trust soon after your child’s marriage, see how the marriage progresses over the next few years.
  3. Marriage status. As mentioned above, after five years or more, you should determine your comfort level with your child’s relationship and how you feel about your son-or daughter-in-law. If you see acrimony or you just have a “gut feeling” about the union’s future, it may be smart to create a trust for your child’s inheritance.

You should look at estate plans as five-year plans, and review your will, trusts and other documents at least that often. You may not need to change them, but a periodic review can help you carefully evaluate relationships, finances and the emotional dynamics of your family.

Working with an estate planning lawyer, you can change the trust during your life, if family circumstances make it necessary.

Reference: Kiplinger (March 2017) “A Trust Can Protect Your Adult Child’s Assets from a Failed Marriage”

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Divorce After Age 50 and the Impact on Retirement Plans

Old couple on benchThere’s an increasing number of older adults who must address this issue. The divorce rate among U.S. adults 50 and older doubled between 1990 and 2010, and about one in four divorces include someone over 50. The data through 2014 found the rates have been about the same in subsequent years.
ABC News’ recent article, “Keeping Some Green in Gray Divorce,” says the reasons for the rise include longer lifespans, more women in the workforce, changing notions about marriage and higher rates of remarriage, which boost your odds of splitting.
Here are some things to consider when divorce suddenly becomes part of your retirement plan. The issues involved in a "gray divorce" are much like those of a divorce at any age, but things like limited working years ahead, complicated assets and adult children may make the process much tougher.
Be sure you have a team of professionals to guide you through the process. This should include an attorney, mediator, financial planner, accountant and a therapist. In a gray divorce, a financial expert is important because you have a lifetime of assets built up. Retirement finances are critical and complex, and you should seek the advice of professionals.
A big issue with an older couple is who gets to keep the family house. You should be receptive to alternatives that will leave you in a better position. Selling a home or choosing other assets in the settlement may give you the income you’ll need in the future. Plus, downsizing can significantly help manage your expenses.
The biggest challenge for individuals going through a gray divorce is making certain that there's enough money to provide a comfortable retirement. Consider and reexamine your options based on the settlement. You might need to delay retirement, return to work, downsize or make other adjustments.
Remember that healthcare can be expensive in retirement. If you’ve been married 10 years or more, you may qualify to receive spousal Social Security benefits.
Make sure you update all the legal agreements and accounts you've set up during the course of your marriage, especially wills, estate plans and beneficiary designations for retirement accounts.
Reference: ABC News (September 7, 2016) “Keeping Some Green in Gray Divorce”

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Financial Tips for After the Split

CalculatorDivorce can take a toll financially on both spouses, with this immediate financial burden resulting directly from the separation of the household. When a couple splits, they end up doubling their housing, utility and other regular costs. After this, there is the property division. This can stifle each spouse's progress toward long-term goals like retirement or the children's education.

Money's recent article, "Keep a Divorce From Killing Your Finances," offers several important tips for those going through or recently completing the divorce process.

Monitor assets in your divorce settlement: If you're in the midst of a divorce, examine the type of assets that you receive as part of your divorce property settlement. The reason for this is your cash flow. Even in cases where the math demonstrates an equal split between the two parties, one spouse could get stuck with a non-liquid asset, which might end up being difficult to liquidate if cash flow becomes a problem.

Factor in an asset's taxable status: For many couples, a $100,000 brokerage account—for which you'll only pay tax on capital gains or dividends—might be of greater value than a $100,000 tax-deferred retirement account because you'd have to pay income tax on withdrawals from that type of account.

Keep an eye on taxes and their effects: Taxation influences continuing income. For example, the payment of alimony is tax deductible, but the receipt of alimony is treated as ordinary income. However, child support is not taxable to the recipient, which may change the way you prepare your annual tax return and the amount you owe the IRS. Make sure you keep this in mind the next time you file your taxes.

Review and update paperwork: Once the divorce is final, both ex-spouses need to make sure to update all aspects of their financial lives. This includes beneficiary designations on pensions, 401(k)s, and life insurance (if not part of the settlement terms), as well as all estate planning documents—like your will, powers of attorney and trusts.

Reference: Money (March 1, 2016) "Keep a Divorce From Killing Your Finances"

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Tips on Conducting a Stress-Free Estate Sale

Bigstock-Stress-Free-Zone-Green-Road-Si-7150032“Choosing a trusted estate sales professional should not be taken lightly.”

Estate sales come at a time when families are at a crossroads resulting from one of the dreaded three D’s: death, divorce, and downsizing. For many, the task of organizing items acquired over a lifetime can be overwhelming, especially when coupled with having to determine each item’s value. It’s a task that can take novices not weeks but months, which is why many people enlist the help of professional estate sale planners.

The Casper Journal’s recent article, “Professionals can ease burden of planning estate sale,” provides some good advice on the subject.

Selecting a reputable estate sales professional is important. These are your possessions, and many of them are valuable.

When finding an estate sales person, ask your family, friends, and business professionals for recommendations. Your estate planning attorney may have some very good references.

Next, look into their business histories and customer reviews at the Better Business Bureau’s website, and conduct a search online to see what type of articles or reviews of their services have been posted.

You should then choose a few and interview these professionals in person before deciding on the company you want to engage. Ask them about their credentials, certifications, and education in the area of estate sales. Also, make sure that they are insured and bonded.

Ask for the names of three or four references. Contact them to find out about their experiences working with the company and whether or not they would hire them again.

Before signing the contract, make sure you understand it, and consider asking your attorney to review it for you. Just so there are no surprises, you’ll want to find out the following from the estate sales business you plan to use:

  • Does the company charge a flat fee or commission?
  • What is their commission and are there additional fees?
  • What services are included?
  • What do you need to prepare for the sale?
  • Is there an extra charge to clean before and after the sale?
  • How much time will they need to get the estate ready for the sale?
  • How are sales recorded?
  • Can the family attend?
  • How are discounts or negotiations handled?
  • What do they do with stuff that doesn’t sell?

Ask these questions well in advance so you’re totally prepared when the time comes to have an estate sale.

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

Reference: The Casper Journal (November 11, 2015) “Professionals can ease burden of planning estate sale

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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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