Marcia felt lucky, having bargained for and gotten full custody of her children in the divorce settlement. But at times like these, with a car repair and tow bill looming, she knew the property she gave up in exchange would have made things easier. But she and the children would get by, like they always did. She couldn’t wait for her divorce to be final, so she could put this behind her and move on to better things.
Marcia never saw the car that swerved off the road and into the grass, hitting her and killing her instantly.
Planning for the unexpected.
Two days later, Marcia’s brother cried over the phone to the claims adjuster that they didn’t have the money to give her a funeral. The adjuster explained that the woman who killed Marcia acknowledged she was at fault, the insurance company had a $50,000 check ready to go, but they could not release it until they knew who to make the check out to. “If she had an executor named in a will, we could give them the funds today,” she said. “Normally, the only person we could write the check out to would be her husband, but knowing the situation with her impending divorce, our company decided to wait until things are more clear.”
While some of the details have been changed, this story is absolutely true. In the end, the insurance money and all of Marcia’s property were given to her children––in the custody of her almost-ex-husband until they turned 18.
When you’re married, it’s easy to avoid planning an estate; most things automatically go to your spouse. But when you’re getting a divorce, you have to give extra thought to the possibility that you won’t be here––which is why you should take the same approach to estate planning that you do to every other aspect of the process: think about what you want, put it in writing, minimize legal hassles and make sure your assets reflect your plan.
What do you wish for?
It’s not enough to say you want to take a trip, get in the car and drive—you have to know where you want to go. It’s the same with estate planning. In fact, a good estate planning attorney will listen to your opinions and goals before suggesting any courses of action. “Far too often, attorneys will herd Will and Trust clients into cookie-cutter plans and documents based on their own personal opinions or according to a client’s net worth,” Raleigh-based estate planning attorney Jeffrey G. Marsocci said. “They’re not digging deep enough to put together a plan that reflects your wishes.”
One of the most important but often under-stressed things to consider is the age when beneficiaries gain control of inherited property. Unfortunately, when people fail to plan, property is inherited by children at age 18. “When I remember what I was like at that age and imagine what most children are like, the thought of giving even a hundred thousand dollars to an 18-year-old is frightening,” computer programmer and high-tech executive Adrian Klingel said. “Even if drugs or alcohol are not an issue, I can still see money being wasted on a Hummer SUV and trips to Myrtle Beach instead of being saved for college. In my estate planning documents, I set an age of 25 before my children would receive any control.”
Klingel’s feelings are typical. While most people generally feel that 25 is a good minimum age, they also wonder about beneficiaries maintaining a certain standard of living and providing for higher education. Not to worry. Here’s where a trustee comes into the picture.
Trust the trustee.
A trustee oversees property and investments for a young beneficiary. “Most divorced clients prefer to have a person they trust handle property rather than leaving it to their former spouse,” Marsocci said. “A trustee does not need to be a financial advisor or attorney – just have enough sense to work with these professionals when needed.”
Generally, a good trustee should make decisions about spending money for certain expenses, and financial advisors should decide what bonds, mutual funds or other investments are needed. “Trustees shouldn’t have to worry about putting either 20% or 30% of the funds in the stock market, but they should decide whether or not it’s in the beneficiary’s best interest to pay for college tuition at UNC Chapel Hill versus paying for a tattooing and body piercing art school in India,” Marsocci said. “Leave fund management in the hands of a good financial advisor or broker, and keep the decisions about spending those funds in the hands of the trustee.”
These are just two things people should talk about with an estate planning attorney. Other things to consider:
- Who do you want to nominate as guardians for any minor children?
- Do you have specific burial wishes?
- If you can’t communicate your wishes about your own healthcare decisions, who do you want making them?
- If you are diagnosed as terminal and incurable or in a persistent vegetative state, do you want to be left on life support?
Use the right tools.
Once you know what you want, it’s time to spell out your wishes. An estate planning attorney will generally draw up at least five documents: 1) Revocable Living Trust, 2) Healthcare Power of Attorney, 3) Living Will, 4) Financial Power of Attorney and 5) Last Will and Testament. It’s all a matter of having the right tool for each job.
The Last Will and Testament traditionally spells out wishes on property distribution, sets up any age restrictions and trusts, names executors and trustees and nominates guardians. For those divorced or divorcing, a good Will makes all this crystal clear. However, there are other options that may be more effective than a traditional Will.
A Revocable Living Trust is the Swiss Army Knife® of estate planning documents. (See “Minimize Legal Hassles,” below.) With it, you can handle all of the items in a Will without probate. “Probably one of the biggest wastes of time and money in the legal system is having a probate court oversee an estate where no one contests anything,” Marsocci said. “If an attorney doesn’t offer a revocable living trust as an option, then go to someone else. It is far easier, quicker, and less expensive in the long term to use a revocable living trust to distribute assets, name trustees and set up other conditions.”
A Healthcare Power of Attorney and a Living Will work hand-in-hand. A Living Will lays out your wishes on life support and artificial nutrition, should you reach the point where the doctors have to ask someone about “pulling the plug.” By writing down your wishes ahead of time, a doctor no longer has to put that burden on anyone else. A Healthcare Power of Attorney appoints someone to make all other healthcare decisions if you can’t do so yourself. “If you aren’t yet divorced, then your spouse is still your next of kin,” Marsocci pointed out. “While some divorces are amicable, I can’t think of anyone worse to make healthcare decisions for you than your soon-to-be ex.”
Finally, a Financial Power of Attorney, often called a durable power of attorney, lets someone of your choosing manage your accounts and property if you become unable to handle your own affairs. “The alternative is to have the court appoint a guardian,” Marsocci said. “Most people would rather choose their own representatives and avoid the costs of a court proceeding.”
There are many other “specialty” tools available for specific circumstances––and as ways to save on estate taxes. Talk to an estate planning attorney to find out which make sense for you.
Minimize legal hassles
A Revocable Living Trust is an excellent example of the benefits of planning ahead. Unlike a Will, it allows you to pass property on to children or other beneficiaries, without the costs, inventories, meetings, delays and frustrations that come with probate court. Many studies show that between 3% and 8% of assets are wasted through probate, and delays of 9 to 16 months are common.
“In general, most clients want to avoid the court system whenever possible, and this is a great way to make sure your wishes after death are obeyed without getting a court involved,” Marsocci said. “It also saves significantly on the cost of transferring property to beneficiaries, and it keeps your estate plan from becoming a public document open to everyone, as is the case with a Last Will and Testament. It’s strange but true; I have seen marketing people going through the probate files at the courthouse, writing down beneficiary contact information and the amounts of their inheritance. Would you want anyone knowing that your 20-year-old son is getting $300,000?”
A Last Will and Testament is still a vital part of an estate plan, but when written in conjunction with a Revocable Living Trust, it is much simpler. This specific type of Will––frequently called a “Pour-Over Will”––names the Trust as the sole beneficiary in case any property mistakenly ends up in probate. It also handles nominations of guardians for minor children and spells out burial or cremation wishes. “If a Pour-Over Will ends up in probate, all the marketing people see is that a trust is receiving a certain amount of property,” Marsocci said. “All of the beneficiary information stays away from prying eyes.”
Match the assets to the plan.
Just as “the devil is in the details” in divorce agreements (and everything else in life), a good estate plan is only effective if all the little stuff is taken care of––improperly titled property, for example, can destroy an otherwise solid estate plan. And a Will or Trust does not control life insurance money if the policy has different named beneficiaries––to get your wishes carried out, you have to change the beneficiary to your estate or revocable living trust.
“Imagine an estate where the main asset is a $1 million life insurance policy, and the person who died wanted it to be held in trust for their child until age 30, with money only being used for basic living expenses and education until then,” Marsocci explained. “Their Revocable Living Trust spelled out all of the details, but the policy named the child instead of the Trust as the beneficiary. So an 18-year-old child gets the $1 million right away and can spend it on whatever she wants.”
In addition to life insurance, all assets that have a title or account name of some sort must be reviewed to make sure the ownership and beneficiary designations are correct: IRAs and 401ks, homes and property, mutual funds and investments, life insurance and annuities. There are a lot of tax and legal implications in how this is done. “While it is often easier and less costly for clients to handle these details with their own financial advisor or bank, they usually need to be told exactly how to do it,” Marsocci said. “And when in doubt, have the advisor or bank call the attorney to make sure it’s done right.”
Estate planning can seem like a daunting task and it is easily put off for another day, especially for people going through a divorce. However, it’s better to be safe than sorry, and good divorce and estate planning attorneys can work together to make sure that you are fully protected.
