Should You Update Your Estate Plan?

Some reasons to update your will are more obvious than others, like marriage, divorce, remarriage, births and deaths. However, those aren’t the only reasons your estate plan needs to be reviewed, explains a recent article appropriately titled “When it comes to a will or estate plan, don’t just set it and forget it” from CNBC.

Think of your estate plan like your home. They both need regular updates and maintenance. If your house starts to get rundown or the roof springs a leak, you know you need to get it fixed. Your estate plan is not as visible. However, it is still in need of ongoing maintenance.

Health events should be a trigger, yours or people named in your will. If the person you named as your executor becomes ill or dies, you’ll need to name a new person to replace them. The same goes for a guardian named to care for any minor children, especially if you named a grandparent for this role.

If you move, your estate plan must ‘move’ with you. Each state has different laws regarding how estates are administered. In one state, an executor living out of state may be okay. However, in another, it may make the executor ineligible to serve. Inheritance tax laws also vary.

Any time there is a large change to your personal wealth, whether it’s good or bad, your estate planning attorney should review your will.

The same goes for a change in parental status. The birth of additional children seems like it might not require a review. However, it does. More than a few celebrities failed to update their estate plans and accidentally disinherited children. The same person who may be willing to be a guardian for one child, may find taking on two or three children to be too much of a challenge. If you want to change the guardianship, your estate plan needs to be updated.

A change in your relationship with fiduciaries also merits an update. Someone you named ten years ago to be your executor may no longer be a part of your life, or they may have died. Family members age, retire and move and siblings have changes in their own lives. Reviewing the executor regularly is important.

If a family member becomes disabled, you may need special needs planning.

A commonly overlooked trigger concerns mergers and acquisitions of financial institutions. If your bank is the executor of your estate and the bank is bought or sold, you likely have a new executor. Do you know who the person is, and do you trust their judgment?

Beneficiaries need to be checked every few years to be sure they are still correct. If your life includes a divorce and remarriage, you could be like one man whose life insurance proceeds and property went to his new spouse. His daughter was disinherited because he failed to update his will.

It doesn’t take long to review an estate plan or beneficiaries. However, the impact of not doing so could be long-lasting and cast a negative light on your legacy.

Reference: CNBC (March 1, 2022) “When it comes to a will or estate plan, don’t just set it and forget it”

Can I Protect My Inheritance from Divorce?

Even if divorce is the last thing on your mind, when an inheritance is received, it’s wise to treat it differently from your joint assets, advises a recent article “Revocable Inheritance Trust: Inexpensive Divorce Protection” from Forbes. After all, most people don’t expect to be divorced. However, the numbers have to be considered—many do divorce, even those who least expect it.

Maintaining separate property is the most important step to take. If you deposit a spouse’s paycheck into the account with your inheritance, even if it was by accident, you’ve now commingled the funds.

You might get lucky and have a forensic accountant who can dissect that amount and make the argument it was a mistake, as long as it only happened once, but the Court might not agree.

Long before the Court gets to consider this point, if your ex-spouse’s attorney is aggressively pursuing this one act of commingling as enough to make the property jointly owned, you could lose half of your inheritance in a divorce.

You might also try to mount a defense of the particular account or asset being separate property, by identifying the means of transfer. Was there a deed for real estate gifted to you from a parent or a wire transfer for securities? This information will need to be carefully identified and safeguarded as soon as the inheritance comes to you, in case of any future upheavals.

To spare yourself any of this grief, there are steps to be taken now to avoid commingling. Document the source of wealth involved as a gift or inheritance, maintain the property in a wholly separate account and consider keeping it in a different financial institution than any other accounts to avoid commingling.

Another way to safeguard gifts and inherited property against a 50% divorce rate is to use a revocable trust. Creating a revocable trust to own this separate property allows you to make changes to it any time but maintains its separate nature, by serving as a wholly separate accounting entity. The trust will own the property, while you as grantor (creator of the trust) and trustee (responsible for managing the trust) maintain control.

For a turbo-charged version of this concept, you could go with a self-settled domestic asset protection trust. This is a more complex trust and may not be necessary. Your estate planning attorney will be able to explain the difference between this trust and a revocable trust.

One clear warning: if you have already created a revocable trust to protect your estate and it is not funded, you may feel like it would be most convenient to use this already-existing trust for your inheritance. That would not be wise. You should have a completely different trust created for the inherited property, and this would also be a wise time to remember to fund the existing trust.

Using a revocable trust this way will also require customized language in your Last Will, as you’ll want standard language in the Last Will to reflect the trust being separate from your other marital property.

Reference: Forbes (April 13, 2022) “Revocable Inheritance Trust: Inexpensive Divorce Protection”

Estate Planning Mistakes to Avoid

Estate planning is crucial to ensure that wealth accumulated over a lifetime is distributed according to your wishes and will take care of your family when you are no longer able to do so. Many well-intentioned people make common mistakes, which could be avoided with the guidance of an estate planning attorney, says the article “Avoiding Big Estate Planning Mistakes” from Physician’s Weekly.

Do you have a will? Many families must endure the red tape and expenses of “intestate” probate because a parent never got around to having a will prepared. The process is relatively straightforward: identify an estate planning attorney and make an appointment. Once the will is completed, make sure several trusted people, likely family members, know where it is and can access it.

Are you properly insured? If the last time you looked at your life insurance coverage was more than ten years ago, it’s probably not kept pace with your life. Although every person’s situation is different, high- income earners, like physicians or other professionals, need to understand that life insurance “replaces” income. This means enough to pay for college, pay off a mortgage and provide for your surviving spouse and children’s lifestyles.

When was the last time you spoke with your estate planning attorney, CPA, or financial advisor? Tax laws are constantly changing, and if your estate plan is not keeping up with those changes, you may be missing out on planning opportunities. Your family also may end up with a big tax bill, if your estate plan hasn’t been revised in the last three or four years. Your team of professionals is only as good as you let them be, so stay in touch with them.

When was the last time you reviewed your estate plan with your attorney? If you thought an estate plan was a set-it-and-forget-it plan, think again. Tax laws aren’t the only thing that changes. If you’ve divorced and remarried, you definitely need a new estate plan—and possibly a post-nuptial agreement. Have your children grown up, married and perhaps had children of their own? Do you have a new and troublesome son-in-law and want to protect your daughter’s inheritance? All of the changes in your life need to be reflected in your estate plan.

Having “the talk” with your family. No one wants to think about their own mortality or their parent’s mortality. However, if you don’t discuss your estate plan and your wishes with your family, they will not know what you want to happen. It doesn’t need to be a summit meeting, but a series of conversations to allow your loved ones to become comfortable with the discussion and make it more likely your wishes will be fulfilled. This includes your estate plan and your wishes for burial or cremation and what kind of memorial service you want.

Reference: Physician’s Weekly (Oct. 8, 2021) “Avoiding Big Estate Planning Mistakes”

Is My Will Void If I Get Divorced?

If you neglect to update your estate plan after a divorce, everything you gave to your ex in your original will could very well add up to a nice post-divorce inheritance. Even in the most amicable divorces, it’s probably not what you had intended. Yet, as reported in the article “Rewriting Your Will After Divorce” from Investopedia, people do this.

Depending on where you live, there might be a law that automatically revokes gifts to a former spouse listed in a will. In Florida, there is a statute addressing this. In Texas, a law revokes gifts to the former spouse and their relatives. However, unless you know the laws of your state as well as an estate planning attorney, it’s best to let the estate planning attorney protect your estate.

What happens if you die before you are legally divorced?

If your will leaves everything to your surviving spouse and you are currently in the process of separating and divorcing, it’s time for a new will, as soon as possible.

Don’t forget assets passing outside of the will. Assets with beneficiary designations, like life insurance, investment accounts and some retirement plans, go directly to the beneficiary listed on the account. If the beneficiary is your ex, you should also make those changes as soon as possible.

Your estate plan must also update any property gained or lost during the divorce. If any assets are specifically identified in your will, be sure to update them.

The executor (the person named in your will to oversee the distribution of assets) probably has to be changed as well. If you had previously named your ex-spouse, it’s time to name a new executor.

Your will is also used to name a guardian for minor children. If you have children with your ex, you will want to appoint a guardian in case both you and your ex are not alive to raise them. If you die unexpectedly, your spouse will raise them, but you should still name a guardian. If a surviving parent has a serious problem, like addiction, child abuse or incarceration, naming a guardian in your will and documenting the reasons you believe your ex is an unfit parent may be a deciding factor in how a judge awards custody.

A will can be updated by writing a codicil, which is an amendment to a previous or a prior will. However, since there may be many changes to a will in a divorce, it is better to tear up the old one—literally—and start over. A prior will is revoked by physically tearing up and destroying the original and including language in the new will that it will revokes all prior wills. Your attorney will know how to do this properly.

Your ex may have the legal right to challenge your will. This is why an estate planning attorney is so necessary to create a new will. There are provisions in some states that may give your ex more rights than in other states. In a divorce situation, the use of an experienced estate planning attorney can make the difference in your ex receiving a windfall and your new spouse or children receiving their rightful inheritance.

Reference: Investopedia (September 14, 2021) “Rewriting Your Will After Divorce”

Do I Have to Give My Husband’s Children from First Marriage Anything When He Dies?”

This is a common question with second (or third marriages) and blended families. Questions frequently arise about Social Security, investments and savings, when the husband is divorced from the children’s mother and is paying child support until each child turns 18.

Nj.com’s recent article entitled “Are my husband’s kids from another marriage due assets when he dies?” says that these questions demonstrate why estate planning is critical to revisit after a divorce. You can take action to make certain that you’re taken care of, but if you don’t do this at the time of the divorce, it could be too late.

Let’s look at what you should know about beneficiaries and wills. First, beneficiary designations supersede a will. Make sure that all beneficiaries and contingent beneficiaries are consistent with your wishes. There are beneficiary designations on retirement accounts, pensions, life insurance policies, annuities and other accounts that take precedence over what may be stated in a will.

While New Jersey does not provide for beneficiary designations on certain assets like a house, vehicles, and real estate, many other states do. For assets without a beneficiary, it’s important to determine the way in which they’re titled.

The titling of assets has an effect on how the assets will be distributed after death. Thus, when married again, spouses should review and update their wills to have an idea of how a spouse’s estate would be disbursed at his or her death.

If a husband is paying child support, divorce decrees will often dictate that he purchase life insurance to cover that obligation upon his death. Therefore, there may be a life insurance policy for the children from a first marriage.

With Social Security, if a spouse remains unmarried after the spouse’s death, he or she can claim a survivor spousal benefit as early as age 60, and if he or she is caring for the spouse’s children from the first marriage who are under 16 years of age, he or she may be entitled to receive a payment earlier. The deceased spouse’s unmarried children can also claim a survivor benefit until age 18, or longer if in high school or disabled.

Reference: nj.com (Aug. 4, 2021) “Are my husband’s kids from another marriage due assets when he dies?”

How to Protect an Estate from a Rotten Son-in-Law

If you’ve been working for a while, you have an estate. If you’ve been working for a long time, you may even have a sizable estate, and between your home, insurance and growing retirement funds, your estate may reach the million dollar mark. That’s the good news. But the bad news might be an adult child with a drug or drinking problem, or a child who married a person who doesn’t deserve to inherit any part of your estate. Not to mention an ex-spouse or two. What will happen when you aren’t there to protect your estate?

There are steps to protect your estate and your family members, as described in the recent article “Is your son-in-law a jerk? Armor plate your estate” from Federal News Network.

Don’t overlook beneficiary designations. Most employer-sponsored retirement and savings accounts have beneficiary designations to identify the people you wish to receive these assets when you die. Here’s an important fact to know: the beneficiary designation overrides any language in your last will and testament. If your beneficiary designation on an account names a child but your will gives your estate to your spouse, your child will receive assets in the account, and your spouse will not receive any proceeds from the account.

Don’t try to sell a property for below-market value. The same goes for trying to remove assets from your ownership to qualify for Medicaid to cover long-term care costs. Selling your home to an adult child for $1 will not pass unnoticed. Estate taxes, gift taxes, income taxes and eligibility for government benefits can’t be avoided by this tactic.

A common estate planning mistake is to name specific investments in a will. A will becomes part of the public record when it is probated. Providing details in a will is asking for trouble, especially if a nefarious family member is looking for assets. And if the sale or other disposition of the named asset before your death impacts bequests, your estate may be vulnerable to litigation.

How will you leave real estate assets to heirs? Real estate assets can be problematic and need special consideration. Are you leaving shares to a vacation home or the family home? If kids or their spouses don’t get along, or one person wants to live in the home while others want to sell it, this could cause years of family fights.

Making a bequest to a grandchild instead of to a troubled adult child. Minor children may not legally inherit property, so leaving assets to a grandchild does not avoid giving assets to an adult child. The most likely guardian will be their parent, undoing the attempt to keep assets out of the parent’s control.

Include a residuary clause in a will or trust. Residuary clauses are used to dispose of assets not specifically mentioned in a will or trust. Your estate planning attorney will create the residuary clauses most appropriate for your unique situations.

Prepare for the unexpected. Your estate plan can be designed to address the unexpected. If a primary beneficiary like a daughter or son divorces their spouse, a trust could prevent the ex from gaining access to your assets.

An effective estate plan, prepared with an experienced estate planning attorney, can plan for all of the “what ifs” to protect loved ones after you have passed.

Reference: Federal News Network (Sep. 1, 2021) “Is your son-in-law a jerk? Armor plate your estate”

Common Estate Planning Mistakes and How to Avoid Them

Every family has one: the brother-in-law or aunt who knows everything about, well, everything. When the information is wrong, expensive problems are created, especially when it comes to estate planning. Estate planning attorneys devote a good deal of time to education to help prevent unnecessary and costly mistakes, as described in the article “Misinformation, poor assumptions result in major planning mistakes” from The News-Enterprise.

The most common is the idea of a “simple” estate plan. What does “simple” mean? For most people, the idea of “simple” is appealing—they don’t want to deal with long and complicated documents with legal phrases they don’t understand. However, those complex phrases are necessary, if the estate plan is to protect your interests and loved ones.

Another mistake is thinking an estate plan is a one-and-done affair. Just as people’s lives and fortunes change over time, so should their estate plan. An estate plan created for a young family with small children won’t work for a mature couple with grown children and significant savings.

Change also comes to family dynamics. The same cousin who was like a sister during your teen years may not be as close in values or geography, when you both have elementary school children. Do you still want her to be your child’s guardian? An updated estate plan takes into account the changing relationships within the family, as well as the changing members of the family. A beloved brother-in-law isn’t so beloved, if he divorces your favorite sister. When families change, estate plans need to be updated.

Here is a huge mistake rarely articulated: somehow not thinking about death or incapacity might prevent either event from happening. We know that death is inevitable, and incapacity is statistically probable. Planning for both events in no way increases or decreases their likelihood of occurring. What planning does, is provide peace of mind in knowing you have prepared for both events.

No one wants to be in a nursing home but telling loved ones you want to remain at home “no matter what happens” is not a plan for the future. It is devastating to move a loved one into a nursing home. However, people with medical needs need to be there to receive proper care and treatment. Planning for the possibility is better than a family making arrangements, financial and otherwise, on an emergency basis.

Do you remember that all-knowing family member described in the start of this article? Their advice, however well-intentioned, can be disastrous. Alternatives to estate planning take many shapes: putting the house in the adult child’s name or adding the adult child’s name to the parent’s investment accounts. If the beneficiary has a future tax liability, debt or divorce, the parent’s assets are there for the taking.

Properly done, with the guidance of an experienced estate planning attorney, your estate plan protects you and those you love, as well as the assets you’ve gained over a lifetime. Don’t fall for the idea of “simple” or back-door alternatives. Formalize your goals, so your plans and wishes will be followed.

Reference: The News-Enterprise (Aug. 24, 2021) “Misinformation, poor assumptions result in major planning mistakes”

A Trust can Protect Inheritance from Relatives

It’s always exciting to watch adult children build their lives and select spouses. However, even if we adore the person they love, it’s wise to prepare to protect our children, says a recent article titled “Worried about Your Child’s Inheritance If They Divorce? A Trust Can Be Your Answer” from Kiplinger.

After all, why would you want the assets and money that you accumulated over a lifetime to pass to any ex-spouse, if a divorce happens?

With the current federal estate tax exemptions still historically high (although that may change in the near future), setting up a trust to protect wealth from federal estate taxes isn’t the driving force in many estate plans. The bigger concern is how well your children will do, if and when they receive their inheritance.

Some people recognize that their children are simply not up to the task. They worry about potential divorces, or a spendthrift spouse. The answer is estate planning in general, and more specifically, a well-designed trust. By establishing a trust as part of an estate plan, these assets can be protected.

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.

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:

Minor children. Children who are 18 or younger cannot inherit assets. However, when they reach the age of majority, they 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.

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 every four or five 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.

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

What Is Family Business Succession Planning?

Many family-owned businesses have had to scramble to maintain ownership, when owners or heirs were struck by COVID-19. Lacking a succession plan may have led to disastrous results, or at best, less than optimal corporate structures and large tax bills. This difficult lesson is a wake-up call, says the article “Succession Planning for the Family-Owned Business—Keepin’ it ‘All in the Family’” from Bloomberg Tax.

Another factor putting family-owned businesses at risk is divorce. Contemplating the best way to transfer ownership to the next generation requires a candid examination of family dynamics and acknowledgment of outsiders (i.e., in-laws) and the possibility of divorce.

Before documents can be created, a number of issues need to be discussed:

Transfer timing. When will the ownership of the business transfer to the next generation? There are some who use life-events as prompts: births, marriages and/or the death of the owners.

How will the transfer take place? Corporate structures and estate planning tools provide many options limited only by the tax liabilities and wishes of the family. Be wary, since each decision for the structure may have unintended consequences. Short and long-term strategic planning is needed.

To whom will the business be transferred? Who will receive an ownership interest and what will be the rights of ownership? Will there be different levels of ownership, and will those levels depend upon the level of activity in the business? Will percentages be used, or shares, or another form?

In drafting a succession plan, it is wise to assume that the future owners will either marry or divorce—perhaps multiple times. The succession plan should address these issues to prevent an ex-spouse from becoming a shareholder, whose interest in the business needs to be bought out.

The operating agreement/partnership agreement should require all future owners to enter into a prenuptial agreement before marriage specifically excluding their interest in the family business from being distributed, valued, or deemed marital property subject to distribution, if there is a divorce.

An owner may even exact a penalty for a subsequent owner who fails to enter into a prenup prior to a marriage. The same corporate document should specifically bar an owner’s spouse from receiving an ownership interest under any circumstance.

A prenup is intended to remove the future value of the owner’s interest from the marital asset pool. This typically requires the owner to buy-out the future spouse’s legal claim to future value. This could be a costly issue, since the value of the future ownership interest cannot be predicted at the time of the marriage.

Many different strategies can be used to develop a succession plan that ideally works alongside the business owner’s estate plan. These are used to ensure that the business remains in the family and the family interests are protected.

Reference: Bloomberg Tax (April 5,2021) “Succession Planning for the Family-Owned Business—Keepin’ it ‘All in the Family’”