Of all the luck. Marcia’s car sat stranded 10 yards behind, and she walked in the heat along the highway shoulder to find a phone.
She wiped the sweat from her forehead and looked back at the cars whizzing towards and then past her—she moved a few feet further away from the highway’s edge. Marcia felt bad leaving her two children in the car, but her daughter was 13 and able to watch her little brother.
Besides, the air conditioning made them more comfortable. She felt lucky, having bargained for full custody of her children, but times like these, when a car repair and tow bill would be coming, meant that the property she gave up to gain full custody made it just a little harder for her and the children. But they would get by, together, like they always did. She couldn’t wait for her divorce to be final, so she could put this part of her life behind and move onto better things with her children.
Planning for the Unexpected
Marcia didn’t see the car swerve off the road, into the grass, and hit her, killing her instantly.
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 that 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 even had an executor named in a Will, then we could give them the funds today,” she explained. “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 above were changed to protect the identity of the family, this story is absolutely true. A woman was hit by a car while walking on the side of the highway, in front of her children who were still in their car, and the auto insurance company could not pay badly needed funds to the children until an executor was named.
In the end, the insurance money and all of her property was given to her children… and put in the custody of her almost-ex-husband until they turned 18. There are many tasks in having a divorce done right, and one part that should never be overlooked is planning for the possibility that you one day won’t be here.
When married, it is far simpler to avoid planning an estate because most things automatically go to your spouse, and the planning concerns are then limited to what happens if something happens to both spouses. When planning a divorce, you and your divorce attorney take steps to discuss your wishes, solidify your desires in writing, minimize legal hassles, and then make sure your assets reflect that plan. The same process should be taken with an estate planning attorney during the divorce process.
Know What You Really Want
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. With estate planning, you also need to know where you want to go, and a good estate planning attorney will listen to your opinions and goals before suggesting courses of action.
“Far too often, attorneys will herd Will and Trust clients into selective, cookie-cutter plans and documents based on their own personal opinions or according to a client’s net worth,” says Raleigh-based estate planning attorney Jeffrey G. Marsocci. “These attorneys are not digging deep enough to put together a plan that reflects your wishes.”
One of the most important but often under-stressed items to consider is the age when beneficiaries should receive control over inherited property. Unfortunately, when people fail to plan, property is inherited by children at age 18.
“When I remember what I was like at 18 and imagine what most children are like at 18, the thought of giving even a hundred thousand dollars to an 18 year old is frightening,” computer programmer and Exaweb, Inc. President Adrian Klingel says. “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 rather than being saved for college. In my estate planning documents, I set an age of 25 before my children would receive any control.”
Mr. Klingel’s feelings about beneficiary ages are typical. While most people generally feel that 25 is a minimum age to start giving children more control over an inheritance, they also worry about money being available for beneficiaries to maintain a certain standard of living and provide for higher education. Not to worry. Here is 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 that they trust handle property rather than leaving it up to their former spouse,” attorney Marsocci says. “A trustee does not need to be a financial advisor or attorney, but instead the trustee needs to 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 whether or not to put either 20 or 30 percent 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 tattooing and body piercing art school in India,” Marsocci says. “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 areas where people should talk about with an estate planning attorney. Overall, a few other questions should also be reviewed, particularly for the divorced or divorcing client:
- Who do you want to nominate as guardians for any minor children?
- If you become unable to communicate your wishes about your own healthcare decisions, then who do you want to handle those decisions?
- Are there any specific burial or cremation wishes you have?
- 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 where you want to go, it is then time to work with an estate planning attorney to create documents that spell out your wishes. A good estate plan generally contains at least the five following documents:
- A Revocable Living Trust
- A Healthcare Power of Attorney
- A Living Will
- A Financial Power of Attorney
- A Last Will and Testament.
A carpenter understands that you need “the right tool for the right job.” A carpenter wouldn’t use a hammer to cut a board, but instead would use a saw to cut the wood and would use a hammer to nail the board to a frame. In estate planning, you also need the right tools to accomplish the appropriate job.
Last Will and Testament
The first tool in the toolbox that usually comes up is the Last Will and Testament. A traditional Will spells out your wishes on property distribution, sets up any age restrictions and trusts, names executors and trustees, and nominates guardians. For the divorced or divorcing person, a good Will makes these wishes crystal clear. However, there are other options for spelling out these wishes which may be more effective than a traditional Will.
Revocable Living Trust
Of the tools listed above, a complete Revocable Living Trust is probably the Swiss Army Knife® of estate planning documents. (Please see the section Minimize Legal Hassles below). It contains many useful ways to handle all of the items in a Will, but it does so 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,” attorney Marsocci says. “If an attorney does not even offer a revocable living trust as an option in estate planning, 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.”
Healthcare Power of Attorney and Living Will
A Healthcare Power of Attorney and a Living Will work hand in hand on medical issues if you can’t communicate your own wishes. A Living Will lays out your wishes on life support and artificial nutrition if you reach the point where the doctors would go to the closest relatives and ask if they should “pull the plug.” By writing down your wishes ahead of time, a doctor no longer has to put that burden on anyone.
A healthcare power of attorney appoints someone to make all other healthcare decisions if you can’t do it for yourself. “If you are in the process of divorcing but are not yet divorced, then your spouse is still your next of kin,” attorney Marsocci says. “While some divorces are done amicably, I still can’t think of anyone worse to make healthcare decisions for you than the person you are in the process of divorcing.”
financial power of attorney
Finally, a financial power of attorney rounds out the five tools of a good estate planning toolbox. This document, often called a durable power of attorney, allows someone you choose to manage your accounts and property if you become unable to handle your own affairs.
“The alternative to having a financial power of attorney is a proceeding where a court appoints a guardian to handle things for you,” attorney Marsocci says. “Most people would rather choose their own representatives and avoid the costs of a court proceeding.”
While there are many other “specialty” tools available, reviewing them all is beyond the scope of this article. Speak to an estate planning attorney if you have questions on other tools, particularly those that save on estate taxes.
Minimize Legal Hassles
A revocable living trust is an excellent estate planning tool that puts your distribution wishes in writing while avoiding probate court. In other words, you can pass property on to children or other beneficiaries, but all of the costs, inventories, meetings, delays and frustrations of probate are avoided. While there are numerous studies on the costs and delays of probate, many show that between 3% and 8% of assets are wasted through probate and average delays of 9 to 16 months are common.
A Last Will and Testament, the document people usually think of in planning their estate, makes all of the property covered by the Will go through the probate court before being distributed.
“In general, I have found that most clients want to avoid the court system whenever possible, and a revocable living trust is an excellent way of making sure your wishes after death are obeyed without getting a court involved,” attorney Jeffrey G. Marsocci says. “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, but I have seen marketing people going through the probate files at the courthouse and writing down beneficiary contact information and the amounts of inheritance they would be getting. Would you want anyone knowing that your 20 year old daughter or son is inheriting $300,000?”
A Last Will and Testament is still a vital part of your 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, and that is all,” attorney Marsocci says. “All of the beneficiary information remains out of those public files and away from prying eyes.”
Change Assets to Reflect that 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 the details are handled.
Improperly titled property and incorrect beneficiary designations can destroy an otherwise solid estate plan. Most people do not realize that their Will or Trust does not control life insurance money if it has named beneficiaries that are different. In order to make sure their wishes are followed, they will have to change the beneficiary to their estate or their revocable living trust.
“Imagine an estate where the main asset is a $1 million life insurance policy, and the person that died wanted it to be held in trust for their 18 years old child until age 30 with money only being used for basic living expenses and education until then,” attorney Marsocci says. “Their Revocable Living Trust spelled out all of the details, but the policy named the child instead of the Trust as the beneficiary. In the end, the 18 year old child gets the $1 million right away and can spend it on whatever they want.”
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. These assets include IRAs and 401ks, homes and property, mutual funds and investments, and life insurance and annuities. For a variety of legal and tax reasons, this is an area where an estate planning attorney should spell out precisely how assets should be titled and what beneficiaries should be listed. “
While it is often easier and less costly for my clients to handle these details with their own financial advisor or bank, the client should know exactly what should be done,” attorney Marsocci says. “And when in doubt, have the advisor or bank call the attorney to make sure it is 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 is better to be safe than sorry, and good divorce and estate planning attorneys can work together to make sure that you are fully protected.
