If you’ve recently divorced, your time likely has been consumed with meetings with attorneys and in negotiations, even if everything was amicable. Probably the last thing you want to do is review your estate plan. But you owe it to yourself and your children to make the necessary updates to reflect your current situation.
Keep assets in your control
The good news is that a divorce generally extinguishes your spouse’s rights under your will or any trusts. So there’s little danger that your ex-spouse will inherit your property outright, even if those documents haven’t been revised yet. If you have minor children, however, your ex-spouse might have more control over your wealth than you’d like.
Generally, property inherited by minors is held by a custodian until they reach the age of majority in the state where they reside (usually, age 18, but in some states it’s age 21). In some cases, a surviving parent — perhaps your ex-spouse — may act as custodian. In such a case, your ex-spouse will have considerable discretion in determining how your assets are invested and spent while the children are minors.
One way to avoid this result is to create one or more trusts for the benefit of your children. With a trust, you can appoint the person who’ll be responsible for managing assets and making distributions to your children. It’s the trustee of your choosing — not your ex-spouse’s.
This also allows you to determine when and under what circumstances your children will receive your property. For example, you may want to delay distributions until they’re past the age of majority or have reached certain milestones, such as attaining a college degree or finding a job.
Furthermore, a trust can be beneficial when adult children inherit assets. In the event that your child gets divorced, the trust can be designed to shield the assets from your child’s ex-spouse. However, if the child has too much control over the trust, a court may view the trust assets as marital property subject to division in divorce. For greater protection, give the trustee full discretionary authority over distributions.
Types of trusts
As part of the postdivorce planning process, you might include a variety of trusts, including, but not limited to, a:
Living trust. With a revocable living trust, you can arrange for the transfer of selected assets to designated beneficiaries. This trust type typically is exempt from the probate process and is often used to complement a will.
Credit shelter trust. This trust type typically is used to maximize estate tax benefits when you have children from a prior marriage and you also want to provide financial security for a new spouse. Essentially, the trust maximizes the benefits of the estate tax exemption.
Irrevocable life insurance trust (ILIT). If you transfer ownership of life insurance policies to an ILIT, the proceeds generally are removed from your taxable estate. Furthermore, your family may use part of the proceeds to pay estate costs.
Qualified terminable interest property (QTIP) trusts. A QTIP trust is often used after divorces and remarriages. The surviving spouse receives income from the trust while the beneficiaries — typically, children from a first marriage — are entitled to the remainder when the surviving spouse dies.
Considerations for the future
Finally, consider the possibility that you might remarry, requiring revisions to your will and trusts. Otherwise, a substantial portion of your estate may go to your children (under your ex-spouse’s control, if they’re minors). This may not be the optimal result, particularly if your new spouse and any children of the second marriage need more financial support than children from the previous marriage.
In any event, whether remarriage is in the cards or not, your estate plan should account for taxes. Under current law, a couple can maximize federal estate tax benefits through a combination of the unlimited marital deduction and estate tax exemption. Again, you can use trusts to further this purpose and they should be coordinated under your postdivorce plan.
If you’re currently in the middle of a divorce, it’s critical to contact your estate planning advisor to make the necessary revisions to your estate plan, as well as to discuss changing the titling or the beneficiary designations on retirement accounts, life insurance policies, and joint tenancy accounts.
