Unintended consequences: After divorce, review your estate plan to avoid surprises

by Adler Pollock & Sheehan P.C.
Contact

If you’re recently divorced, you’ve likely had your fill of legal documents and proceedings. But it’s important to review your estate plan as soon as possible to ensure you’re protected against unintended consequences. Consider the following questions after your divorce.

How can I keep control of my assets?

Generally, a divorce judgment automatically extinguishes your spouse’s rights under your will or any trusts. So there’s little danger that your ex-spouse will inherit your property, even if you haven’t yet amended your estate planning documents. If you have minor children, however, your plan may inadvertently give your ex-spouse control over your wealth.

Property inherited by minors generally must be held in a conservatorship until they reach the age of majority (usually 18). And in most cases a court will appoint their surviving parent (your ex-spouse) as conservator. Even though the conservatorship will be under court supervision, your ex-spouse will have a great deal of discretion in determining how your assets are invested and spent while the children are minors.

The best way to avoid this result is to create one or more trusts for the benefit of your children. A trust allows you to choose a trustee who’ll be responsible for managing assets and making distributions to your children. It also allows you to determine when and under what circumstances the children will receive your property. For example, you may want to delay distributions until your children are beyond the age of majority or have reached certain milestones (such as finishing college or finding a job).

Also, a trust can protect your children’s inheritance from claims of their ex-spouses. (See the sidebar “Divorce protection for your children.”)

What if I decide to remarry?

Estate planning is particularly important if you remarry. Suppose, for example, that you have children from a previous marriage. If you haven’t updated your will or trusts, a substantial portion of your estate may go to them (under your ex-spouse’s control, if they’re minors). This may not be the best result, particularly if your new spouse and any children of the second marriage need more financial support than children from the previous marriage.

It’s also important to consider estate taxes, although they aren’t as big a concern as they once were. Today, the federal estate tax exclusion is more than $5 million ($5.34 million in 2014), so relatively few families are subject to the tax. But if your estate is very large, there may be opportunities to reduce or defer estate taxes. Here’s an example:

Frank dies with a $15 million estate. He leaves $5 million to his second wife, Marie, and $10 million to his children (Ray and Debra) from his first marriage. The $5 million he leaves to Marie is shielded from tax by the marital deduction, but the $10 million he leaves to Ray and Debra triggers a $1,864,000 estate tax liability (assuming a 40% tax rate). Had Frank left his entire estate to Marie, estate taxes would have been deferred until her death.

The problem with this approach is that, by leaving everything to Marie, Frank puts his children’s inheritance at risk. What if Marie spends it all? What if she remarries and leaves everything to her new husband and children?

Here are two strategies Frank can use to provide for Ray and Debra while still taking advantage of the marital deduction:

1. QTIP trust. Generally, to receive the benefits of a marital deduction, you must leave property to your spouse outright. The qualified terminable interest property (QTIP) trust is an exception to this rule. A QTIP trust is an irrevocable trust that pays out all of its current income to the surviving spouse at least annually and meets certain other requirements. In the example, had Frank transferred assets to a QTIP trust, he could have taken advantage of the marital deduction while preserving the trust principal for Ray and Debra.

Historically, there was a disadvantage to leaving your entire estate to your spouse, either outright or in a QTIP trust: The marital deduction defers, but doesn’t eliminate, estate taxes, so the assets were eventually subject to estate tax as part of the surviving spouse’s estate, wasting the first spouse’s estate tax exemption. With the advent of portability, however — which allows a surviving spouse to take advantage of a deceased spouse’s unused exemption amount — this disadvantage has been eliminated in most cases, or at least minimized.

2. ILIT. Another option for Frank is to establish an irrevocable life insurance trust (ILIT) for the benefit of Ray and Debra. He can leave his entire estate to Marie, taking full advantage of the marital deduction, while also providing a generous inheritance for his children. If the ILIT is designed properly, the insurance proceeds will pass to Ray and Debra outside of Frank’s estate and be free of estate taxes.

Keep what’s yours

In the event of a divorce, ask your advisor to review your estate plan as soon as possible. The last thing you want is for your hard-earned wealth to end up in the hands of an ex-spouse or your child’s ex-spouse. Several strategies are available to make sure that won’t happen.

Sidebar: Divorce protection for your children

When people plan their estates, they often overlook the possibility that their children may get divorced. If that happens, there’s a risk that your child’s ex-spouse will end up with some of your property in a divorce settlement.

The most effective way to avoid this result is to establish a trust for your child’s benefit. But simply setting up a trust isn’t enough. You must design the trust carefully to ensure that your child’s ex-spouse has no claim to the trust assets. 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.

It’s also advisable to avoid giving the child a remainder interest in the trust or providing for mandatory distributions, which may be considered property rights in some states. Ideally, to ensure that your child’s ex-spouse can’t reach the trust assets, give the trustee full discretionary authority over whether to make or withhold distributions.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Adler Pollock & Sheehan P.C. | Attorney Advertising

Written by:

Adler Pollock & Sheehan P.C.
Contact
more
less

Adler Pollock & Sheehan P.C. on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!