Divorce necessitates an estate plan review

There are few events that can completely upend a person’s life more than divorce. Of course, there’s the emotional toll on you and your family to contend with, but you also have to consider the divorce’s impact on your estate plan.

When you originally crafted your plan, you likely centered many of its strategies around your spouse. Thus, when divorce proceedings begin, it’s crucial to update your estate plan as soon as possible to avoid unintended outcomes. Don’t wait until the divorce is final.

Who’s next in line for your wealth?

Unless you wish to provide your soon-to-be former spouse with an inheritance, amend your will and any trusts to eliminate him or her as a beneficiary. In addition, unless you’re comfortable with him or her administering your estate or controlling your wealth, you should designate someone else as executor or trustee. This is a good idea even if you live in one of the many states where divorce automatically nullifies any gifts or bequests to an ex-spouse and automatically revokes an appointment of a former spouse as executor or trustee.

There are several reasons for this. First, if you die before the divorce is final — even if you’re legally separated — your spouse will still inherit in accordance with your will or revocable trust, and his or her appointment as executor or trustee likely will stand.

Second, typically, the laws in these states treat your estate plan as if your former spouse had predeceased you. If you’ve named contingent or residual beneficiaries, any property your spouse would have received will go to them. If not, the property will pass according to the laws of intestate succession. But relying on these laws can be dangerous.

Finally, keep in mind that, in many states, as long as you’re legally married, your spouse will retain elective share or community property rights to a portion of your estate. So while updating your plan soon after you decide to divorce can reduce the amount your spouse will receive if you die while you’re still married, it can be difficult to disinherit him or her completely before the divorce is final.

Seek peace of mind

If you’re going through divorce proceedings, review and revise your estate plan to ensure that the proper heirs are provided for in the event of your death.

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Keep family matters out of the public eye by avoiding probate

Although probate can be time consuming and expensive, perhaps its biggest downside is that it’s public — anyone who’s interested can find out what assets you owned and how they’re being distributed after your death. The public nature of probate can also draw unwanted attention from disgruntled family members who may challenge the disposition of your assets, as well as from other unscrupulous parties.

However, by implementing the right estate planning strategies, you can keep much or even all of your estate out of probate.

Probate, defined

Probate is a legal procedure in which a court establishes the validity of your will, determines the value of your estate, resolves creditors’ claims, provides for the payment of taxes and other debts and transfers assets to your heirs.

Is probate ever desirable? Sometimes. Under certain circumstances, you might feel more comfortable having a court resolve issues involving your heirs and creditors. Another possible advantage is that probate places strict time limits on creditor claims and settles claims quickly.

Choose the right strategies

There are several ways you can avoid (or minimize) probate. (You’ll still need a will — and probate — to deal with guardianship of minor children, disposition of personal property and certain other matters.)

The right strategies depend on the size and complexity of your estate. The simplest ways to avoid probate involve designating beneficiaries or titling assets in a manner that allows them to be transferred directly to your beneficiaries outside your will. So, for example, be sure that you have appropriate, valid beneficiary designations for assets such as life insurance policies, annuities and retirement plans.

For assets such as bank and brokerage accounts, look into the availability of “pay on death” (POD) or “transfer on death” (TOD) designations, which allow these assets to avoid probate and pass directly to your designated beneficiaries. However, keep in mind that, while the POD or TOD designation is permitted in most states, not all financial institutions and firms make this option available.

For homes or other real estate — as well as bank and brokerage accounts and other assets — some people avoid probate by holding title with a spouse or child as “joint tenants with rights of survivorship” or as “tenants by the entirety.” Be aware that drawbacks exist for this technique.

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Make health care decisions while you’re healthy

Estate planning isn’t just about what happens to your assets after you die. It’s also about protecting yourself and your loved ones. This includes having a plan for making critical medical decisions in the event you’re unable to make them yourself. And, as with other aspects of your estate plan, the time to act is now, while you’re healthy. If an illness or injury renders you unconscious or otherwise incapacitated, it will be too late.

Without a plan that expresses your wishes, your family may have to make medical decisions on your behalf or petition a court for a conservatorship. Either way, there’s no guarantee that these decisions will be made the way you would want, or by the person you would choose.

2 documents, 2 purposes

To ensure that your wishes are carried out, and that your family is spared the burden of guessing — or arguing over — what you would decide, put those wishes in writing. Generally, that means executing two documents: 1) a living will and 2) a health care power of attorney (HCPA).

Unfortunately, these documents are known by many different names, which can lead to confusion. Living wills are sometimes called “advance directives,” or “health care directives.” And HCPAs may also be known as “durable powers of attorney for health care” or “health care proxies.”

Regardless of terminology, these documents serve two purposes: 1) to guide health care providers in the event you become terminally ill or permanently unconscious, and 2) to appoint someone you trust to make medical decisions on your behalf.

A living will expresses your preferences for the use of life-sustaining medical procedures, such as artificial feeding and breathing, surgery, invasive diagnostic tests, and pain medication. It also specifies the situations in which these procedures should be used or withheld.

An HCPA authorizes a surrogate — your spouse, child or another trusted representative — to make medical decisions or consent to medical treatment on your behalf when you’re unable to do so. It’s broader than a living will, which generally is limited to end-of-life situations, although there may be some overlap.

Put your plan into action

No matter how carefully you plan, living wills and HCPAs are effective only if your documents are readily accessible and health care providers honor them.

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5 questions single parents should ask about their estate plans

In many respects, estate planning for single parents of minor children is similar to estate planning for families with two parents. Single parents want to provide for their children’s care and financial needs after they’re gone. But when only one parent is involved, certain aspects of an estate plan demand special attention. If you’re a single parent, here are five questions you should ask:

1. Are my will and other estate planning documents up to date? If you haven’t reviewed your estate plan recently, do so as soon as possible to ensure that it reflects your current circumstances. The last thing you want is for a probate court to decide your children’s future.

2. Have I selected an appropriate guardian? If the other parent is unavailable to take custody of your children should you become incapacitated or die suddenly, does your estate plan designate a suitable, willing guardian to care for them? Will the guardian need financial assistance to raise your kids and provide for their education? If not, you might want to preserve your wealth in a trust until your children are grown.

3. Am I adequately insured? With only one income to depend on, plan carefully to ensure that you can provide for your retirement as well as your children’s financial security. Life insurance can be an effective way to augment your estate. You should also consider disability insurance. Unlike many married couples, single parents don’t have a “backup” income in the event they can no longer work.

4. What if I become incapacitated? As a single parent, it’s particularly important for you to include in your estate plan a living will or advance directive to specify your preferences for the use of life-sustaining medical procedures and a health care power of attorney to designate someone to make other medical decisions on your behalf. You should also have a revocable living trust or durable power of attorney that provides for the management of your finances.

5. Have I established a trust for my children? Trust planning is one of the most effective ways to provide for children regardless of their age. Trust assets are managed by one or more qualified, trusted individuals or corporate trustees, and you specify when and under what circumstances funds should be distributed to your kids. But a trust is particularly important if you have minor children. Without one, your assets may come under the control of your former spouse or a court-appointed administrator.

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Use an ILIT as a wealth preserver

If you’re concerned about your family’s financial well-being after you’re gone, life insurance can provide peace of mind. Going a step further and setting up an irrevocable life insurance trust (ILIT) to hold the policy offers additional estate planning benefits.

Asset protection

If you’re concerned about your heirs’ money management skills, an ILIT may be the answer. Why? Your loved ones won’t receive the proceeds directly, as they would if they were the policy beneficiaries. Rather, they’re the beneficiaries of the trust, and the trust controls when they receive proceeds.

You can also establish conditions for distributing funds from an ILIT. For example, you might instruct the trustee to withhold funds from a beneficiary who drops out of school or develops a substance abuse problem.

A properly drafted ILIT can also protect trust assets against your and your beneficiaries’ creditors, particularly if it’s established in a state with favorable asset protection laws.

Estate tax savings

Placing your life insurance policy in an ILIT removes it and its proceeds from your taxable estate. Contributing an existing life insurance policy to an ILIT constitutes a taxable gift to the trust beneficiaries of the policy’s fair market value (which generally approximates its cash value). With the combined gift and estate tax exemption currently at $5.49 million, now may be a good time to make such a gift.

Future ILIT contributions to cover premium payments will be taxable gifts. You may, however, be able to apply your annual gift tax exclusion to reduce or eliminate the tax — provided the ILIT is structured appropriately and certain other requirements are met.

Bear in mind that a repeal of the federal estate tax has been proposed by President Trump and the Republican-led Congress. A repeal or other estate tax law changes could have a significant impact on an ILIT’s estate tax benefits.

Drawbacks

An ILIT does have some significant limitations you need to be aware of. After you transfer a policy to the trust, you can no longer:

  • Change or add beneficiaries,
  • Assign, surrender or cancel the policy, or
  • Borrow against or withdraw from the policy’s cash value.

In addition, you’re not allowed to alter the ILIT’s terms or act as trustee.

Nevertheless, you can design the trust to adapt to changing circumstances and provide that children or grandchildren born after you establish the trust be automatically added as beneficiaries.

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Are you leaving your IRA to someone other than your spouse?

An IRA can be a powerful wealth-building tool, offering tax-deferred growth (tax-free in the case of a Roth IRA), asset protection and other benefits. But if you leave an IRA to your children — or to someone else other than your spouse — these benefits can be lost without careful planning.

“Inherited IRA” stretches tax benefits

Surviving spouses who inherit IRAs are permitted to roll them into their own IRAs, allowing the funds to continue growing tax-deferred or tax-free until they’re withdrawn in retirement or after age 70½. Beneficiaries other than your spouse, such as your children, are treated differently.

To take full advantage of an IRA’s tax benefits, nonspouse beneficiaries must transfer the funds directly into an “inherited IRA.” Although the beneficiaries will have to begin taking distributions by the end of the following year, they’ll be able to stretch those distributions over their life expectancies, allowing earnings to grow tax-deferred or tax-free as long as possible.

Your children or other nonspouse beneficiaries won’t have this option, however, unless you name them as beneficiaries (or secondary beneficiaries) of your IRA. If you leave an IRA to your estate, your children or other heirs will still receive a share of the IRA as beneficiaries of your estate, but they’ll have to withdraw the funds within five years (or, if you die after age 70½, over what would otherwise be your remaining actuarial life expectancy).

If you name multiple nonspousal beneficiaries (several children, for example), they’ll have to establish separate inherited IRA accounts by the end of the year after the year of your death in order to take distributions over their own life expectancies. If they miss the deadline, they’ll have to use the oldest beneficiary’s life expectancy.

Be aware that, unlike other IRAs, inherited IRAs aren’t protected from creditors in bankruptcy.

Inherited IRA rules

The following special rules apply to an inherited IRA:

  • The IRA must be a new IRA set up for the specific purpose of receiving the inherited account.
  • The IRA must be specially titled in the deceased account owner’s name.
  • No other contributions may be made to the IRA.
  • No other amounts may generally be rolled into or out of the IRA.
  • Required minimum distributions will need to be made over the beneficiary’s life expectancy starting the year after the IRA owner’s death.

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2016 charitable deductions: Substantiate them or lose them

Sharing your wealth with a favorite charity can benefit those in need and reduce your taxable estate. In addition, your donations can ease your income tax liability. But you must meet IRS substantiation requirements. If you fail to do so, the IRS could deny the corresponding deductions you’re claiming. Let’s take a look at the requirements for different asset types.

Cash gifts

Generally, you can substantiate gifts of less than $250 with a canceled check, written receipt or other reliable record (such as a credit card statement) that indicates the name of the charity and the amount and date of your gift.

If you donate more than $75 in exchange for goods or services other than intangible religious benefits (such as admission to religious ceremonies), the charity must provide you with a statement that 1) advises you that your deduction is limited to the amount by which your gift exceeds the value of those goods and services, and 2) provides a good-faith estimate of that value.

Gifts of $250 or more require a “contemporaneous” written acknowledgment from the charity that includes the amount and date of your gift and the estimated value of any goods or services you received or a statement that no goods or services were received. If goods or services received consisted entirely of intangible religious benefits, a statement to that effect must be included. An email will suffice.

To satisfy the contemporaneous requirement, you must have the acknowledgment in your possession before you file your income tax return. If you file later than the extended due date of your return, you must have received the acknowledgment by that extended due date.

Noncash gifts

If you make noncash gifts totaling more than $500 for the year, you must file Form 8283, “Noncash Charitable Contributions,” with your federal income tax return. And for gifts of property valued at more than $5,000 ($10,000 for closely held stock) you’ll need to obtain a “qualified appraisal” by a “qualified appraiser” and have the appraiser sign Sec. B, Part III, “Declaration of Appraiser.” If property is valued at more than $500,000, you’re required to attach a copy of the appraisal report to your return. No appraisal is required for publicly traded securities, regardless of value.

A qualified appraiser is a professional who meets certain education, experience and accreditation requirements. A qualified appraisal must 1) be prepared, signed and dated by a qualified appraiser other than the taxpayer or the recipient of the donation, 2) be conducted within 60 days of the gift, 3) provide certain information about the property, the appraiser and the valuation methods used, and 4) not involve fees based on a percentage of the appraised value or deduction amount.

Don’t leave it to chance

If you’ve made substantial charitable donations, their deductibility depends on compliance with IRS substantiation rules. Ensure you’ve properly substantiated your donations and can maximize your deductions on your 2016 income tax return.

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