Speaker: Maritess Bott
Maritess:
Hello everyone. Thank you for watching or listening to our podcast today. I’m Maritess Bott of Bott & Associates. Today’s topic is estate planning and divorce. You might think, how do those two topics go together? Well, divorce is one of those things that can affect your estate plan — whether it’s your own divorce that you’ve gone through and how that is going to work when your assets go to your kids and maybe an ex-spouse. But it also will affect your estate plan if maybe your kids or beneficiaries get divorced.
I always kind of try to explain that when we do estate planning, we’re thinking of other things besides just “here’s your money, Little Johnny” — you get the money and you go about your life. What if we can give the money to them and then protect it from a potential divorce settlement? Right? I’ll give you a couple examples. What I like to do in general is provide for each beneficiary some type of divorce protection, and we usually use what we call an access trust.
Let’s just say Mom and Dad are Bill and Mary; their kids are Susan and John. John is one of those people that you’re worried about — that he might someday have some challenges in life and possibly a divorce because you’re not sure how good his marriage is right now. When we give John his share — let’s just say he’s getting half a million dollars when Mom and Dad have passed — he gets half a million dollars and it’s put into an access trust that he can access, but it stays in the John Trust name.
What does that do? It allows John to be able to protect that money just in case. Because what if he and his wife get a divorce a year after receiving that inheritance? OK, Mom and Dad die. There could be two things that happen. John takes the inheritance and puts it into the house because they want to pay off that house and it’s a jointly owned house. Typically you pay off the house; now it’s fully paid off. But then a year after that happens his wife files for divorce, and now what happens to the proceeds that you just paid off when it came to that house? Now that the house is jointly owned — even though your inheritance paid for the balance of that mortgage — that house has to be evenly distributed or divided between you in the divorce settlement. That didn’t have to happen that way.
The second option — that’s one option that’s typical of a couple — is we put it in a trust and instead of paying off that loan perhaps the trust is kind of part owner of the house. The John Trust is 50% owner — whatever that percentage matches what you’re paying off — and then the balance is owned 50/50 by husband and wife, by John and his wife. When that happens a year later and his wife wants to file a divorce, that 50% that was only in John’s trust name is only John’s. It can’t be part of that divorce settlement when you are saying, “What do we have collectively? What did we commingle together so that we have to divvy it up?” Because it’s inherited money, he’s protected his money and saved it for him only, not necessarily to divide in a divorce settlement.
So there’s a big difference between Option One, where he just put everything into the joint asset, and Option Two, where his portion is still in his name in a trust to be protected. An example that I’ll share with you is: a few months ago we did an estate plan for a husband and wife. They were a young couple, probably mid-30s. Sadly, her mom had passed away and left her some money, which is fine. She had ended up getting a good sum of an inheritance from her mom — she got $2.5 million.
They had called me to do an estate plan, and we were doing some planning — wills and trusts and things like that. I felt the need to tell her at least that she has a choice. She could certainly keep her inheritance in a separate trust in her name only if she wants to do that. The conversation, of course, took place when both of them were present. As you can imagine it was a bit of an uncomfortable conversation because she said, “Oh, of course not. No way. My husband — I trust him. We together — this money should be jointly owned.” I said, “Okay — it’s your choice. I’m just telling you; I’m giving you the option.”
So that’s the difference. It’s kind of an uncomfortable conversation because you want to say you love your husband; you trust your husband. But maybe in the back of her mind she was thinking, “Well, maybe I should keep it in my name.” It’s her choice; it’s her inheritance. Because if, say, a year from now she signs her estate planning documents and a year from now she comes to me and says, “Well, my husband asked for a divorce — now my money is going to be half his. Why didn’t you tell me to keep it separate?” — I’ve given them the option; I’ve given them the choice, and she can’t go back to me and say, “I didn’t know.” Right? You have to have that conversation and it’s a candid conversation.
Now, if her mom would have created a trust that said, “Daughter, you’re getting an inheritance of $2.5 million, but we’re going to keep it in your name in a trust” — daughter trust as opposed to taking that money and putting it together with your husband — in that situation then we wouldn’t have had even the conversation because Mom already made that decision for her. It’s not an uncomfortable conversation with her husband because Mom already made this decision for me; she told me it has to be in a trust, and no offense to you, I’m just going to follow Mom’s instructions.
So I always tell people it’s sort of like an out for her because it has nothing to do with emotions or love or what you feel with your husband. It’s just instructions by Mom. When she wrote out her will or her trust she said to keep it in the daughter’s name in her trust so that way it is protected from any potential divorce in the future.
The moral of the story is: plan early and write it down. It is possible to protect your kids’ inheritances from any future divorces as long as it’s done right — as long as it’s in that situation of a trust for the person who’s receiving it. On the flip side, another issue with divorce is when a person has passed. First of all, the husband and wife have gone through a divorce; the divorce is final, but they didn’t change beneficiaries on all of their 401(k)s and life insurance.
I had a case a few years back where a woman called me and said, “My husband — we got a divorce a year ago, he lived in Illinois here, but then he moved to Washington State and then he unexpectedly dies.” She told me that she was the beneficiary of his life insurance at work and his 401(k) still; he didn’t change it, which you should after a divorce. What ended up happening was an estate had to be opened in the state of Washington, and we had to work with that lawyer to make sure that my client got a share because she was rightfully the beneficiary. The family of the husband, of course, was fighting tooth and nail and said, “Hey, wait a second — they’re divorced; there’s no way she should get it.” But the way the law works depends on the state. I’m only speaking for Illinois: when you die in Illinois, whatever you wrote down on your beneficiary form is what prevails, not what you wrote down in your will or your trust or what you told people. If the beneficiary still has your ex-wife on there, the money has to be paid out to your ex-wife.
So, just a word of caution: when people go through a divorce, change the beneficiaries. Make sure that everything in your estate plan is matching your wishes based on what you just went through in a divorce. We just don’t want it to go accidentally to the wrong people.
Lastly, the one issue that I talk about with divorce is when a couple is newly divorced and one of the people is coming to me for estate planning. We talk about what is in the divorce decree: what are your requirements with the divorce decree? Do you have to keep life insurance up so that, if something happens to you unexpectedly, there’s coverage? Do you have provisions for maintenance? Do we have to put that in the estate plan?
Really, I want to make sure that the money you want to leave to your minor children doesn’t accidentally go to your ex-spouse and that they end up spending it all without even benefiting the children. What does that mean? In your estate plan we want to put down provisions that say whatever I’m required to do in the divorce decree — maybe it’s a life insurance policy — the proceeds have to be laid out and given to my kids in a trust, and somebody in my family will watch that money and make sure it goes to the kids, not necessarily directly to your ex-spouse, who might just grab it and go. Or maybe they’re remarried already and then that money has gone to that other family and that person rather than your kids together.
So it’s super important. When you’re doing estate planning, it’s not just that people mostly think, “Oh, my life is simple; we’ll just give it to the kids or spouse, then to the kids.” What we do is think through outside the box: what other issues will you or your beneficiaries possibly go through, and then we plan around those real-life issues and make sure we write down what you wish to happen as opposed to the money accidentally going to the wrong people. That’s the goal.
If you do have any questions, or anything — maybe you already have an estate plan and you’re not sure if it’s protected from divorce with your kids — give us a call. We can certainly take a look and see what we can do and help you with. We’re here to help you in that regard. I can help to review documents as well as prepare obviously new documents if you haven’t had one already.
So once again, thanks for watching or listening to our podcast. Hopefully you learned a little something, and we will talk to you soon. Have a great day.
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