Stepchildren, Adopted Children and Natural Children: Who Inherits?

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Stepchildren, Adopted Children and Natural Children: Who Inherits?

With the different variations of families in today’s modern world, complications can arise as to who has the legal right to inherit assets. In some cases, an adult child will come to a lawyer’s office after a parent has died to discuss the distribution of the estate — only to find out that he or she is not entitled to anything.

Besides being excluded in someone’s will, two of the reasons why a child possibly could have no right to an inheritance is that the child is not the natural born child of the parent or the child was not legally adopted. In general, if there is no will, people who are stepchildren cannot inherit from the stepparents. This is also true of people who were raised by an extended family member or close friend without a legal adoption, even with a legal guardianship,

So what are some of the inheritance rules regarding adopted children and stepchildren? The law varies from state to state. Generally though, natural born children and adopted children are provided the same rights to inherit assets if there is no will. However, a stepchild typically does not have a right to inherit assets from a stepparent if the stepparent dies without a will — or the will specifically does not designate the stepchild as a beneficiary.

On the other hand, the law in most states provides that an adopted child has the same rights as a natural child if legally adopted. It should also be noted that when a child is adopted, the adopted child generally loses the right to inherit from his or her natural parents, although the child gains the right to inherit from the adopting parents.

An exception is when one spouse adopts a child of the other spouse. In that situation, the adopted child does not give up inheritance rights from the natural parent.

Important: A parent of a stepchild who wants the individual to inherit assets must specifically state so in a will. The phrasing in a will is critical for the parent’s wishes to be carried out. Phrases that leave assets to “my children,” or to “my brothers and sisters,” will not include stepchildren and stepsiblings.

The same is true if you are a stepchild and want your parents or siblings to share in your estate. You must specifically name the individuals. Otherwise, by law, if you generally list “parents” or “siblings” without the specifics, the bequest may not go to the people who you want.

There is a way in which a stepchild could challenge the lack of inheritance. That would be when the child is financially dependent on the stepparent. If a stepchild was treated as a child of the family by a married stepparent or was financially dependent on a stepparent who has died, and there is either no or inadequate provision on the death of the stepparent, he or she might be able to make an application to the court for part of the inheritance.

The rights of inheritance for family members hinge on the laws in your state. Because these issues can be complicated, it is important for you to consult with an attorney to help fulfill your estate planning wishes.

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Saving for Your Child’s Education with a Section 529 Plan

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Saving for Your Child’s Education with a Section 529 Plan

Q. It’s time for us to begin saving for our child’s education. We’ve heard a great deal about Section 529 plans. What are the advantages?

A. The advantages can be significant. Section 529 plans include both prepaid tuition programs and college savings plans. While prepaid tuition programs have been around longer, it is the college savings plan that is garnering most of the attention these days. Changes enacted by the Economic Growth and Tax Relief Reconciliation Act made these college savings plans more attractive from a tax-strategy standpoint.

Basically, a college savings plan allows you to place money in a state plan to be used for the beneficiary’s higher-education expenses at any college or university. These expenses include tuition, fees, books, supplies, and certain room-and-board costs. There is no tax deduction for contributions made to the plan, but the money is allowed to grow tax-free until the funds are withdrawn to pay for qualified education expenses. Your money is invested in stocks, bonds, or mutual fund options offered by the plan, with no guarantee as to how much will be available when the beneficiary enters college.

Here are some of the more significant benefits of these plans:

- - You are the owner of the account and can change the beneficiary or even take the money back, if permitted by the plan. This is helpful in the event that your original beneficiary decides not to go to college. If you take the money back, you will owe income taxes on the earnings and a 10% federal tax penalty as well. The money can be withdrawn without penalty if the beneficiary dies or becomes disabled.
  - In 2018, you or other family members can contribute up to $75,000 to a qualified plan in one year and count it as your annual $15,000 tax-free gift for five years (up from $14,000 in 2017). If the gift is split with your spouse, you can contribute up to $150,000, also for five years. However, if you die within the five-year period, a pro-rata share of the $75,000 returns to your estate. Grandparents can set up accounts for grandchildren, transferring large sums from their estates while providing for their grandchildren’s education.
  - There are no income limitations for contributions. Thus, these plans may be of particular interest to higher-income individuals who may not qualify for other college savings tax breaks.
  - The assets in the plan are considered the account owner’s assets, not the beneficiary’s assets. For financial aid purposes, 5.6% of the parents’ assets and 35% of the child’s assets are to be used for college costs. If the grandparents are the owners, the assets may not even be considered for financial aid purposes. Even though distributions are income tax free, their status for financial aid purposes is not clear. It may come down to a college-by-college decision whether the income will be considered the child’s income.
  - You can now make tax-free transfers of funds from one plan to another or from one investment option to another for the same beneficiary once every 12 months. In the past, the beneficiary had to be changed to make a tax-free transfer.

Private colleges and universities can now set up their own prepaid Section 529 plans. Distributions from these plans are eligible for the same federal income tax advantages as distributions from state-operated plans.

Most states now offer college savings plans, with the plans administered by the state or financial institutions. Certain state programs only accept residents, but most plans allow participants from any state. Before contributing to a plan, consider these tips:

- - Check out your own state’s plan first. Many states offer state income tax benefits to residents who contribute to their in-state plans.
  - Review investment options carefully.You can’t actively control the investments in your account, so you have to select from the plan’s options. Some offer a couple of choices, while others feature a more diverse selection. Recently, several plans added a principal-protected or guaranteed-return option to counter concerns about stock market volatility.
  - Examine fees. The management fees charged by plans vary widely and can significantly impact the performance of your fund. Some also charge an enrollment fee, an annual maintenance fee, and other annual expenses.

College savings plans offered by each state differ significantly in features and benefits. The optimal choice for an individual investor depends on his/her objectives and circumstances. In comparing plans, an investor should consider each in terms of investment options, fees, and state tax implications.

Update: Beginning in 2018, a new law, the Tax Cuts and Jobs Act (TCJA) makes it possible to use 529 accounts to pay for tuition not just at college, but also at public, private, or religious elementary or secondary schools. The TCJA also allows you to take tax-free distributions of up to $10,000 per year to pay for these education costs.

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How to Use a Prenuptial Agreement as an Estate Planning

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How to Use a Prenuptial Agreement as an Estate Planning

Prenuptial agreements and domestic law vary from one state to another but nearly every state has laws that prevent one spouse from entirely disinheriting the other. However, with a prenuptial agreement, one spouse can waive his or her right to the other’s estate.

Let’s say you are getting married and have children from a previous marriage. Your spouse-to-be also has children and is financially secure. You may want to change your will to leave the bulk of your estate to your children and perhaps a small amount to your new spouse.

However, the change in your will may not completely disinherit your spouse because of most states’ laws.

A properly drafted prenuptial agreement, along with a change in your will, may help to fulfill your wishes.

Without proper planning, it is possible that say, a family home or family business, could pass to your new spouse and eventually to his or her children, rather than your own.

In some cases, agreements segregate property owned before the marriage from property acquired during the marriage.

Here are some factors necessary to ensure that a prenuptial agreement is valid and enforceable:

1. It must be in writing and signed by both parties.

2. There should be no pressure. The prenuptial agreement should be given to the other party well in advance of the wedding.

3. There must be full disclosure. A pre-nup should generally list both parties’ assets, as of the date of the marriage. If one party doesn’t make an adequate disclosure, the agreement is likely to be disregarded.

4. Both parties should be represented by their own attorneys.

So in the case of a second or third marriage, you can ensure your children will receive the assets you desire by having a valid prenuptial agreement, as well as having a properly drafted will — and keeping the will current as you acquire assets during the marriage. You may also want to set up a trust.

Important: Just because you have a prenuptial agreement doesn’t mean you can’t name your spouse in your will. You may want to leave your spouse some money or assets to ensure his or her future security.

Consult with your attorney. The requirements of prenuptial agreements and estate planning are complex and vary from state to state.

What if you are already re-married and didn’t sign a prenuptial agreement? You may be able to sign a post-nuptial agreement to accomplish the same goals. Consult with your attorney.

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Special Needs Trust: What Expenses Can It Pay For?

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Special Needs Trust: What Expenses Can It Pay For?

A special needs trust or a supplemental needs trust can be established to help a disabled individual who is receiving assistance from the government — or is eligible to receive it. Disabled people, who cannot support themselves and rely on government assistance, are not allowed to have more than a certain amount of personal assets, so family members can’t just give them money to pay for just any expenses. The use of a trust can pay for some expenses and keep the disabled person from being disqualified from receiving public assistance, including Medicaid or Supplemental Social Security, because he or she has acquired too much money.

Let’s say you are appointed to be a trustee of a special needs trust or supplemental needs trust. Or perhaps you are a beneficiary of such a trust or you want to set one up for a loved one. In these cases, you want to know what permissible expenses the trust can pay for without losing governmental support. This article will address the products, services and debts that a trustee can pay for a beneficiary — and which expenses are not permissible.

Quick Overview of Special Needs Trusts

If someone is deemed incapacitated or disabled, and is receiving governmental assistance such as Medicaid or SSI, the law allows for the creation of an irrevocable trust. This is also true if an individual is disabled and eligible for public assistance but has not yet applied for it. A special needs trust is funded by either a third party (such as a parent) or from the applicant under certain circumstances so that a designated trustee can pay for some expenses of the applicant without him or her losing the governmental assistance.

Assets can be held in the trust and used to pay for the beneficiary’s special or supplemental needs, which the government does not provide. Meanwhile, Medicaid could be paying the significant medical bills for the individual and SSI could be used to pay for food and shelter. If the medical assistance provided during the individual’s lifetime does not turn out to be costly, then upon the death of the beneficiary there is a chance that assets may be preserved in the trust and pass to loved ones. It is important to plan carefully with your estate planning attorney because in some cases the remaining assets could revert to the government under a “payback clause.”

Families can also use special needs trusts to shield excess income for Medicaid purposes. By using a trust in this way, a disabled Medicaid recipient can actually keep the benefit of almost all of his or her income under certain circumstances, rather than having to pay a portion of it towards the cost of his or her care.

Types of Expenses Allowed to Be Funded

Generally, a trustee of a special needs trust could use the money without penalty to pay for:

- - Medical and dental care not paid by other sources;
  - Private rehabilitation training, services or devices;
  - Supplementary education assistance;
  - Entertainment, hobbies;
  - Transportation;
  - Personal property and services.

In-Kind Support and In-Kind Maintenance

In-kind support and maintenance means that someone else, including a trustee, is helping an individual with his or her food and shelter expenses. Receiving In-kind support and maintenance that contributes to some or all of an individual’s food and shelter expenses could penalize the recipient or prevent him or her from receiving governmental support. This applies if the support is given in the form of gifts or payment of money or items that an individual could sell to pay for food or shelter. For Social Security Disability purposes, food and shelter includes the following expenses:

- - Room and board;
  - Rent;
  - Garbage collection and sewer;
  - Water;
  - Electricity, gas and heating fuel.

If a trustee provides in-kind support and maintenance to the beneficiary for the above services, the SSI benefits will be reduced up to a certain point. The amount by which the Social Security Administration will reduce a beneficiary’s payments is determined using certain models. It’s important to know how much SSI a beneficiary is receiving and what payments would need to be made from a trust that could be considered in-kind support and maintenance. A cost-benefit analysis would be necessary to determine if it is worth a trustee making in-kind support and maintenance payments that will cause a reduction in SSI benefits.

Special needs trusts or supplemental needs trusts are complex and there are serious implications for incorrectly paying certain expenses with them. Consult with your attorney about these issues if you want to set up a trust — or you are the beneficiary of one.

Have an estate planning question or concern? Please let us know! Call us at 630.665.2300 or click the button to schedule a complimentary consultation.

Getting Your Records Organized is More Important Than You Think

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Getting Your Records Organized is More Important Than You Think

Keeping track of important papers is critical to maintaining an accurate picture of your finances and ensuring that your heirs are cared for in the way you want. The paper trail that follows us throughout our lives includes records that track births, deaths, marriages, divorces and adoptions — among other life changing events. Personal records also document purchases, investments, assets and home improvements.

Keep in mind: The better organized you are, the better you can manage your affairs, support claims on your tax returns, and be certain that your heirs can easily find the paperwork they need.

Here is a list of some important documents you need to save:

Taxes. Copies of past returns (you should generally keep these for seven years); receipts of deductible expenses; income statements including any interest and dividend earned; tax payments, and canceled checks (retain for the statute of limitations).

Real estate. Deeds; title papers; appraisals; records of renovations, additions and repairs; mortgages and receipts of payments, and records of purchase prices and closing and selling costs.

Finances. Bank statements; stock and bond certificates; mutual fund records; records of purchase dates and prices, dividend or interest payments and dates; savings certificates; savings passbooks; loan papers, list of credit cards.

Insurance and retirement. Insurance policies; IRA documentation; descriptions and statements from pension and profit sharing plans; beneficiary designation forms.

Personal documents. Wills; trust agreements; powers of attorney; living wills; birth and death certificates; marriage licenses; adoption and custody papers; divorce and separation papers; property agreements; military records; passport, and Social Security records.

Once your files are organized, don’t fall into the trap of saving unnecessary documents. Clean them out periodically. And decide where to store the documents. For example, you might use a safe deposit box for originals, set aside room in a fireproof filing cabinet for copies and give other copies to loved ones or advisers. The important thing is that the papers are safe and your loved ones know how to access them. Your future — and theirs — depends on it.

Keeping it All Safe

A safe deposit box is an effective way to protect your will and trust documents.

In fact, all important papers should be stored in a safe deposit box, including stocks, certificates of deposit, birth and death certificates, documents related to buying and selling real estate, life insurance policies, and notes proving loans you have paid.

But you don’t have to store everything there. You can keep records of credit cards, other insurance policies, major purchases and warranty information in a safe place or dead storage, but not necessarily in a safe deposit box. The same applies to copies of income tax returns filed within the last three years and the canceled checks and receipts you save to prove your income and deductions.

The deed to your house is rarely needed and doesn’t require safe storage. Anyone interested in it can rely on courthouse records.

Keeping an original and a copy of important documents is a good start, but may not be adequate. Disasters such as tornadoes and earthquakes, as well as the September 11 terrorist attack in New York City, taught us the importance of backing up important data.

If you have only one copy of your documents stored in a bank vault and the bank is destroyed, your records will be gone too, or at the very least, some important material may not be accessible for several weeks.

Make triplicate copies of important documents and store them separately. And make sure your lawyer, accountant or trusted family member or friend knows where your important papers are and can readily access them.

Have an estate planning question or concern? Please let us know! Call us at 630.665.2300 or click the button to schedule a complimentary consultation.

Concerned About Fido’s Care: Consider a Pet Trust

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Concerned About Fido’s Care: Consider a Pet Trust

Pets are often considered family members, yet many owners don’t plan for their future in the event of death or incapacitation. What happens to these well-loved and orphaned animals if there’s no one to care for them? Some will enter animal shelters and be euthanized.

When people plan for the future distribution of their assets, it’s essential they don’t forget about their pets. Making provisions for them doesn’t have to be complicated. It could be as simple as talking it over with your children or other relatives and ensuring that they would welcome your pets into their homes. But if you don’t know for sure where your dog, cat or other pet will end up, don’t leave the future to chance. For your peace of mind and the health and comfort of your furry friends, you need to do some planning.

What Are Your Options?

Ask your attorney what is allowed in your state. Most states have laws addressing pet trusts. Growing in popularity, pet trusts are similar to trusts that people set up to care for family members.

A pet trust provides a specified amount of money to be held in trust for the ongoing care of one or more pets. It generally terminates upon the death of the last surviving animal covered by the trust.

Here are some elements to consider in a pet trust:

- - Trustee – You need to designate a person who will be the willing trustee. Ideally, it should be someone who likes animals. It’s a good idea to also appoint an alternate trustee in case your first choice cannot fulfill the obligation or doesn’t want to.
  - Caregiver – Decide who will be the actual caregiver (as well as successor if necessary). The caregiver can also be the trustee, but doesn’t have to be.
  - Funding – Determine how much money will go into the pet trust. The deciding factors should include the type of animal, the age, health, life expectancy, future food costs, potential future health needs, and the standard of living you wish the pet to have.
  - Standard of living – You can specify nutritional needs, which veterinarian to use and other preferences.
  - Distributions – What circumstances should trigger distributions for your pet’s needs? Besides reasonable care, you may specify regular six-month check-ups, monthly grooming or the services of an additional dog walker.
  - Remainder beneficiary – Finally, you need to designate the person(s) or charity to receive the amount that remains in the trust after your pet dies.

The Court Factor

Courts have some discretion concerning how pet trusts are administered. Some states impose funding limits. As illustrated by Leona Helmsley’s estate (see right-hand box), a large amount of money left to an animal may be ruled excessive and put back into an estate.

In addition, there are a handful of states where pet trusts are not valid. Therefore, pet trusts or alternative arrangements must be carefully planned and comply with the laws in your state in order to be upheld.

FAMOUS DOG INHERITS FORTUNE

One of the most famous canine beneficiaries of all time was a Maltese named Trouble. Hotel heiress Leona Helmsley left the dog a $12 million trust fund when she died in 2007.

However, a surrogate court judge dramatically reduced the amount of the inheritance because it was ruled unreasonable. The judge ruled that $2 million was enough for Trouble to receive “the highest standard of care.”

The dog lived out the rest of its life at a Florida Helmsley hotel with a caretaker and a security guard.

When Trouble died in 2010, the remainder of the trust set up for her care reverted to a charitable trust Helmsley set up.

Have an estate planning question or concern? Please let us know! Call us at 630.665.2300 or click the button to schedule a complimentary consultation.

Estate Planning with 529 College Savings Accounts

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Estate Planning with 529 College Savings Accounts

Saving for college is one of the most daunting financial tasks a family can face, taking as much commitment and careful planning as arranging your estate.

But there’s a powerful tool that lets you both put aside money for your family members’ educations and reduce your estate’s exposure to taxes. The 529 plan, named after the section of the Internal Revenue Code authorizing it, lets you remove wealth from your estate while you steadily accumulate assets to help educate children, grandchildren, nieces, nephews — and even yourself if you’re planning to go back to college.

These accounts are particularly useful for grandparents looking for ways to limit the tax hit on a lifetime of assets. You can set up accounts for several grandchildren and reap the same rewards from each account.

There are big tax advantages to 529 college savings accounts. Briefly, these state-sponsored accounts are allowed to accumulate earnings free of any federal income tax (usually free of state income tax too). Then, when the account beneficiary reaches college age, tax-free withdrawals can be taken to pay for the beneficiary’s qualified college expenses. While 529 accounts are usually set up for children and grandchildren, no family relationship is required. You can set up an account for any college-bound student you want to help.

Section 529 plans accept large lump-sum contributions (over $200,000 in most cases). Smaller installment pay-ins are also accepted. However, there’s an estate tax advantage to making relatively large lump-sum contributions. This article will explain how it works.

The Estate Tax Advantage

Contributions to a 529 account reduce your taxable estate.

For federal gift tax purposes, the contributions are treated as completed gifts eligible for the annual gift tax exclusion $15,000 in 2018 (up from $14,000 in 2017). Even better, you can elect to spread a lump-sum contribution over five years and thereby immediately benefit from five years’ worth of annual federal gift tax exclusions. You make the election on the federal gift tax return.

For instance, a single grandparent can make a lump-sum contribution of up to $75,000 in 2018 (5 times $15,000) to a 529 account set up for a grandchild. A married set of grandparents can jointly contribute up to $150,000 ($75,000 times 2). If you have several grandchildren, you do this for as many of them as you wish. Gifts up to these amounts won’t reduce your $5.60 million federal gift tax exemption for 2018 if you elect to take advantage of the five-year spread privilege (up from $5.49 million in 2017). Your $5.60 million federal estate tax exemption is also untouched.

However, if you die during the five-year spread period, a pro-rata portion of the contribution is added back to your estate for federal estate tax purposes.

Example: You and your spouse have three young grandchildren. Together you can immediately contribute up to $450,000 to 529 accounts with no adverse federal gift or estate tax consequences ($150,000 to three separate accounts, one for each grandchild). Assuming you live at least five years after making the gifts (the period over which the gifts are deemed to be spread), your taxable estates are reduced by a combined $450,000 ($225,000 each).

In addition, you avoid income and estate taxes on future earnings that would otherwise accumulate from the $450,000 contributed to the 529 accounts. In contrast, what if taxable college savings accounts were set up for the three grandchildren in the names of you and your spouse? In this case, the federal income tax hit on the earnings could be as high as 39.6%, plus state income taxes, plus possible estate taxes if you and your spouse die before all the money gets spent on the grandchildren’s college costs.

Key Point: Contributions covered by the annual gift tax exclusion (including under the five-year spread privilege) are also excluded for generation-skipping transfer tax purposes.

Accounts Are Flexible Too

When funding an account for a grandchild’s college education, you should always be concerned about what will happen to your money if things don’t turn out as expected. After all, your grandchild could decide to become a professional tattoo artist instead of going to college. If that happens, 529 accounts give you good flexibility.

First, the Internal Revenue Code allows you to change account beneficiaries without any federal tax consequences — as long as the new beneficiary is a member of the original beneficiary’s family and in the same generation (or a higher generation). For this purpose, an account beneficiary’s first cousin is considered a same-generation family member. That means a grandparent can move money from an account originally set for one grandchild into an account set up for any other grandchild with no federal income tax, gift tax, or generation-skipping transfer tax consequences.

Finally, what happens if you simply need to get your money back from the 529 account? The federal tax rules permit that too. You’ll be taxed on any withdrawn earnings and be charged a 10% penalty on any withdrawn earnings. Frankly, that’s an acceptable price for being allowed to recover your money.

Have an estate planning question or concern? Please let us know! Call us at 630.665.2300 or click the button to schedule a complimentary consultation.

7 Estate Planning Questions to Ask When Marrying Late in Life

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7 Estate Planning Questions to Ask When Marrying Late in Life

Although senior citizens are aging, their hearts remain young. Marrying later in life to establish companionship is a route that many people take. For many older people, there is nothing stopping them from continuing their adventures and at the same time enjoying their extended families.

However, if older people marry late in life, how should they handle estate planning? Most people in their seventies or even eighties still have their mental capacity to make proper estate planning decisions. However, as people reach their late eighties and nineties, there is more likelihood they may have diminished capacity.

Therefore, prior to marrying or re-marrying, older people should consider putting their estate plans together so they cover their intentions.

People marrying in their later years confront a variety of issues that younger couples do not face. For example, they may have accumulated considerable assets separately and may both have children from earlier relationships.

Getting married has a range of financial implications when it comes to Social Security, receiving alimony from a former spouse, Medicaid, retirement benefits, taxes and health insurance. For these reasons, many people decide to live together, rather than marry.

But if you are considering tying the knot later in life, here are seven questions to consider:

1. Where Are You Going to Live?

When you marry, you will have to choose a place to live. If you own, do you give it up to live with your partner? Or should you have your partner move in with you? Or do you find a new place to live? What happens if you move and then your partner dies? What happens if your partner lives with you and you pass? Who inherits the real estate and property?

Some of these issues can be handled with a revocable trust or maintaining a life estate. So, if you move into your partner’s home, you can have a life estate set up or put the house in a trust so you can live there. A trust or a life estate protects you from uncertainties when one of you passes. Also, it allows for you to pass your inheritance to other family member while allowing you or your partner to be taken care of in your lifetime.

1. How Are You Going to Pay for Your Expenses?

You may need to look into Medicaid planning in case one of you has to go into a nursing home. Forming a supplemental needs trust may help you avoid paying your assets for nursing home expenses — and yet still obtain Medicaid to help pay the bill.

1. Who Will Make Financial Decisions if You Need Help?

It is important to have a Power of Attorney in place in case you need someone to help with your banking and finance needs. Your new spouse could be your attorney-in-fact, in other words, the person who has a right to handle your finances when you cannot do so. Or perhaps you have another family member or friend who can be the attorney-in-fact. If you marry later in life, your spouse may eventually have diminished capacity too, so it is important to pick someone who can be there for you over the long term to make financial decisions.

1. Who Will Make Your Health Care Decisions if You Become Incapacitated?

This decision is very important. So many times, family members dispute who should make health care decisions — especially if you have children and have remarried. If the children do not agree with your new spouse, this can cause complications. Be very careful to draft a health care proxy so people know who can make decisions for you.

1. If You Have Assets for Distribution, Who Will Receive Them?

If you marry later in life, you may not want all of your assets to go to your new spouse. You may have children from a previous marriage, grandchildren, nieces, nephews or friends that you have known for years that you would like to designate as beneficiaries. Testamentary trusts that become active when you pass could be a way to help you distribute your assets to your family and friends while at the same time providing for your spouse during his or her lifetime. Also, you should also consider drafting a written prenuptial agreement that outlines who gets what upon death.

1. Who Is Going to Run Your Estate?

You need to pick a person to be the personal representative or executor of your estate. You may also need to pick a trustee. If you choose your new spouse, you should also select a successor representative so if your spouse is incapacitated or unable to handle the estate, you have someone else that you trust to handle it.

1. If You Have Children, How Are they Going to React?

If you have children and you remarry late in life, the children may feel threatened by your new spouse. They may have concerns in regard to inheritance, finances and health care decisions that will be made for you. Addressing these issues with your children can go a long way toward promoting family harmony and helping your family members accept your new spouse. Talk with your children before you get married so they know that you will protect their interests while at the same time allowing yourself the happiness you deserve.

There are likely many decisions to make and documents to sign if you tie the knot later in life. Both parties should consider drafting new wills and a prenup. Consult with your estate planning attorney about these matters prior to the ceremony.

This article only discusses some of the estate planning issues involved with getting married.

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9 Questions You Must Ask Yourself Before You Get Divorced

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9 Questions You Must Ask Yourself Before You Get Divorced

Divorce is a painful, emotional experience, and without proper planning, it can also be a disastrous financial event. Once certain decisions are made involving your assets, there is no way to change them. Following are some valuable questions you must consider to ensure your family is well taken care of.

1. 1. How much will it cost to live after the divorce? Will you be able to financially survive?
  2. Will alimony be paid and for how long? (Keep in mind that alimony is deductible by the spouse paying it and taxable to the spouse receiving it.) What about child support?
  3. Which parent will get to claim the dependency exemption for the children?
  4. What about financing the children’s college educations?
  5. Should one spouse keep the house?
  6. How will your retirement accounts be split? (It’s critical to discuss a “Qualified Domestic Relations Order,” which establishes a legal right to a portion of a retirement plan and ensures that your ex-spouse is responsible for paying the income taxes on any distributions that he or she receives. Without a QDRO, you could wind up paying the tax bill.)
  7. Are there potential hidden assets?
  8. If you or your spouse owns a closely-held business, how will it be valued?
  9. What are the tax consequences of property settlements?

These questions are a good place to start as you’ll discover many more during this long ordeal. Always keep in mind that once a divorce settlement is final, you will be unable to change many of the provisions.

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5 Commonly Asked Financial Questions During Divorce

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5 Commonly Asked Financial Questions During Divorce

Divorce involves more than just heartbreak and hassle. Your life savings, financial security and future earnings are also at stake. Don’t leave settlement of the marital estate to the discretion of your soon-to-be ex-spouse or the court. Take charge of your financial well being by knowing your rights, obligations and risks in divorce. Here are answers to five commonly asked questions.

1. What’s included in the marital estate?

Not every asset that you or your spouse owns is part of your marital estate and, therefore, divisible when you get divorced. What’s included in your marital estate is a function of many factors, such as:

- - Prenuptial agreements;
  - A comparison between the asset’s acquisition date and your wedding anniversary;
  - Each spouse’s contribution to the asset or participation in the asset’s management during the marriage;
  - State laws and legal precedent; and
  - Whether the asset has been combined with other marital assets.

For instance, a piece of real estate acquired prior to your wedding may be specifically excluded from your marital estate if you signed a prenuptial agreement. But it will likely be included in your marital estate if you used marital funds to pay for landscaping and improvements on the property for the past ten years.

When it comes to business interests, the value to include in the marital estate can be even trickier. Only the appreciation in value during your marriage may be included if a spouse owned the interest prior to the marriage, for example. But if you contributed additional capital from your joint checking account, a court might rule that the entire business interest should be included in your marital estate.

In addition, goodwill may require special treatment. About half the states specifically exclude personal goodwill — the value inextricably tied to the owner as an individual — from the marital estate if alimony is awarded. The rest of the states either include or exclude all goodwill in the marital estate. When little relevant case law exists about how to handle goodwill in your state, courts sometimes look to other states for guidance.

What your marital estate includes (or excludes) varies from state to state, so pick your venue carefully if you have options. To illustrate, one wife moved across state lines with her children to the couple’s vacation home to establish residency in a jurisdiction that favors her financial interests and custodial rights.

2. Could my ex be hiding assets?

When divorce turns ugly, people worry that an estranged spouse will hide assets. A classic example is the cheating husband who buys real estate and jewelry for his mistress using marital funds. But male or female, rich or poor, self preservation may cause normally honest people to hoard assets. So, always be on the defensive.

If an asset goes missing or the numbers don’t add up, hire a forensic accountant. He or she can do a title search for undisclosed assets under your ex’s social security number. Forensic accountants also can evaluate income and expenses to determine whether everything appears legitimate.

**3. What’s the real value of each asset?**

Cash is king. You know what cash is worth, and you can spend it immediately. But what about your house, jewelry, retirement funds or business interests? The value of these assets is more subjective and less liquid.

Consider your house. Many people want to continue living in their home after the divorce, especially if they have children. But moving — and letting go of your emotional ties — may be better for your financial well being. The current real estate market is uncertain, and you risk having your property over-appraised. Plus if times get tough and you need cash, you may not be able to sell your house and downsize quickly. And banks are stingier about home equity lines of credit these days. A lump sum in cash might be a safer bet than real estate.

Retirement funds and private business interests are even harder to convert into cash. You generally cannot access your retirement until age 59 and 1/2 without incurring a 10% penalty. If you are currently, say, 40 years old, this can be a long time to wait.

Business interests may be subject to transfer restrictions or built-in capital gains tax. Suppose you own an interest in an S corporation; you are personally responsible for the company’s tax obligation, even if you receive no cash distributions to fund your tax bill. Plus it takes time and effort required to sell private shares, especially when you receive a minority interest.

The bottom line: Not all assets are equally desirable when settling your divorce. Consider the risk, liquidity and tax consequences of the asset mix you take away from the marital estate.

4. How much maintenance will be awarded?

There are two types of maintenance payments awarded in divorce cases: child support and alimony. Child support is an amount paid to the custodial parent to raise a minor child. It is usually based on a statutory percentage of the noncustodial parent’s annual income.

For income tax purposes, the noncustodial parent cannot deduct child support payments, and the custodial parent does not claim child support as income. Your settlement agreement should also specify who can claim dependency exemptions and tax credits for minor children, as well as who pays for college and health insurance.

Alimony payments are not a sure win. They are affected by many factors, including:

- - Prenuptial agreements,
  - Length of your marriage,
  - Your status and standard of living, and
  - Education, skills and earning capacities of both spouses.

The spouse who pays alimony can usually deduct it from adjusted gross income. If so, the recipient must claim alimony as taxable income. Alimony may be temporary until the non-monied spouse receives some training or education. Or it can last indefinitely until the non-monied spouse remarries.

All maintenance is based on the payer’s income, so reasonable replacement compensation is important to assess. If an unscrupulous person intentionally underpays himself or herself, court-awarded maintenance payments may be inequitable or insufficient to cover post-divorce expenses.

5. Will I have enough money to pay all my post-divorce expenses?

Financial independence can be scary. Some people getting a divorce have never held a job, paid a bill or individually met with a CPA in their lives. Others are uncertain how to invest the cash they’ve been awarded. Budgeting is a step in the right direction.

Creating a monthly household budget starts by brainstorming all sources of cash from alimony and child support receipts, salaries, investment income and gifts. Then estimate all your expenses, such as child support and alimony payments, household and vehicle costs, vacations, child care and health-related costs. As long as your income outpaces your expenses every month, you’re in good shape. If not, you should have sufficient savings available for any shortfalls.

The most important step in the budgeting process is comparing the budget to your actual income and expenses. This comparison tells whether your budget is complete and accurate. It also lets you know whether your spending is out of control. If you can’t get a handle on your finances, your financial advisor can help.

AN OUNCE OF PREVENTION

Even the most amicable situation can turn adversarial if one party suddenly becomes greedy or suspects foul play. The best way to protect your financial interests is to communicate openly and freely share financial information with your former spouse.

Before you file for divorce — or as soon as you are served divorce papers — go through your financial records and make copies of relevant documents, such as:

– Bank, investment and retirement account statements;

– Mortgages and lines of credit;

– Personal tax returns;

– Home appraisals and closing documents;

– Legal contracts, such as shareholder agreements, leases and employment contracts; and

– Corporate financial statements and tax returns, if applicable

Have an estate planning question or concern? Please let us know! Call us at 630.665.2300 or click the button to schedule a complimentary consultation.

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5 Commonly Asked Financial Questions During Divorce

1. What’s included in the marital estate?

2. Could my ex be hiding assets?

3. What’s the real value of each asset?

4. How much maintenance will be awarded?

5. Will I have enough money to pay all my post-divorce expenses?

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**3. What’s the real value of each asset?**