Getting divorced is a stressful process. Facing the prospect of going into a courtroom to divide assets and time with children can force you to look at your life through a new lens. Have you ever considered what will happen to your property if you were to die unexpectedly? What would happen to your children? Have you created the proper documentation that would ensure they would benefit from your years of hard work? It’s time to get your life in order. This often means creating a will or similar plan.
Defining beneficiaries can be a stressful but necessary part of estate planning. Understanding the intricacies of life insurance policies, pension plan accounts, and IRAs is not sexy stuff. Time spent in such efforts is almost certainly always filed under the “Things I Have to Do” column.
But choosing beneficiaries is a very important decision with complicated estate and income tax consequences. In actuality, the whole affair can get quite complex and lawyerly rather quickly.
For example, a will and estate plan are very similar: both are defined as making outright gifts to a certain number of people. Consider the following: a will might name the beneficiary as the spouse and contingent beneficiaries as the children. A simple variation on this kind of arrangement might contain a stipulation of trust where beneficiaries under the age of 25 could not claim what was left to them until the age of 35.
Unfortunately, such arrangements don’t offer any kind of asset protection for the beneficiary. This type of plan can make assets subject to the the beneficiary’s creditors.
Plans that provide creditor protection features usually begin at $1,500 or higher. If you’re looking to create a trust that might escape estate taxes and creditors for years to come and that number has now risen to approximately $2,500 to start.
Like with most things, the devil is almost always in the details. When naming beneficiaries there are factors that should be considered, including:
- The age of the person(s) to be included in the policy or plan. Most plans won’t transfer assets directly to minors until a guardian is approved by a court.
- The beneficiaries ability to effectively manage assets. This, of course, is always a prominent factor for consideration when building a plan that will involve an underage person as the beneficiary. Creating a trust in the person’s name might be the best course of action rather than a direct transfer.
- When choosing a beneficiary for a pension plan it’s important to note that, unless waived in writing, a spouse is required by law to be the primary beneficiary of such an account.
The key to creating a plan that reflects your intentions and desire is to understanding the overall undertaking. The following is a breakdown of various types of plans and policies.
Benefit proceeds are always paid out income tax free upon death, and it doesn’t matter who is designated. Instead of property being disposed in a will, beneficiary forms completed correctly insure that proceeds do not go through probate.
When creating your plan, it would behoove you to name a contingent or secondary beneficiary. If the primary beneficiary passes away the trust will then be transferred to the surviving beneficiary.
Should both the first and secondary beneficiaries be deceased, then the beneficiary is generally the “estate of the insured,” meaning that the death benefits end up being probated and distributed based upon the decedent’s last will and testament. Dying without a last will and testament means that the state will designate the beneficiaries.
Pension Plans and Individual Retirement Accounts (IRAs)
For legal reasons, spouses are usually named as the primary beneficiary of a 401(k) or a profit-sharing account. The only way this can be avoided is if said spouse waives that right in writing. Single people who are looking to name a beneficiary are eligible for a tax-free transfer to an individual retirement account. Everyone’s situation is different, and extenuating circumstances may occur. Consider consulting a tax professional to learn more about rules and changes in your situation that could affect the overall plan.
Naming Children Can Create Problems
It’s a natural instinct to name your children as a secondary beneficiary in any estate plan or will. If your children are over the age of 18, more power to you. However, if your kids are still in diapers it may not be the best initial course of action. Naming a child as beneficiary comes with it’s own unique set of problems. Often times, insurance companies, pension plans, and retirement accounts will not pay death benefits to minors. The process is usually such that the benefits are held until such time that they could be placed with a court-approved guardian and/or trustee of the child’s trust. Specifying a guardian, trust, or trustee is the best bet for creating a competent management scenario of the proceeds for the children. For example, naming a children’s trust as the beneficiary is smart because the proceeds could be invested and managed according to your will and desire.
It’s important to note the IRS regulations are subject to change, and seeking counsel on such matters is advised. Currently, non-spousal beneficiary plans are allowed to annuitize retirement plan distributions over the life of the beneficiary. Such options may vary depending upon your employer. Ask if this is an option under your plan prior to naming a child. A competent financial advisor might also be able to provide valuable insight into this effort.
Keep Your Plan Up-to-Date
When completing any kind of legal living document (which basically means that it can change as long as you are living) including estate plans and wills, it is advised to regularly check beneficiary designations so that your overall estate plan or will accurately reflects your desire for the distribution of assets. Unfortunately, outdated beneficiary designations (for example: a former spouse or deceased parent) could create an unintended situation in the event of your untimely demise. Also, it’s important to bear in mind that beneficiaries are paid only under the name designated in the legal document. Should a name change for any reason, the new information would need to be added to the document as soon as possible. If you first created your will when your kids were in the third grade and they are now graduating from college, it’s time to update your documents. When undertaking the task of estate planning, it’s a worthy investment to have a lawyer present for consultation so that you understand what you’re doing. It’s easy to get bogged down with legal jargon.
The best way to protect your future beneficiaries is to ensure that you have seen to all of the details in the process, and that the final documents align with your overall goals.
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Divorce is never easy. Creating two separate lives from what was considered one entity for so long is a long and frustrating process. Family dinners give way to custody arrangements and shuttling the kids back and forth. Banks accounts are separated and the business of deciding who will get what becomes a paramount order of business when dividing property and debts.
If your separation has been harmonious, the nightmare of dividing all of your marital assets may not be as long lived as what it might be for a former couple whose split has been acrimonious.
The goal, of course, is for you the two of you to come to an agreement that works for both of you. However, it is important to bear in mind that all assets remain community property until a judge finalizes your order. That goes for debts too.
When dividing property and debt, it is advisable to create an agreement that divides everything equally, so that each party leaves the marriage with roughly the same value of property (and debt). Dividing your property does not necessarily mean a physical division.
Consider the following: If you and your partner have two joint bank accounts, it’s not necessary to split one account and then the next. Instead, it would make more sense to check the balance of both accounts and take inventory of which one has more and which account has less. If one account has a substantially higher balance than the other, perhaps you could keep the larger account and your partner could keep the smaller account along with an asset that adds up to what’s in your account.
How to Divide Your Property
The best course of action when trying to decide how to divide your property and debts is to make a list of everything that you own and all debts accumulated during the marriage. The next step is to figure out which items are individual property, which are community property and then determine the fair market value of each item.
These are steps you’ll need to take to have your divorce granted anyway, so it’s better to be on the same page with your former spouse from the beginning. During the divorce process you’ll be required to fill out a Schedule of Assets and Debts. This document is one of the forms you and your spouse must fill out in the financial declarations of disclosure sections, which is required for all divorces and legal separations.
The most important thing to remember during this process is to be honest in the evaluation of your situation. During a divorce, hiding items of value can hold serious penalties.
Once all of the proper forms have been completed, it might be helpful to sit down with your partner and discuss the following:
- Do you disagree about whether something is community or separate; and
- Is there a huge discrepancy in how you each value the community property.
These two simple questions can help you decide if your case can be settled outside of court or if you need to go to trial.
Dividing debt is one of the primary ways that divorce can have a lasting impact on your life. Proceed with extreme awareness and caution. Don’t be bullied into accepting more of your fair share or playing the martyr.
Simply dividing community debts in half, for example, is not always the best idea. In theory, yes, it seems fair. Partners cut the amount owed down the middle with one party taking all the credit card debt and the other accepting the remaining amount. This may be in the written agreement. But what you need to remember is that that making informal agreements to pay off debts your debtors are not required to honor that agreement. Regardless of which party is responsible for the debt, if you signed for a loan or application, the debtor can go after either partner.
For example, if your spouse has a credit card in her name but you have graciously agreed to pay off the balance, the card company can still go after your spouse, and vice versa. If a card were in your name but you and your spouse had come to the understanding that she would handle the debt, it’s still within the debtor’s rights to try to get payment from you. From their perspective, it doesn’t matter who pays the debt so long as it gets paid. Think about it like this: should your soon to be ex default on a payment arrangement, no matter what your debt agreement was during the divorce, you are responsible. You could end up having to pay the balance, late fees and a damaged credit score.
To avoid these potential problems with dividing debt, consider:
- If there is real property to be sold partners sometimes agree to pay the credit cards using monies from the sale of that property.
- Another option is the party who agreed to pay the joint credit card must get a new credit card in only his or her name and then pursue a balance transfer.
Problems on the Horizon
Once all of the property and debt has been divided either through a marital settlement agreement (MSA) or a court judgment specifying who gets what, there’s a possibility that you may need to follow a few more steps to obtain the divorce should your former spouse or partner not cooperate with the process.
If your marital settlement agreement (MSA) was “merged” or “incorporated” into the judgment, then it can be enforced like any other family law money judgment.
However, if your MSA was not merged or incorporated into your judgment, the document is treated like a contract and not a judgment. What this means is that the courts, you or your lawyer cannot enforce it as a money judgment. If, at that point, you are determined to enforce any of the terms in the document you may be forced to file a civil case for breach of contract and get a judgment through that civil case.
Mediation as Another Option
Mediation may offer another avenue of problem solving before you head down the road where litigators and long-drawn out lawsuits become a necessity. Mediation exists as an option to help solve disagreements about money issues and how to divide your property. Private mediators are available for hire in every state and are often a great asset in helping to work out a fair way to divide your property and debts. Many courts also offer a mediation service. Do some research and find out how the process works in your city.
When dealing with the separation of property and debt, it’s important to understand just what you’re getting into. Go into the process with your eyes open. Try to be fair, but remember that you also need to be fair to yourself.
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One of the prime documents you should revise when you are divorcing your spouse is your medical directives. Once you understand the process it is relatively easy, so don’t feel intimated by the legalese. A medical directive is merely a health care document. There are two types of health care documents. Let’s look at them both.
Two Types of Health Care Documents
There are two documents that allow you to declare your wishes for medical care: a living will and a durable power of attorney for health care. It’s advisable to have both. In some states, the living will and the power of attorney are combined into a single form – called an Advance Directive. Advance Directives are referred to by different names depending on the state where you live. They may be called: advance directive, living will, declaration, power of attorney, patient advocate designation, etc. These documents are types of health care directives since they contain the details about what you want done regarding your health care in the event that you become incapacitated (unable to speak for yourself).
- Living Wills. A living will is a statement you write which declares the type of care you want, or don’t want, if you become incapable of speaking for yourself. This document is generally called a living will, though it may be named differently depending on which state you live in. A living will is not the same as a conventional will or living trust used to leave property at death. A living will strictly pertains to your health care preferences. You can use your living will to go into as much detail as you wish about the kind of health care you want to receive.
- Power of Attorney for Health Care. In this document, you appoint a trusted person to act as your health care agent (this person may also be called a health care proxy, or surrogate). This person will make any necessary health care decisions on your behalf and make sure your wishes are executed according to your specifications.
Who Can Make Health Care Documents?
You must be an adult (18 years old in most states) to make a document directing your health care that will be recognized under the law. You must also be of sound mind – meaning that you are able to understand what the document means, what it contains, and how it works.
When do your Health Care Documents Take Effect?
Your health care documents take effect once a doctor determines that you lack the capacity to make your own health care decisions.
Lacking capacity is usually defined by:
- The inability to comprehend the nature and consequences of the health care choices that are available to you, and
- The inability to communicate your own wishes for care (either orally, in writing, or through gestures)
Basically, once you are too injured or too ill to express your health care wishes in any recognizable way, your documents will go into effect. In the case of any ambiguity about your capacity to comprehend and communicate your choices clearly then your doctor will make a decision regarding when your documents will take effect (taking into account input from your health care agent).
Do your Health Care Documents End under any Circumstances?
Your written wishes for health care remain valid for as long as you are alive unless you take action to revoke your documents or in the rare case the court steps in and issues a decree.
Your medical directives are valid until:
- You choose to revoke your document. You can revoke your directives at any time for any reason. Just be sure to notify your health care providers and your agent that you are voiding the document.
- A court invalidates your document. This is highly uncommon, as the law recognizes your right to dictate your own healthcare. However, under extreme circumstances it may end up in court if someone doubts that you had the mental capacity to prepare a valid health care document and brings their case before a judge. Again, such lawsuits are rare. The burden of proof of your lack of capability falls upon the person who is issuing the challenge to the validity of your document due to your lack of mental capacity.
- You get a divorce. While getting a divorce will have no effect on your written directions for health care, if your ex-spouse is named as your health care agent, his or her authority is automatically revoked in many states. If you have an alternate agent listed than that person will take over, otherwise you need to name a new person by updating your document or just starting over with a new health care document.
Increasing Interest in Advance Directives
There has been a recent rise in interest regarding Advance Directives. This is largely due to the advances in medical technology that are now able to prolong life well past what was once the norm. The amount of legal cases in the media involving comatose patients with family members battling over whether to stop life sustaining treatment has also added to the awareness of advance directives and to the interest from people who want to avoid such a situation in their future
Laws vary depending on the state but generally a patient’s written instructions will be upheld in the event there is any ambiguity or challenges. The Patient Self-Determination Act of 1990 requires hospitals to inform their patients about Advance Directives. In many states, hospitals will provide their own living will forms which follow the state’s specific requirements. You may also write and sign your own statement dictating your health care preferences, but it is advised that you adhere to your state’s requirements regarding witnesses. If you do not execute your document according to state law then it is invalid.
If you execute your document in your state of residence and are later hospitalized in a different state, then your wishes will still be upheld. However, it is advisable to draft an advance directive in each state you visit frequently, spend a lot of time in or have a residence in.
In the event you become incapable of directing your own medical care and you do not have an advance directive, the decision on how to proceed with treatment, or withdraw treatment, will be made by your family, your doctor and the hospital. If there is disagreement between those involved, a court may step in to resolve the conflict. In order to avoid your family members guessing over and fighting over what you would have wanted, you can create a medical directive. This avoids your loved ones being placed in a very difficult and potentially damaging position to make decisions on your behalf.
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You should review and change your will when you go through major life transformations, and divorce is one of the most disruptive life transitions. By updating your will you are avoiding future problems with loved ones over your estate and ensuring your wishes are carried out exactly as you intended. A little bit of planning now will avert potential disaster down the road.
What is a codicil? Let’s start with the basics to be clear on the legalities. A will is the legal declaration of a person’s wishes regarding the distribution of his or her property after death. Your will covers issues such as dictating whom will receive what assets and money from you, guardianship of your minor children, and how you wish your remains to be dealt with after death. A codicil is a formal, written revision to a will that amends the will by adding to it, subtracting from it or changing it in some way. In other words, a codicil legally updates your will to reflect any changes that you want made after the will was originally written.
When should I change my will? It is advisable to change your will when you have a life-changing event, a change in your financial situation, or a change in your beneficiary or beneficiaries. Your will should name an executor, the person you assign responsibility for carrying out the instructions in your will. Your executor will be your representative to the probate court, and will take charge of your affairs upon your death. Be sure to take into account applicable tax law when crafting your will to maximize the transfer of your wealth to your inheritors.
Does my divorce invalidate what I left to my ex-spouse? In most states once a divorce is finalized the law automatically revokes any provisions in your will that favor your ex-spouse. However, the best advice is to leave nothing to chance and to update your will with a codicil. If you fail to redirect the property originally bequeathed to your ex-spouse, then that property will either fall into the “residue” clause, or if there is none, it will pass to your intestate heirs. Avoid any potential complications by updating your will; it is well worth your peace of mind.
How do I change my will? There are two ways to make a change to your will.
- You can revoke your current will and write a new one, or:
- You can amend your existing will by crafting a codicil. A codicil is a formal supplement to your will. It requires the same process as executing a will—it must be written and signed by you and your witnesses. If you have a long list of changes to your will, consider revoking your old will and create a new one.
How do I revoke my will? By choosing to revoke your will you completely invalidate it, as if it was never created. You can revoke your will by two methods.
- Write a new will that includes a statement saying you are revoking your previous will.
- Physically destroy your will. If you choose to physically destroy your will (burn it, shred it, cut it up, etc.), be sure to destroy the entire will to avoid running the risk an ineffective revocation. For example, if you write “void” on your will then write it legibly and boldly across every page, not just the first page. And, make sure all copies of the will are so amended or destroyed.
Can I simplify things and just add a new clause at the end of my will instead of executing a codicil? No, that is not possible. Since the additional details were not present when the will was executed they are not legitimate. If you add anything new to the original will then you must re-execute it for the new information to be valid under the law. In short, it must again be signed by you and your witnesses.
If my attorney has my will can I have him or her shred it to revoke it for me? The only way that your revocation will be valid is if your lawyer destroys the will on your behalf with you present. Phone instructions, even if you are on the phone at the time the action is taken, are invalid.
Tips for updating your will:
- If you add a codicil to your will be sure to keep it with your will so it can be easily found.
- When writing a new will include a statement saying you are revoking all previous wills and codicils, that way if you forgot to destroy a copy of the old will or codicil you are covered. It is clear that this document is the most current and valid statement of your wishes.
- If you write a codicil, then later change your mind and want the terms of your original will reinstated you can revoke the codicil, making the terms of the original will valid once again.
- If your will was not properly executed (for example, it was not signed by witnesses, only you), and you write a codicil and execute it in accordance with the law, then the previously invalid will is made valid by the codicil being executed properly.
- It is wise to make changes to your will when you get married, divorced or have or adopt a child. You should also revise your will if you have a substantial change in your assets or financial situation, for example you sell or buy a house or business. It is a good idea to update your will if one or more of your beneficiaries pass away, change the status of your relationship to them making them no longer a desirable beneficiary (i.e. a divorce or have a falling out) or you have additional beneficiaries you want to include. You may also want to add a codicil to your will under the following situations:
- You want to add or change the nomination of any executor, trustee or guardian.
- You have Digital Assets you did not address in your existing will and want to include them now. (Digital assets can include online accounts or files stored on a computer or server, such as email accounts, blogs, social media accounts and photo and document sharing websites.)
- You wish to appoint a Digital Executor to handle your Digital Assets.
- You want to modify terms or restrictions on the receipt of a bequest.
Divorce is a time of seemingly endless changes and it can be exhausting to keep up with all the legal, financial and parenting changes during the transition. The most prudent advise – seek out an lawyer’s help if you need it, and update your will as a result of your divorce. You want to be certain that you are not leaving your loved ones in a prolonged legal battle, with a guardian you no longer find appropriate, or without the possessions and/or money you want them to have after your death. The peace of mind that comes from knowing that in the event of your death everything has been planned and will be executed according to the very last detail is truly priceless.
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