This month, I want to take a break from reviewing what is happening in the markets to talk about estate planning. To be more specific, I’d like to walk you through three recurring problems we’ve seen time and again, and, more importantly, how you can avoid them.
These three problems are outside the scope of what people traditionally consider when developing their estate plan. Fortunately, with a little knowledge and proper planning, all these problems are preventable.
Problem One: Estate Planning With Second Marriages
Consider a couple who are in a second marriage, and both bring children from their first marriage. It’s common for the new couple to agree to transfer assets to each other upon death, with the intent of splitting the remaining assets among all children after the second spouse passes away.
The problem is that upon the first spouse’s death, the surviving spouse can change beneficiary designations so that all assets go exclusively to his or her children from the first marriage, thereby disinheriting the other spouse’s children from their first marriage.
Similarly, this same problem can occur when a couple has children, one spouse passes away, and the surviving spouse remarries a person who also has children.
To prevent this from happening, certain trusts can be set up while both spouses are living to ensure that children are treated according to the plan agreed upon while both second-marriage spouses are living.
Problem Two: Beneficiaries Mismanaging Inheritances
A second problem occurs when children inherit assets from their parents, but they aren’t good at managing money. When this occurs, the old saying, “Easy come, easy go,” seems to prove true from my experience.
I rarely see individuals who worked their entire lives to save a nest egg for retirement blow through their money upon retiring. Unfortunately, it is not uncommon to see beneficiaries squander their inheritance, especially if they have a history of poor money management habits.
To prevent this from occurring, parents can create an estate plan that ultimately places a spendthrift child’s inheritance into a trust that regulates how much the child can take out. These trusts can be created in a variety of different ways based on the parents’ wishes. For example:
- The spendthrift can receive a specified monthly amount.
- Additional monetary amounts can be granted to the child for certain emergencies as outlined in the estate plan.
- Provisions can be made for a variety of circumstances depending on what the parents wish.
Once a plan is created, the trustee who oversees this trust for the spendthrift child will ultimately ensure that the parent’s wishes are carried out after they pass. This trustee can be a known person or a hired company that provides this service for a fee.
One potential benefit of using a company that acts as a trustee is that there is no personal or emotional attachment to the child. If a friend or family member who knows the child is appointed, that connection can potentially influence decision-making or affect the relationship between the child and the trustee.
Problem Three: Marital Property And Community Property States
The third problem that gets overlooked with estate planning occurs with people who live in marital property or community property states.
These states generally require marital property assets to be split 50/50 upon divorce: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Alaska, Florida, Kentucky, South Dakota and Tennessee allow couples to opt into a community property system. If you live in one of these states or have a child who lives in one of these states, you will want to pay special attention to this section.
When money is left to a child who lives in one of these states, and they are left an inheritance that they commingle with assets from their marriage, it could become community property. In this circumstance, the child could lose up to half of their inheritance to their ex-spouse amid a divorce.
Fortunately, attorneys can create trusts that help ensure a child’s inheritance remains protected, even in the event of a divorce, while living in a marital property state.
Protecting Your Legacy
Now that you understand the three problems that are not frequently discussed when developing an estate plan, you should be armed with the intel to prevent these problems from occurring to your family. When considering working with a professional, I encourage everyone to have conversations with at least a few reputable estate attorneys before making the ultimate decision about who to use to ensure that your life’s work doesn’t get squandered due to a lack of planning.
