Impact of Divorce on Estate Planning Login

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Impact of Divorce on Estate Planning Login Powered By Docstoc
					    Effect of
  Divorce or
 on Existing
Estate Plans
About your presenter:
  Ronald   C. Morton
    Mississippi   College, B.S. 1988;
     J.D. 1992
    University of Alabama, LL. M.
    Certified Elder Law Attorney
    Memberships
      American Academy   of Estate Planning
      WealthCounsel
      National Academy of Elder Law Attorneys
      ElderCounsel
Why You Need to Understand
     Estate Planning?
  Many   of Your Clients have
   Estate Plans
  Divorce Will Probably
   Impact Those Plans
  If you Do Not Factor In
   Those Plans It Will Probably
   Cost Your Client Money
  Your Client Will Look For
   Someone to Blame
      Overview of Covered
 Wills,Trusts & Spousal Elections
 Basics of A/B Trust Planning
 IRA’s & Qualified Plans
 Deferred Compensation
Overview of Estate
  What is an Estate?

          of value that
 Everything
 you own makes up an
   Cash
   Accounts
   Vehicles
    But Don’t Forget…

 Life Insurance
   Full face value of policy

 Retirement Assets
   401k,   IRA
    Choice of Beneficiaries
 Intestacy:
   Restricted   beneficiaries
 Wills:
   Name   anyone as beneficiary:
      Spouse,  Children, Relatives
      Friends, Strangers
      Charities
 Spouse Restrictions on Wills
 Rights    of surviving spouse:
   Difficult
            to disinherit the Spouse
   Can “elect against the will”
      Setoff   to extent separate estate exceeds
   Right to One Year’s Support
   Right to Home until death or
 Spouse     may consent to the will:
   Reduces      risk of challenge
Can Trust Disinherit Spouse?
Basics of Trust Based
Think of the Trust as a Box

          Holds title to assets
   3 Rolls in Every Trust …
 Grantors
  Create   Trust and transfer their assets
 Trustees
  Manage   Trust assets
   but can’t spend them
   on themselves
 Beneficiaries
  All Trust assets are
   for their benefit
  2 Primary Types of Trusts

 Revocable
   Canbe amended, restated or
   revoked by grantor
 Irrevocable
   Cannot   be changed by grantor
        2 Types of Trusts

 Revocable   Trusts
   Grantoris “Owner” for purposes of
   Division of Property in Divorce
 Irrevocable   Trusts
              is “Owner” for
   Beneficiary
   purposes of Division of Property in
            Trust Grantors

 1st   Party Trusts
   TrustCreated by the Grantor for his
    own benefit
 3rd   Party Trusts
   Trusts created by Grantor for the
    benefit of others
            1 st Party Trusts

 Not   Protected from Creditors
   Miss.   Code Ann. 91-9-509
 Comparewith Laws in Allowing
 Domestic Asset Protection Trusts
   TN,   NV, AK, DE & SD
     Irrevocable
     Trustee Discretion
     Trustee Resident in Situs State

 Pre-Marital   Strategy ?
         3 rd Party Trusts

 Established    by 3rd Party
   Frequently   Parents
 Discretionary    Distributions
   Frequently Designed with Child as
    Management Trustee
   Appoint Distribution Trustee with
    Sole Discretion over Distributions
 Provides Asset    Protection During
Can Trust Disinherit Spouse?

 Unanswered   Question in
  Presumption   would be yes, since
   statutes are strictly construed
  But Strong Public Policy
   Against Impoverishing Spouse
      Other Estate Issues

 Children’s
 Guardianship Appointment
      Restrictions on Wills

 Rights   of children:
   Pretermitted  heirs
   Intestate rights
   No Forced Heirship Rights in

 No Statutory Right to Name
  Guardian of Minor Child
 Courts Will Give Strong
  Deference To Wishes of Parent
 Strong Presumption in Favor of
  Natural Parent
Taxation of
      4 Gifts in Tax Code

 Stepped   Up Basis for Inherited
 Continued Income-Tax Deferral
  for Inherited IRA’s
 Income-Tax Free Treatment of
  Life Insurance Proceeds
 Unlimited Spousal Deduction
Distinction Between Probate
   Estate & Taxable Estate
 Probate   Estate = All Titled

 TaxableEstate = Probate
 Estate + Contract, Beneficiary,
 & POD Assets
… and the Federal Estate Tax Is

          41% to 55%
      Exclusion      Year
      $1,000,000     2002-2003
      $1,500,000     2004-2005
      $2,000,000     2006-2008
      $3,500,000     2009
      Repealed       2010
      $1,000,000     2011
  Common Plan to Minimize
  Taxes for Married Couples
 A/B   Trust
    A/B Trust Tax Planning - $2M Estate
                                                  Checking account
                                                     Life insurance

Both Spouses are the Co-                                       IRA
Grantors and Co-Trustees
                              First Death

  (Revocable)                   INCOME               (Irrevocable)
      "A"                                                 "B"
   $1,000,000              PRINCIPAL for HMSE          $1,000,000

                       PRINCIPAL 5% or $5,000
Mary is sole Trustee
and sole Beneficiary
                             Second Death

            Children                            Children
A/B Trust

Above ground
               Below ground
What About Unequal Estates?

 Funding of “B” Trust is Limited
 to Assets Owned by Decedent
    Estate Equalization

 Alternatives to Equalization

         QTIP Trust
 Lifetime
 Testamentary Power of
  Appointment Trust
   PLR   200101021
   Divorce Eliminates A/B
 ExSpouse’s Estate < Exclusion =
 No Planning Needed

   Spouse’s Estate > Exclusion =
 Ex
 New Planning Required
   Alternative Tax Planning

 Irrevocable   Life Insurance Trust
 Sale   to IDGT
Division of
 Qualified and Non Qualified
   Complete   Preemption of State Law
   State   Law Governs
 ERISA Plan Rights of Spouse

 Right to Be Named Beneficiary
 Alternate Beneficiary Requires
  Waiver of “Spouse”
 Pre-Marital Agreement Not
 Post-Marital Agreement Not
  Binding on Plan Administrator
   “Plan   Documents” Rule
  2 Types of Qualified Plans

 Defined   Benefit
   Pension

 Defined   Contribution
   401k
  Division of Qualified Plan
 QDRO   Required
 Distribution Without QDRO
  Taxable to Account Owner
Requirements for Valid QDRO

 Child Support, Alimony, or
  Marital Property Rights
 Create or Recognize Right of
  Alternate Payee
 Must Specify:
   name,address, amount or
   percentage, number of payments,
   each plan affected
         Impact of QDRO

 Alternate Payee is Taxed on
 10% Penalty is Waived
 Alternatively, can Rollover into
  own IRA if Spouse or former
       Impact of No QDRO

 ExSpouse gets account money
 Account Owner gets Taxed
       Non-ERISA Accounts

 No   QDRO Required
   Individual Retirement Account (IRA)
   Simplified Employee Plan (SEP)

 Spousal Consent Not Required to
  Name Alternate Beneficiary
 Only need letter of instruction
 Some Plans Will Not Accept
 State Retirement
 Religious Retirement Plans
  (“church plans”)
 Strategies for Dividing Tax
 Deferred Assets in Divorce
   Rollover into IRA
   Stretch Tax Deferred Growth
   Convert to Roth IRA

 Other   Property
   Discount for Present Value
   Watch for Unrecognized Gain in
    Other Property
   Sell House while Married if Equity >
  Strategies for Dividing Tax
  Deferred Assets in Divorce
 Life   Insurance
   Tax  Free Benefit vs Tax Deferred
   Single Pay Premium
   Gift Premium While Still Married
          QDRO Traps

 Date  of Valuation & Division
 Responsible Party for Drafting
 Responsibility for Outstanding
 Alternate Plan Spelled Out in
  Settlement Agreement
 Stay away from generalities
  “retirement plan.”
              QDRO Traps

 Adjust  for Earnings and Losses?
 Amount rather than %?
 “Surviving Spouse” Designation
  if Death Before & After
   Defined   Benefit Plan
     Qualified   Pre Retirement Survivor
   Defined   Contribution Plan
          QDRO Traps

 Who is Drafting the QDRO?
 Who will Pay for the QDRO?
      Non Qualified Deferred
   Compensation for Highly
    Compensated Individuals
     Rabbi  Trusts
     Vesting Trusts
     Life Insurance

 Law Limits Withdrawals from these
 Divorce is not a stated exception.
 Interim guidance indicates that
  divorce is beyond employee’s control.
Charitable Remainder Trusts

 Canbe divided between Spouses
 as part of a divorce decree.
   PLR   200823015; 200824002
 Division not taxable event
 But acceleration upon death of
  first spouse is not compensated
  by increase in charitable
132 Fairmont St., Suite A
Clinton, MS 39056
Phone: 601-925-9797
Fax: 601-925-9774

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