Estate Planning Ideas for Divorced or Remarried Parents By Attorney Daniele Redmond Streed Law Office of Redmond & Redmond Like all parents, you owe it to your children to plan for every contingency, including the possibility that an untimely death may remove you from the scene. That's why, if you don't already have one, an up-to-date estate plan should be at the top of your to-do list. The younger your children are, the more imperative this becomes. In the age of divorce, remarriage and blended families, parents who are divorced or remarried have even greater need for estate planning and more difficult challenges to overcome. It is important to ask yourself, what is at stake? Believe it or not, more than most parents imagine. There are several unwelcome possibilities that your family could face should you die without a carefully designed estate plan in place. If you die without any estate plan at all, you have relinquished authority over distribution of your estate to the State of Michigan. The rules of distribution vary from state to state, so your state will divide up your property and disburse it among your family according to a predetermined formula. Michigan laws regarding intestate succession will be changed in April 2000. Dying Without an Estate Plan For many parents, the state's distribution plan is worlds apart from how they would distribute their assets if could oversee that distribution. For instance, most parents realize that younger children with college still ahead of them will need a greater share of their estate than grown children living out on their own. Your state's predetermined formula may not take into account the earning potential or health of your new spouse. A stay-at-home spouse or one with a disability may need greater financial support than your grown children from a previous marriage. The point is that you, and not the state of Michigan, should be in a better position to decide how your estate should be divided among your loved ones. Unless you plan ahead, your opportunity will be lost. Exposure to Probate Here's another reason why it's unconscionable for a parent to die without an estate plan. In that case, your estate will go through probate. This is often a time-consuming, costly and public proceeding. Although the probate court may allow interim distribution of your assets to support young children, probate may still impose a financial hardship on them and their custodial parent or guardian until your estate is finally settled. Without a will or other estate plan in place, your probate proceedings could become a freeñ-for-all, as family members battle over the right to serve as your executor or stake competing claims to your estate. Only you can ensure that the transfer of your estate occurs as trouble-free and expeditiously as possible. Keep in mind, too, that your estate will also go through probate when you use a will as your estate planning tool of choice. For many Americans, that's reason enough to choose other estate planning options. Naming a Guardian In most cases, your ex-spouse will get custody of your children if he or she isn't already the custodial parent. In rare cases, the surviving parent may not be suitable or able to assume full-time guardianship of your children. In that case, you should make sure you've worked with your attorney to nominate someone else to serve as their guardian. Updating Beneficiaries After you divorce, remember to update your beneficiary designations on such financial instruments as your life insurance policies, stocks, bonds and other assets. A word of caution! Check your divorce decree first. You may be obligated by court order to name your ex-spouse as a beneficiary for a specific amount of life insurance proceeds. In addition, your ex- spouse may be entitled to a portion of retirement benefits accrued while you were married. Your attorney will help you determine the assets for which you can assign new beneficiaries. Controlling Distribution of Assets If you leave assets to your minor children outright, keep in mind that your ex- spouse will probably be the one to control and manage them. Like most divorced parents, you may find it completely unthinkable that your ex-spouse will have discretion over how your assets are spent. You may also have reason to fear that your children will not enjoy the full benefit of your legacy as you intended. Without effective strategies incorporated into your estate plan, these are two very possible outcomes. Ownership of Property Many remarried individuals don't think twice about owning property in joint tenancy with their new spouse. It's an automatic reflex to put both your name and your spouse's name as joint owners on the title of a new home, autos, and cash accounts. Unfortunately, when you do that, you effectively disinherit everyone else, including your children from a previous marriage. Joint tenancy -- more accurately called joint tenancy with rights of survivorship -- means that when one of the owners die, the surviving owner inherits the deceased owner's portion. So there is no opportunity for you to allocate assets to your children. Once again, you need to do some careful planning or you could disinherit those you love. Essential Estate Planning Strategies for Parents Fortunately, all the problems described above can be neatly countered with a well designed estate plan that addresses your concerns for your children and new spouse. For most parents, the estate planning issues of greatest concern are: Controlling to whom, when and how their assets are distributed after death. Capturing every tax break available. Avoiding probate. Here are just three of the estate planning strategies that can help you achieve these objectives. The Revocable Living Trust Growing in popularity year by year is this versatile estate planning tool. Unlike a will, it allows you to avoid probate, with all its potential for delay, expense and public exposure. Upon your death, your designated Successor Trustee assumes responsibility for management and distribution of your assets, which are owned by your Revocable Living Trust. Your Trustee will follow the directions you have provided in your Trust documents, including when you want assets distributed, to whom and how. You may decide, for instance, that your minor children should receive regular distributions for education, maintenance, health care or other essential expenses. Or you can instruct your Trustee to provide lump sums to your children after they achieve certain milestones -- such as an attained age or a major event like college graduation, marriage or a new baby. The point is, you have complete discretion to control how and when your money is distributed. In addition, the Revocable Living Trust allows you to capture estate tax advantages. The Children's Trust Another estate planning strategy popular among parents is the Children's Trust. It is similar to the Revocable Living Trust, with one notable exception: The Children's Trust is irrevocable. Once you transfer title of assets to it, you can't take them back. That small loss of control, however, is more than made up for by the tax advantages you gain with a Children's Trust. For instance, assets transferred to the Children's Trust are removed from your estate for estate tax purposes. Of course, you'll be limited each year to transfers of assets worth no more than $10,000 per child. But given sufficient time, you'll be able to remove a substantial amount from your estate to your children's. Further, those assets transferred from your estate to your Children's Trust are out of the reach of your creditors. The Irrevocable Life Insurance Trust The Irrevocable Life Insurance Trust -- or ILIT for short -- accomplishes several important objectives for parents. First, it lets you remain in control of the distribution of your life insurance policy's proceeds long after you're gone. Your Trustee will follow your instructions, and disperse the policy's proceeds to your beneficiaries when and how you want. So, rather than let minor children, who may not be ready to manage a large sum of money, squander your legacy, you can ensure that the proceeds are spent for a college education, a first home, or other worthwhile expenditures. For many parents, those advantages alone are enough to recommend the ILIT. But it also offers exceptional tax advantages. When the federal and state governments tally up your estate tax liability, they will include the proceeds of any life insurance policies you own at the time of your death. Because these proceeds are often for sums well over $100,000, they can easily push your estate value over your $650,000 estate tax exemption. When you use an ILIT, however, you no longer own the insurance policy. The ILIT does. Thus, the death benefit proceeds are outside your estate and will have no impact on your estate tax liability. Getting Started Any of these solutions -- or a combination of all three -- may help you achieve the tax advantages and control you seek. Equally important is the peace of mind you will gain when you know that your children will be well provided for. Because your goals and your family's situation are unique, seek out the counsel of an attorney who concentrates on these estate planning strategies. Only he or she will be able to show you in how you can best employ them for your children's benefit.
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