I was a guest on Patti Handy's show "Starting Over" on KHTS in Santa Clarita. The show is for people starting over after a divorce or the loss of a spouse. Patti went through a divorce herself and put an estate plan and living trust in place when her son was 18 months old. Below are her questions and my answers. To learn more about Patti, visit www.PattiHandy.com.
What exactly is an estate plan?
Many people hear the word "estate" and think it has something to do with real estate, or that they must be wealthy like the Rockefellers. An estate plan is simply a plan for what to do with your stuff. If you have $25,000 in the bank and that is all you have, that is your estate. If you have $5 million, that is your estate. An estate plan is a legal toolbox: a living trust, wills, powers of attorney, health care directives and guardianship nominations for minor children.
Is an estate plan only about who gets your assets?
That is what most people think of, but the more important question is who has the legal authority to act for you. Many people assume their spouse or their child has that authority. They do not, unless they hold the legal documents. When I called my wife's credit card company to ask her balance, they would not tell me, because I had not shown them legal authority, even though we are married.
That is just the tip of the iceberg. Everyone needs a plan, divorced or not, because there will come a time when someone has to act for you, or when you pass away and your things need to reach the right people responsibly, especially minor children.
When is the right time to do it if you are going through a divorce?
Some clients call the day after they get divorce papers. There is not much we can do yet, because the dust has not settled. We do not know what is his and what is hers until everything is divided. Once you have your column of assets, you can make a plan for them. One client wanted to move his house into a trust during the divorce, but his wife's name was on the house, so he could not do it alone. When the divorce is over, we sit down and create the plan.
How do you put assets into a trust?
Say John Smith has a divorce and signs the "John Smith Living Trust." The document has no magical properties. You have to move your assets into the name of the trust. For real estate that means signing a new deed so the house is owned by the John Smith Living Trust instead of John Smith.
For bank accounts you go to the bank and have the accounts retitled to the trust. This is called funding the trust, and it is the biggest mistake people make: they do not do it. It is like building a house to your specifications and never moving in. What was the point?
What about IRAs and life insurance?
Those are a different animal. I tell clients to imagine two funnels. Some assets pass through the living trust funnel. Others, like life insurance and IRAs, care only about the beneficiary form. After a divorce you want to revisit those forms. You probably do not want your ex-spouse to be your primary beneficiary on your life insurance or your 401(k).
For people with minor children, the beneficiary can be the living trust. My own life insurance is payable to our family trust, not to my kids directly, because I do not want that money going directly to my children at a young age. The trust dictates when and how they get it, and if it is built right it also says when they do not.
What if my son is in a bad marriage, my daughter is in the middle of a lawsuit, or a child is disabled and should not receive money directly? You can build those protections into the trust.
Should you worry about an ex-spouse managing money for your kids?
Yes. In the John Smith trust, John can say that his brother Jack shall be trustee. John's kids still get the money, but Jack manages it, not John's ex-wife. That is especially important if the ex-spouse is not good with money or you suspect they would take it and go to Vegas. Do not name just one person. Name a deeper bench of two or three people in case your first choice cannot do the job.
Should you put your children on title to your assets?
I am not a big fan. After a divorce or the death of a spouse, many people start adding their children to title. There are several reasons it is a bad idea:
- If Mary puts her son Johnny on her house and Johnny is sued, files for bankruptcy or gets divorced, her house has a bullseye on it.
- A co-owner on a bank account can walk into the bank and take the money.
- If you have three or four children and put only Johnny on title, Johnny gets everything when you die, and he may not want to share.
There are tax ramifications too, but they are too complicated for the show. One caveat: if you are nervous, put most of your assets in the trust and keep a small "baby account" of, say, $2,500 or $5,000 with one child on title. That child can help you write checks and has access to immediate cash.
Should the trust or the child be the beneficiary of an IRA or 401(k)?
It depends. If you have three grown children in their mid-30s who are doing fine, naming the three kids is the shortest distance between two points and makes life easier. If you have minor children, or a child with a disability, or any reason to protect them, you may name your trust.
There are many caveats, but the question is whether you think they will be okay. Life insurance is different. The company writes one lump sum check, so I usually say to name your trust as beneficiary. The trust then says what happens to the money, and the person you chose manages it.
For example, I have a million-dollar policy, so I am worth more dead than alive, and that money goes to our family trust, where my brother-in-law would manage it for my children so that they would not have immediate access.
What about guardianship of children?
You specify it in your documents. After a divorce you may not want your ex-spouse to be guardian. I had a client whose ex-husband was verbally abusive. In her will we named other guardians and she explained why her husband would not be a good choice.
A judge may read that, so it is a way to communicate your reasons. You may not have much leeway, because a judge may order the natural parent, but sometimes that parent is absent or does not want the job, so you should name who is legally responsible for your children.
Why does a living trust help avoid probate?
Probate comes into play when you die with assets in your name alone, such as a piece of real estate with only your name on it, no joint owner and no beneficiary. I may have to go to a judge to get permission to give it to your child.
If the asset is in the name of your trust, I do not need the judge, because the trust owns it. Probate is only required when assets in your name alone exceed California's small estate limit. For deaths on or after April 1, 2025, that limit is $208,850, and it is adjusted every few years.
Many clients think probate is a necessary evil, but if everything is properly titled by trust or by beneficiary you will avoid probate almost all the time, which is a good thing.
Will you review an old estate plan?
I do that a lot. Sometimes I tell a client the plan is actually very good and needs nothing. If it is more than 10 years old, at the very least freshen up the powers of attorney and health care documents. They may be legally sufficient, but a financial institution, doctor or hospital may ask if you have anything newer.
Their policy might be that they do not honor documents more than five, seven or ten years old. You could go to court to enforce an old document, but that is a pain. I suggest revisiting your documents every seven years, and any time they no longer say what you want, such as when you want to change guardians or you have just divorced.
What happens to a living trust when you divorce?
You want to remake it. Revoke everything and start brand new.
What about remarriage and blended families?
Say John Smith has his own trust and several years later meets Sally, who may also be divorced with children and her own trust. There are many ways to go. I am a big fan of his and hers trusts, especially when people marry later in life. John stays in charge of his stuff and Sally stays in charge of hers. We leave John's plan alone but include Sally in some way, and Sally makes her own plan that includes John. Each can make changes when they want.
Ten years later, if the marriage is going swimmingly, they may decide to replace both trusts with one Smith family trust. The key is to address the elephant in the room: what happens when one of them dies? If Sally passes away, who takes care of her kids?
If John dies, what happens to his? It is like the Brady Bunch. Where the stepchildren do not like the new spouse, we can create a plan in which his children get, say, $100,000 each when he dies and then leave her alone. She rests easy knowing she does not have to worry about those children.
A life insurance policy payable to those kids can do the same thing.
When you meet the lawyer, both spouses should come, so that everything is above board and the plan suits everyone's needs.
How often do couples do separate trusts versus one joint trust?
About 50-50. I just did his and hers plans for a client named Cathy, because her assets already sat in her existing trust and retitling everything would have been a hassle. We tweaked her trust to include her new husband and he did his own plan. They also liked having dominion over their own things, so neither needs the other's signature to make changes. Other clients decide to start over with one joint plan. The trust can still say what happens when each spouse dies. If both parties have no children, things are simpler.
What is the most common problem you see?
The more detail you put in the trust, the fewer problems you have. The problems I see a lot are where the trust is silent on a particular issue, or came from an online document service. It is fine as far as it goes, but it does not address things specifically enough. My clients often say, "I didn't know there was that much to talk about." There is.
How can people reach you?
My website is mansourlaw.com (Mansour is spelled M-A-N-S-O-U-R), which has many helpful videos and articles. The phone number is 661-414-7100.