UPDATE YOUR ESTATE PLAN TO REFLECT YOUR SECOND MARRIAGE

If you are in a second marriage or planning another trip down the aisle, it’s vital to review and revise (if necessary) your estate plan. You probably want to provide for your current spouse and not inadvertently benefit your former spouse. And if you have children from each marriage, juggling their interests can be a challenge. Here are a few suggestions.

Pre-Nuptial Agreements

If you have not yet remarried, but intend to, we recommend that you and your proposed spouse enter into a Pre-Nuptial Agreement setting forth your respective understandings regarding the control that each party will have over his or her own assets both during the marriage and in the event of a divorce or death. This process can take several weeks or even months to accomplish and should not be left to address in the week or two weeks before the wedding date.

Take inventory

Have you updated your will, trusts and beneficiary designations to name your current spouse where desired? Remember that the terms of your divorce may require you to retain your former spouse as a beneficiary of certain pension plans, retirement accounts or insurance policies. It is important following your divorce to review all of your beneficiary designations.

Next, assess your financial situation and think about how you want to provide for various family members. For example, do you want to provide for all children equally? Will you favor biological children over stepchildren?

Also, are children from your first marriage significantly older than children from your second marriage? If so, their needs likely will be different. For example, if children from the first marriage are college age, in the short term they may need more financial support than children from your current marriage. On the other hand, if your older children are financially independent adults, they may need less help than your younger children.

Use trusts

Trusts generally avoid probate, so your assets can be distributed efficiently and without probate court involvement. However, if you leave your wealth to your current spouse outright, there’s nothing to prevent him or her from spending it all or leaving it to a new spouse, effectively disinheriting your own children. To avoid this result, you can design a trust that provides income for your current spouse while preserving the principal for your children.

Trusts are particularly valuable if your children from a previous marriage are minors. Generally, if you leave assets to minors outright, those assets must be held in a conservatorship until the children reach the age of majority (i.e., 18 years old in Michigan). It’s likely that your former spouse will be appointed a conservator, gaining control over your wealth. Even though your former spouse will be obligated to act in your children’s best interests and will be supervised by a court, he or she will have considerable discretion over how your assets are invested and used.

To avoid this situation, consider establishing trusts for the benefit of your minor children. That way, a trustee of your choosing will manage the assets and control distributions to or on behalf of your children.

If you’re contemplating a second or third trip down the aisle or have recently wed for the second or third time, contact us for help reviewing and, if necessary, revising your estate plan.

THE WRITE STUFF: A LETTER OF INSTRUCTIONS

When you draft an estate plan, the centerpiece is your will or living trust. Such a document determines who gets what, where, when and how, as well as tying up the loose ends of your estate. A valid will or living trust can be supplemented by other legally binding documents, such as trusts (or additional trusts), powers of attorney and health care directives.

But there’s still a place at the table for a document that has absolutely no legal authority: a “letter of instructions” to your heirs. This informal letter can provide valuable guidance and act as a road map to the rest of your estate.

Taking inventory

Begin your letter of instructions by stating the location of your will or living trust. Then create an inventory of all your assets and include their location, any account numbers, and relevant contact information. This may include, but isn’t necessarily limited to, checking and savings accounts, 401(k) plans and IRAs, health insurance policies, business insurance, life and disability income insurance, stocks, bonds, mutual funds and other investments, and any tangible assets your heirs may not readily find.

The contact information should include the names, phone numbers and addresses (including emails) of the professionals handling your financial accounts and paperwork, such as an attorney, CPA, financial planner, banker, life insurance agent, and stockbroker. Also, list the beneficiaries of retirement plans, IRAs, and insurance policies and their contact information.

Guidance for personal preferences

A letter of instructions is more than just a listing of assets and their locations. Typically, it will include other items of a personal nature, such as funeral, burial or cremation arrangements, accounting of fees paid for cemetery plots or mausoleums, the names, addresses and telephone numbers of people and organizations to be notified upon death, and specific instructions for handling personal and financial affairs after you’re gone.

The letter can also expand on instructions in a living will or other health care directive. For example, it might provide additional details about the decision for being taken off life support systems. It may also cover charitable contributions you wish to have made in your memory following your death.

Some people have various thoughts regarding their own funerals, including the order of the service and the music and readings to be used.  Some also would like certain items included in their eulogies. These matters can be addressed, as well, in the letter.

Putting pen to paper

As you’re writing your letter, bear in mind that there are no legal requirements making the letter enforceable. And just like a will or living trust, the letter should be updated periodically to reflect significant changes in your life. Finally, keep the letter in a safe place where the people whom you want to read it can easily find it. Contact us if you have questions or would like assistance in creating a letter of instructions.

A CHARITABLE REMAINDER TRUST CAN PROVIDE A MULTITUDE OF BENEFITS

 

If you’re charitably inclined but concerned about having sufficient income to meet your needs, a charitable remainder trust (CRT) may be the answer. A CRT allows you to support a favorite charity while potentially boosting your cash flow, shrinking the size of your taxable estate, reducing or deferring income taxes, and enjoying investment planning advantages.

How does a CRT work?

You contribute stock or other assets to an irrevocable trust that provides you — and, if you desire, your spouse — with an income stream for life or for a term of up to 20 years. (You can name a noncharitable beneficiary other than yourself or your spouse, but there may be gift tax implications.) At the end of the trust term, the remaining trust assets are distributed to one or more charities you’ve selected.

When you fund the trust, you can claim a charitable income tax deduction equal to the present value of the remainder interest (subject to applicable limits on charitable deductions). Your annual payouts from the trust can be based on a fixed percentage of the trust’s initial value — known as a charitable remainder annuity trust (CRAT). Or they can be based on a fixed percentage of the trust’s value recalculated annually — known as a charitable remainder unitrust (CRUT).

Generally, CRUTs are preferable for two reasons. First, the annual revaluation of the trust assets allows payouts to increase if the trust assets grow, which can allow your income stream to keep up with inflation. Second, you can make additional contributions to CRUTs, but not to CRATs.

The fixed percentage — called the unitrust amount — can range from 5% to 50%. A higher rate increases the income stream, but it also reduces the value of the remainder interest and, therefore, the charitable deduction. Also, to pass muster with the IRS, the present value of the remainder interest must be at least 10% of the initial value of the trust assets.

The determination of whether the remainder interest meets the 10% requirement is made at the time the assets are transferred — it’s an actuarial calculation based on the trust’s terms. If the ultimate distribution to charity is less than 10% of the amount transferred, there’s no adverse tax impact related to the contribution.

As an alternative, you might want to consider a Charitable Gift Annuity (CGA):

How It Works

  • You transfer cash or securities to a qualified charity. Different charities have different minimum requirements.
  • The charity pays you, yourself and a spouse, or any two beneficiaries you name, fixed payment for life.
  • Beneficiaries are recommended to be at least 60 years of age at the time of the gift.
  • The remaining balance passes to the charity when the contract ends.

The Benefits of a CGA

  • Receive dependable, cash-flow for life, regardless of fluctuations in the market.
  • In many cases, receive payments at a rate higher than the interest you are currently receiving on the cash or securities used to establish the CGA.
  • Receive an immediate income tax deduction for a portion of your gift.
  • A portion of your annuity payment will be tax-free.
  • If you are you a younger donor, you might consider a deferred gift annuity.

Handle with care

If the estate tax is repealed as part of tax reform as has been proposed, these tools would become less beneficial from an estate tax perspective. But they could still help the charitably inclined achieve their goals. CRTs require careful planning and solid investment guidance to ensure that they meet your needs. CGAs are usually a bit less complex  However, before taking action, discuss your options with us.