Newly single? Time to update your estate plan
Most people who go through divorce or separation believe that their legal work is complete once an agreement is made and papers are filed. But there is one additional piece of legal work that remains: an updated estate plan.
In addition to assets, newly single people need to reconsider the roles their ex-partner would have played and assign those responsibilities, including and especially making sure to designate someone to make decisions in the event of an emergency, incapacity, or death.
We can guide you as you put a new plan in place, line up a new roster of people, and update your accounts to reflect your new situation. You might also consider setting up a revocable trust, a type of legal entity that is used to avoid probate, the court process that transfers your assets into the names of your heirs. The trust is created during your life (“living”) and can be changed or revoked or amended by you at any time (“revocable”).
When someone passes away, the assets that they’ve left behind must be transferred into the names of their heirs. If there is not a revocable living trust in place, this process involves the probate court (also known as “surrogate’s court”). If there is a will, that must be first validated by the court and the executor is appointed and makes the gifts directed in the will. Alternatively, when there is a living trust in place, assets that are held by that trust can be gifted immediately according to the terms of the trust without any court involvement. This makes the transfer of assets much simpler when someone dies.
A will can also have a trust in it, as a place where assets can be directed to be gifted, which is common when there are minor children. These trusts are called “testamentary trusts” and are different from living trusts in several ways: For starters, they are part of the will, in other words, a subsection of the will directs the creation of such trust. Living trusts are separate documents and are not part of the will. The substantive distinction is that living trusts will hold assets during a person’s lifetime, whereas testamentary trusts hold assets only upon a person’s death.
This means that the funding (retitling of assets in the name of the trust) happens at two different times for these two different types of trusts: as part of the planning for a living trust and as part of the court process for a testamentary trust. That’s why living trust planning does entail more work during your planning process, but it’s usually worthwhile, given the benefits of a revocable living trust.
Having a revocable living trust in place has many advantages:
A trust allows for a faster, cheaper, and more efficient administration of your estate. In most cases, the administration of a revocable living trust is faster and less expensive than probate, which is the court process that transfers ownership of your assets to your heirs. Probate can be particularly burdensome when someone leaves behind a minor child or when relatives not included in the will contest its validity.
A trust allows urgent expenses to be paid. If you pass away, there may be expenses that need to be paid within days or weeks for your child and your home. Without a revocable trust, no one is able to access your financial accounts until the probate process is complete which could take months, creating a financial burden on your loved ones. A revocable living trust provides access to your assets immediately so that your family’s needs or other important expenses can be taken care of without delay.
A trust avoids a guardian ad litem. When a minor is involved in a probate proceeding, a court will appoint a guardian ad litem, which is a stranger who is tasked with representing your child’s interest in the proceeding. The appointment of a guardian ad litem slows down the process, and, since your estate is responsible for paying the guardian ad litem, it can add significantly to the cost of the process.
A trust allows for more flexibility in designing a creative estate plan. If you have specific ideas of how you want your assets managed and distributed, a trust is ideal. Giving a specific trustee the directives and discretion to manage complex or creative plans is better than having a court administer such an approach. The court is limited in its ability to interpret and apply directives, whereas an individual acting as trustee can be commanded to follow your wishes according to complex instructions found in a trust.
As a single parent, you may wish to provide more specific directives about caring for your child. For example, you may want to specify how the other parent’s financial responsibility should be considered. If they were unable to cover expenses, you can indicate that the trust may cover such expenses, through a loan or otherwise. You could also, for example, require a trustee work with a financial advisor; allow other individuals to request an accounting or view statements; and/or appoint a co-trustee.
A trust protects your privacy. When an estate goes through the probate process, a report documenting the value of each of your assets would be filed with the court and become part of the public record. The administration of a revocable living trust is a private process, eliminating the need to disclose any information to a court.
A trust eliminates probate in multiple states. If you own real estate outside of New York, transferring the property to your heirs may require a court proceeding in the state in which the property is located. Transferring the property into a revocable trust eliminates the need for an out-of-state probate, relieving your loved ones of the hassle of trying to oversee a distant court proceeding.
A trust allows a family member outside the U.S. to administer your children’s assets. Under New York law, a person who resides outside the U.S. cannot serve as the sole executor of an estate or as the sole trustee of a testamentary trust (i.e., your children’s trust). If you would like a non-U.S. resident to administer the assets left for your children, then it is important to establish a revocable living trust, which avoids court involvement and therefore has more flexible standards for who can serve as the trustee.
A revocable trust may avoid Medicaid recovery. Since assets in a revocable trust pass outside the “estate” of an individual, recovery after the grantor’s death may be avoided. New York law currently provides for Medicaid recovery against the probate estate only.
Fischer Harbage is an estate and tax planning law firm built for the way people actually live today. With offices in Brooklyn and Manhattan, we serve clients throughout the tri-state area.