Updating Estate-Planning Documents at Divorce

This story of a divorcing couple in Arizona demonstrates why you need to update your estate plan at divorce.

The couple, who were in their early 40’s and had been married for several years, had created a multi-million dollar business together. When they filed for divorce, the process became bitter and full of disagreements about small issues. They were thinking in the moment about the immediate dollars and cents, but didn’t consider what would happen with their assets at death.

One night, the wife had dinner with friends. Sadly, she died in a tragic car accident on her way home.

Neither she nor her husband had changed their wills. As a result, everything she had, including the half of the business that belonged to her, went to her husband. Her family was left with nothing.

In this case, an interim will could have stated that her share of the marital estate would go to her parents.

The lesson: during divorce, update your will to ensure your assets go where you want them to go, such as to your parents or to a child.

In addition to changing your will, you must also change the following:

Power of Attorney and Health Care Proxy documents

It’s essential you change your powers of attorney during divorce, to ensure that your financial decisions will not be made by your divorcing spouse, and also your health care proxy so that your divorcing spouse cannot make medical decisions for you.

Guardian for your minor children

If you have chosen a guardian for minor children in your will, any change will have to be agreed to by your estranged spouse. You cannot create an interim will that excludes the other parent as guardian, unless your spouse’s parental rights have already been removed.

Accounts with named beneficiaries.

While you are in the process of divorcing, you typically cannot change the named beneficiaries on 401(k) plans or life insurance policies, though if needed you might be able to obtain an interim order to authorize a change. Once your divorce agreement is in place, it might state which beneficiary designations can and cannot be changed. Be sure to make the appropriate changes.

Once your divorce is final, remember to review interim documents and other documents again. Any trust you have with your former spouse will have to be revoked or amended. The assets will have to be moved to a new trust.

Preventing A Will Contest

When you write a Will, you have control over how your assets will be distributed after your death. However, if someone in your family disputes your Will, a probate court judge could end up with the final say over who gets your property.

Emotions run high when someone dies. If family members aren’t content with what they’ve received, or don’t believe your wishes are being interpreted property, they may contest your Will. Will contests can drag on for years, preventing your heirs from getting the assets you wanted them to receive.

As part of creating an estate plan, look for ways to reduce the possibility that someone could challenge your wishes. Here are some steps you can take to ward of a Will contest after your death:

1. Start Early. Make your estate plan while you are of sound mind. If you wait until your health is failing, or your mind is impacted by an accident, your Will becomes vulnerable to claims that you lacked sufficient mental capacity to draft it.

2. Prove Competency. When you write your Will, you can ask a physician and/or your attorney to certify that you are mentally competent. A video record at the time you sign the Will can also help demonstrate you acted with a clear head and of your own free will.

3. Get Qualified Legal Advice. There are do-it-yourself books and online tools available for writing your Will. But using an estate planning attorney is the best way to ensure it is property executed and valid. If you do choose the DIY rout, have it reviewed by an attorney.

4. Consider Trusts. There are a variety of Trusts that direct how your assets are managed, held, and distributed to your heirs. With a Trust, you generally can avoid probate and increase control over how your estate is settled. Your heirs will receive their inheritance more quickly, and privately, with potentially fewer costs to the estate.

5. Write Your Will Without Interference. Avoid complaints that someone exerted undue influence over you when you write your Will. To help avoid such contests, don’t have your beneficiaries sign as witnesses, and don’t include them in meetings with your attorney.

6. Share Your Intentions. Consider talking to your family about the intentions in your Will. Let your heirs know why you’ve designed it the way you have, or write an explanatory letter to accompany your Will. Generally what you put in the letter will not have a legal effect on your Will, but it can help family members accept your choices.

7. Include A No-Contest Clause. A no-contest clause stipulates that anyone who contests the Will, and then loses that contest in court, is disinherited from what they would have otherwise received. No-contest clauses aren’t enforceable in all States, and they’re only effective if you’re leaving your heirs enough value that they wouldn’t want to risk the challenge.

Once your Will is complete don’t just file it away. Sit down regularly with an attorney to make updates that reflect your current situation. Changes such as moving, having grandchildren, or losing a loved one, can significantly impact your estate plan.

Your Health Savings Account Can Be a Stealth IRA

Generally, people don’t think about a Health Savings Account (HSA) as a savings account. The HSA was intended to be a tax-advantaged account to pay for medical expenses, but in certain ways it’s better than an IRA.

An HSA is a tax-preferred investment account with triple tax advantages. Your money isn’t taxed when it’s contributed, as it grows, or when you spend it on qualified expenses. It’s the only tool that allows you to contribute tax-deductible dollars and take them back out tax-free.

Unlike flexible spending accounts, there’s no “use it or lose it” provision, meaning the account can continue to grow and gain in value.

In order to open an HSA, you must be enrolled in a High Deductible Health Plan. For 2019, this is defined as one with deductible of at least $1350 for an individual or $2700 for a family.

The 2019 contribution limits are $3500 for an individual and $7000 for a family. If you’re over 55, you can add $1000 in catch-up contributions. This is better than the limits on both traditional and Roth IRA’s.

Plus, unlike IRA’s, there’s no income limit on deducting contributions to an HSA. Your contributions remain deductible no matter how much you earn. An HSA combines the tax benefits of a Roth IRA and a traditional IRA in one sheltered account. If you don’t use the money, it can continue to grow tax-free.

If you withdraw money before age 65, you must use it to pay for qualified medical expenses. Otherwise, you’ll be subject ti income tax and a 20 percent penalty. However, once you reach age 65, you can withdraw money for any reason. At that point, you can continue to use your HSA funds for medical expenses and avoid taxes, or you can withdraw funds for other purposes and pay income tax on the amount. Essentially, you have the option to treat it like a traditional IRA once you reach age 65.

Considering your expected health care costs in retirement, an HSA may be a better savings tool than other options. Talk to an advisor about adding it to your financial strategy.

Keep Your Tax Credit for Charitable Gifts

Following the Tax Cuts and Jobs Act (TCJA), many taxpayers are concerned about losing tax breaks for charitable contributions. Under the law, fewer households have a tax incentive to make charitable gifts. However, with planning, individuals and businesses can still benefit from donations.

The law increased the standard deduction to $12,000 for individual filers and $24,000 for married households filing jointly. This increase, plus the elimination of other deductions, means many households will no longer itemize, essentially losing the benefit of their charitable gifts.

However, you can still leverage contributions if you bundle several years of giving into one tax year and surpass the standard deduction limit. You’ll have higher giving one year and less the next. This strategy works well for households already close to the new standard deduction limit.

January-December bundles

One approach is to donate at the beginning of January and the end of December. This comes closer to normalizing cash flow for both you and the charity. Just be sure the charity records the correct date on your receipt.

Donor advised funds

Another approach is to bundle your giving in a donor advised fund (DAF), available through brokerage firms and community foundations. With these funds, you get a tax benefit for the year you donate, but you have unlimited time to decide how you want to allocate those gifts. This strategy is scalable, meaning you can put several years of donations into one DAF.

Appreciated stock

Under the new law, you still get a tax break for donating shares of appreciated stock, mutual funds, and real estate. By making the gift directly, instead of selling the asset and then making a gift, you eliminate the tax consequences.

Charitable advertising

Businesses still can gain a tax benefit from charitable sponsorships or advertising through a charity. You could, for example, sponsor a golf outing or advertise in the charity’s newsletter. If certain conditions are met, such exchanges are deductible as business advertising. Your preferred charity benefits, and you retain the savings.

Be aware that you can’t inflate the value of a sponsorship or ad. For the promotion to be deductible as an advertising expense, there must be a reasonable expectation that you will receive a proportionate financial return. If there’s a rational reason your company would benefit from a sponsorship, you may be able to claim a deduction.

Talk to an advisor to build your giving strategy and ensure you are meeting any requirements under the new law.

Make an Estate Plan for Your Digital Assets

Today, 77 percent of Americans go online every day, according to a recent Pew Research Center survey. And, most of us maintain at least some kind of digital data in the cloud. We save emails, post to social media, and store photos in online albums.

All of this digital information has created a new issue for you, your heirs, and the technology firms that hold your assets. The key concern is maintaining your privacy and security, and determining who can legally access this information upon your death.

A statute called the Revised Uniform Access to Digital Assets Act provides a legal path for fiduciaries (such as your Personal Representative or attorney-in-fact) to manage your digital assets if you die or become incapacitated. But under the law, which has been adopted (often in slightly modified versions) by most states, a fiduciary can access your digital assets if, and only if, you've given proper consent. 

What are digital assets?

Digital assets include your online accounts, your emails, your social media, online photo storage, personal websites or blogs, URLs you own, etc. 

What's the concern?

Even though many digital assets have no monetary value, you may want some control over what happens to them when you die. Think about what digital assets you may have, and whether you would want those assets deleted, modified, or distributed to family. 

Until the uniform law was enacted, it was difficult to know who had a legal right to access these accounts and files. Some user agreements indicate that these assets are non-transferable, meaning they are either untouchable or can simply be deleted when you die. 

Beyond privacy issues, some digital assets do have value. Frequent flyer points are transferable after death, credit card points can be redeemed, and URLs may be sold. 

What's your legal protection?

Under the uniform law, your family members or personal representative  can't access your digital assets just because of that relationship. Other users, including family members, need express authorization to access your accounts and information.

How can your personal representative and/or family have access?

1. Insert a provision in your will that grants your personal representative the authority to access digital assets and accounts. If you want someone other than your personal representative to access your digital assets, you can appoint a special fiduciary for that specific purpose. 
2. Add language that grants your power of attorney authority to act on your behalf in terms of digital assets. 
3. Inventory your digital assets and provide someone with the necessary passwords. Some online password managers can be set up to transfer passwords to another person at your death. 
4. Designate a digital guardian in any online tools that offer such a feature. For instance, Facebook's "legacy contact" and Google's "account trustee." This is someone who will look after your account after you've died. Be aware, however, that under the uniform law, any such settings will override conflicting instructions you leave in your Last Will.