Estate Planning When Divorcing With Children

Estate Planning When Divorcing With Children in New Jersey: It’s natural to look to your beloved children when updating your estate plan during or after a divorce. While your children’s financial concerns may be at the forefront for consideration, understanding how best to have them involved in your estate planning is crucial for their success and your future as well.

There are some important estate planning issues to consider when you are going through a divorce in New Jersey which involves children. Some of these considerations as a divorcing parent, which are discussed more fully below, include:

Inheritance Issues in Divorce

• – Do Not Provide Outright Inheritances for Your Children When Getting Divorced
• – Why It’s a Bad Idea to Provide an Outright Inheritance to Adult Children
• – The Differences Between an Outright Inheritance and an Inheritance in Trust

Beneficiaries: Wills and Trusts

• – Don’t Name Your Minor Children as Your Beneficiaries
• – Name a Trust for Your Children as Your Beneficiary

Do Not Provide Outright Inheritances for Your Children When Getting Divorced

It is important to update, or at least revisit, your estate plan whenever you experience a significant life change such as separation or divorce. At this time in your life, you may be thinking about naming your children as beneficiaries of your will or trust, instead of your spouse.

Wanting to ensure your children’s future, whether they are minors or adults with their own families, is commendable. But how you go about creating an estate plan for your children can make a huge impact on what actually happens to your hard-earned money and assets after your death.

For a number of compelling reasons, providing outright inheritances for children is typically not a very good idea, no matter what their age. Instead, it is recommended that you set up an estate trust, a virtually fool-proof way to make sure your money and assets reach your heirs in the way you intended.

Why It’s a Bad Idea to Provide an Outright Inheritance to Adult Children

It might seem like an easy solution to simply remove your husband or wife’s name as your sole beneficiary and replace it with your 30-year old son’s name. But circumstances that you may not even be aware of could mean that the inheritance you want to leave your child is not utilized as you planned. Consider these scenarios:

Example One:

Fred and Velma were married 20 years when Fred inherited his father’s estate, worth about $1 million. Because of their longstanding marriage, Fred put his inheritance in joint names. Velma divorced Fred a few years later and was entitled to half of what had been Fred’s inheritance as part of the property distribution.

Example Two:

Tiffany was being sued by a tenant (who claimed to have injured himself falling down the stairs at a rental house she owned) when she inherited $100,000 from Grandma Sally. She lost the case and the inheritance was seized to pay the case judgment.

Example Three:

Michael was a functioning alcoholic. When he inherited from his mother, Martha, Michael went on a bender to Atlantic City and was found dead in his hotel room from an overdose of alcohol and cocaine

The Differences Between an Outright Inheritance and an Inheritance in Trust

An outright inheritance is transferred to a beneficiary and put into their individual name. (Unless, as explained in the next section, the beneficiary is a minor; in which case, the court appoints a guardian of the assets.)

When assets are put in an adult child’s own name, they have full control over those assets. As these all-too-real scenarios show, this means that any inherited assets can be seized by a divorcing spouse and creditors such as from a car accident lawsuit, bankruptcy, malpractice claim, or medical crisis.

On the other hand, if assets are passed to your adult children in trust, the assets are available for your child’s needs, but not given directly to them. The specific benefits of setting up a trust for children include the following:

• Trust planning provides asset protection and keeps you in control. You get to choose the trustee and how distributions are to be made.
• With trust planning, your ex-spouse only has access to the assets if that is your expressed desire;
• Your children will not have unfettered access the day they turn 18; and,
• Assets cannot be taken by your child’s divorcing spouse or creditors.

Don’t Name Your Minor Children as Your Beneficiaries

It’s natural to make plans for the welfare of any minor age children when updating your estate plans during or after a divorce. But it’s not a good idea to name minors as beneficiaries; in fact, the law prohibits it. Minor children cannot legally own or inherit assets. If they are named in a will, a guardian of assets, typically the other custodial parent is named to oversee the inheritance until the child turns 18. That’s right, the very same person you took off your will in the first place could be back in control of your money.

Consider these two examples of a will that names minor children as beneficiaries without the benefit of a trust:

Example One:

Sandy and Dan had been married 10 years; they shared two children, Alexis and Madison, who were 6 and 8, respectively. Over the years, Dan developed a serious drinking problem and was a spendthrift.

Sandy couldn’t take the stress any longer; she filed for a no-fault divorce and immediately updated her will, naming her daughters as beneficiaries.

Five years later, Sandy was diagnosed with pancreatic cancer and died.

Because Sandy’s daughters were minors when she died, they legally could not inherit or own assets in their own names.

The court appointed Dan (their other parent) as guardian of the assets Sandy left for the girls. (The court appointing the surviving parent for this role is very common.)

Dan blew through Sandy’s $800,000 in assets within 3 years and there was no money left to pay college tuition for Alexis and Madison.

Example Two:

The same facts as above, but Dan was responsible with the money; the girls received their share of their inheritance as soon as they turned 18 years of age.

What would you have done with $400,000 in assets on the day you turned 18?

Name a Trust for Your Children as Your Beneficiary

A trust for the benefit of your children can be the beneficiary of your will, trust, and beneficiary designations. With trust planning, your minor children are protected and so are the assets you leave for them.

Besides initial estate planning legal fees, there is no downside to naming a trust for your minor children as a beneficiary of your estate plan. Because of court costs and legal fees associated with guardianships, a trust will likely end up being less expensive than naming minors as individuals (and has a lot less risk.)

Trust benefits for younger children include:

• You stay in control.
• You name the trustee who will carry out your instructions.
• The trust assets can’t be seized by your ex-spouse.
• The trust assets can stay in trust for your beneficiaries’ lifetimes; no trust assets need be forced out.
• Your beneficiaries’ future creditors (i.e. people who may sue your child) and/or divorcing spouses won’t have access to trust assets.
• Your children won’t have access to assets at an early age.

Consult with a Qualified Estate Planning Attorney

Our law office offers comprehensive family law services to New Jersey residents. We are family law attorneys; we are not estate planning attorneys. However, we recognize that family law, divorce, child support, child custody, property agreements, alimony, marital agreements, and the like are inextricably intertwined with estate planning issues.

We would be happy to work with your estate planning attorney; if you don’t have one, we can refer you to a qualified estate planning lawyer who understands family law issues and would be a good fit for you. Contact us for a referral or for help with your divorce or other family legal matters.