Should I Change Beneficiary Designations if I Get a Divorce?
Change Beneficiary Designations Upon a Divorce

Should I Change Beneficiary Designations if I Get a Divorce?

Money problems in a marriage can be a big part of a couple’s decision to divorce. In fact, a recent study found that 13% of divorced student loan borrowers attributed their student loan debt for the dissolution of their marriages. The question then to consider is whether you should change beneficiary designations.

Motley Fool’s recent article entitled “6 Tips for Managing Your Investments Through Divorce” says that the financial fallout from divorce can leave spouses struggling to recover.

While the divorce rate in the U.S. is dropping a little for younger couples, “gray divorce” is on the rise. The divorce rate for couples who are 50 or older has nearly doubled since 1990. The rate has tripled for those ages 65 and older, according to data from the National Center for Health Statistics and U.S. Census Bureau. Divorce in these older couples has the potential to be even more financially problematic, because they’re entering (or already in) retirement.

Here are some tips for managing your investments, while going through the divorce process:

  1. Update beneficiary designations on your investment accounts. If you don’t want your soon-to-be ex-spouse to be the beneficiary to your investment accounts, remove his or her name and designate one or more new beneficiaries.
  2. Obtain access to all accounts. In many families, one spouse handles the family finances. If you are not this person in your relationship, make certain that you have all the information you need to access information about all your assets, including your investment accounts.
  3. Think about tax consequences and other penalties. Before you sell any assets, consider the tax ramifications and other potential negatives, like expenses or penalties. In many taxable accounts, selling securities can mean capital gains taxes. Annuities may have big penalties, if you leave early. There’s also the issue of timing: if your divorce takes place in a market decline, it might not be the best time to sell. You may agree to keep your holdings and divide shares evenly between the spouses, so you don’t have to worry about taxes or penalties if they can be avoided.
  4. Dividing taxable investment accounts. Splitting up these assets will have different processes, based on the type of account. For taxable accounts, like a brokerage account jointly owned with your spouse, you have to provide a letter to the financial institution requesting that the joint account be closed, and that new, separate accounts be opened in each spouse’s name.
  5. Dividing retirement accounts. In most states, retirement account assets generally are considered marital property. That means your spouse may be entitled to some of these assets. Many couples include specific terms about what will happen to retirement account assets in their divorce or settlement agreements. Dividing up retirement assets can be complicated, because different information is needed, and different rules apply depending on the type of account. Note that how you divide an account, might trigger taxes and fees that you’ll want to avoid if you can.
  6. Get legal assistance. Dividing financial assets during divorce can be complicated, so work with an experienced attorney. A lawyer with the right background can help with estate planning and other investment-related issues, as well as the tax issues.

Beneficiary designations are especially important for IRAs.

Reference: Motley Fool (October 24, 2019) “6 Tips for Managing Your Investments Through Divorce”

How Can Beneficiary Designations Wreck My Estate Plan?
Naming Family Members in Beneficiary Designations is an Important Part of a Good Estate Plan

How Can Beneficiary Designations Wreck My Estate Plan?

It’s not uncommon for the intent of an individual’s will and trust to be overridden by beneficiary designations that weren’t chosen carefully.

Some people think that naming a beneficiary should be a simple job, and they try to do it themselves. Others don’t want to bother their attorney with what seems like a straightforward issue. A well-intentioned financial advisor could also complete the change of beneficiary form incorrectly.

Beneficiary designations are often used for life insurance and retirement benefits, but more frequently, they’re also being used for brokerage and bank accounts. People trying to avoid probate may name a “payable on death” beneficiary of an account. However, they don’t know that doing this may undermine their existing estate plan. It’s best to consult with your attorney to make certain that your named beneficiaries are consistent with your estate planning documents.

Wealth Advisor’s “7 Ways That Beneficiary Designations Can Mess Up Your Estate Plan” lists seven issues you need to think about, when making your beneficiary designations.

Cash. If your will leaves cash to various people or charities, you need to make certain that sufficient money comes into your estate, so your executor can pay these gifts.

Estate tax liability. If assets do pass outside your estate to a named beneficiary, make certain there will be sufficient money in your estate and trust to pay your estate tax lability. If all your assets pass by beneficiary designation, your executor may not have enough money to pay the estate taxes that may be due at your death.

Protect your tax savings. If you have created trusts for estate tax purposes, make sure that sufficient assets flow into your trusts to maximize the estate tax savings. Designating individuals as beneficiaries instead of your trusts may defeat the purpose of your estate tax planning. If there aren’t enough assets in your trust, the estate tax provisions may not work. As a result, your heirs may eventually end up paying more in taxes.

Accurate records. Be sure the information you have on the change of beneficiary form is accurate. This is particularly important if the beneficiary is a trust—the trust name, trustee information and tax identification number all need to be right.

Spouses as beneficiaries. Many people name their spouse as the primary beneficiary of their life insurance policy, followed by their trust as the secondary beneficiary. However, this may defeat your estate planning, especially if you have children from a first marriage, or if you don’t want your spouse to control the assets. If your trust provides for your surviving spouse on your death, he or she will be taken care of from the trust.

No last minute changes. Some people change their beneficiary designations at the last minute, because they’re nervous about assets flowing into a trust. This could lead to increased estate tax payments and litigation from heirs who were left out.

Qualified accounts. Don’t name a trust as the beneficiary of qualified accounts, like an IRA, without consulting with your attorney. Trusts that receive such qualified money need to contain special provisions for income tax purposes.

Be sure that your beneficiary designations work with your estate planning, rather than against it.

Your estate planning attorney can help you figure out how beneficiary designations affect your estate plan.

Reference: Wealth Advisor (October 8, 2019) “7 Ways That Beneficiary Designations Can Mess Up Your Estate Plan”

How Do I Set Up a Living Trust?
A Living Trust is a Great Estate Plan

How Do I Set Up a Living Trust?

For those who want to spare heirs the hassle and cost of the probate process, you may consider transferring your assets to a living trust.

Yahoo! Finance’s recent article, “How to Create a Living Trust in Tennessee” explains that creating a living trust is mostly the same, regardless of where you live in the U.S. This article applies equally to setting up trusts in Florida.

Let’s look at the basic steps you’ll need to take, with the help of a qualified estate planning attorney:

  1. List the assets that should go into the living trust. There are some assets, such as 401(k) plans and IRAs, which must be in an individual’s name. Other items like bank accounts, securities and life insurance policies can but don’t need to, provided you set up payable-on-death accounts or designate your beneficiaries. Usually real estate and business interests are shielded with living trusts.
  2. Select the right type of living trust. If you use a revocable trust, you can remove assets or cancel the trust. With an irrevocable trust, you don’t have this luxury. If you’re not married, you can create a single trust. If you’re married, a Tennessee Community Property Trust will hold what you own jointly without having to split property or say who owns what. However, this type of trust isn’t a good option, if you’re in a later marriage with separate assets and children from previous relationships.
  3. Name a trustee. The trustee will manage the trust. With revocable trusts, you can also be the trustee, or in the case of a joint trust, you and your spouse can be co-trustees. If you name yourself, name a successor trustee for when you pass away.
  4. Create a trust agreement. It’s best to hire an estate planning attorney to create the trust, because it must be done correctly and legally. If the trust is found to be invalid, there may be penalties, taxes and added costs.
  5. Sign and notarize the trust document.
  6. Transfer property into the living trust. The law states that the trust won’t be effective, unless and until property is retitled in the name of the trust.

Trusts and their rules can be complicated. Use an experienced estate planning attorney to do it right.

A living trust is a great way to plan your estate in Jacksonville, Florida.

Reference: Yahoo! Finance (September 27, 2019) “How to Create a Living Trust in Tennessee”