Consider the following story: Beth’s divorce from her husband was recently finalized. The most valuable things she owns are her employer-sponsored retirement plan and her life insurance policy. She has opted to use the beneficiary designations as her only form of estate planning and updated the primary beneficiary designations to name her two minor children. She does not want her ex-husband to receive the money.
Beth passes away one year after her divorce. Her children are still minors, so the retirement plan and insurance company require that an adult be appointed to manage the children’s inheritance that Beth left behind. Whom does the court presumptively consider to serve as the caretaker of this money? With no legally binding documentation from Beth, her ex-husband is appointed to manage the inheritance on behalf of their children. (In some states, this caretaker of the money is called a guardian; in others it is called a conservator. The title does not matter as much as the role, which is to manage the funds on behalf of a minor, since the minor is not legally able to manage a significant inheritance on their own.)
Sadly, stories like Beth’s are all too familiar for the loved ones of divorced people who do not make effective use of estate planning tools. Naming a beneficiary for retirement benefits or life insurance or having a will can be a good start. However, postdivorce relationship complexities often render these basic tools inadequate. Luckily, there is a more effective way to protect and control your children’s inheritance.
Enter the Trust
A trust allows you to coordinate and control your money and property in a way that no other tool can. A trust is a legal arrangement designed to manage your money and property for your benefit while you are alive and for your named beneficiaries after you pass away. There are a few key players in a trust. First, there is the person who created the trust, often called the trustmaker (this is you). Second, there is the trustee, who manages the accounts and property owned by the trust (usually you during your life and then someone you select to take on the role when you are no longer able to manage the trust or when you pass away). Finally, there are the beneficiaries, who receive the money and property held in the trust (usually you during your life and then typically your children or other loved ones after your death).
How a Trust Protects Your Children’s Inheritance after a Divorce
A trust can protect your children’s inheritance in a few distinct ways:
Since you (as the trustmaker) select the trustee, you can choose someone other than your ex-spouse to manage the trust’s accounts and property. If Beth had created a trust, she could have named her brother or another trusted adult to be trustee after her death. Her brother (rather than her ex-husband) would then be in charge of managing the children’s inheritance according to the instructions in her trust document, even if her ex-husband has legal custody of the children.
As the trustmaker, you select the beneficiaries and determine how and when the trust’s accounts and property are given or used for their benefit. You may have long-term goals for your beneficiaries, such as attending college, purchasing a first home, or starting a business. When you document your intent, your trustee can appropriately manage the trust’s accounts and property and ensure that your legacy is used the way you want rather than being potentially wasted or used thoughtlessly. If Beth had created a trust, she could have instructed how she wanted the inheritance used rather than leaving it to the whims of a court and her ex-husband.
A fully funded trust avoids probate. As a result, your children do not have to deal with the cost, publicity, and delay that is all too common in probate cases. Although plain beneficiary designations, like the one that Beth used, also avoid probate, they may still open the door for court supervision over the inheritance, especially while your children are minors. A fully funded trust can keep the management of an inheritance away from prying eyes and court supervision. This means more money for your intended beneficiaries and less for the lawyers and courts.
When using a trust to protect an inheritance, it is important that the trust owns or is the beneficiary of the important accounts and property. In this case, Beth would have needed to update the beneficiary designations on her retirement account and life insurance policy to name the trust as beneficiary instead of her minor children.
If you are divorced, it is essential to ensure that your plan works precisely the way you want. Every situation is unique, but we are here to help design a plan that achieves your goals and works for your family. Call us today.
