In our last post, we looked at how a couple with a complicated estate and grown children could incorporate estate planning into their divorce mediation. In this post, we will look at how a couple with minor children and a simpler estate can consider both estate planning and educational planning as they attempt to settle their divorce.
Deena and Greg have three children, ages 22, 14 and 12. Both parents have similar incomes and plan to share parenting time of the two younger children equally. They are not, therefore, particularly concerned about child support. They are, however, interested in planning for 14-year-old Brian’s and 12-year-old Lindsey’s future education expenses. 22-year-old Molly has already completed college with very little student debt, and they would like Brian and Lindsey to be able to do the same someday. They also have a special concern for Lindsey, who has a visual impairment resulting from premature birth.
Neither Deena nor Greg has any kind of estate plan. Their only substantial assets are a marital home, which they plan to sell, and their retirement accounts, which they fortunately have funded well up to this point. Greg has a traditional IRA and Deena has a 401k. They are concerned not only with their children’s educations, but also their long-term futures, and they are wondering what would happen to these accounts if either of them was to pass away after their divorce. They decide to talk about estate planning first, and then consider how to address educational planning.
Estate Planning Basics
Greg and Deena’s mediator is an experienced family law attorney who also handles estate matters. She advises them that some aspects of estate planning can be coordinated with marital settlement negotiations, while others cannot. She outlines some of the basics for them, including the following:
Once their divorce is final, they will no longer automatically inherit anything from each other under New Jersey intestacy laws. They will also cease to be the beneficiaries of each other’s retirement accounts.
Minor Children and Inheritances
If they do not make separate estate plans after the divorce, and either of them passes away without remarrying, then the children would inherit everything from that parent. Because minors cannot be direct beneficiaries of assets (including so-called “non-probate” assets like retirement accounts), the other parent, as legal guardian, would manage funds for any child still under the age of 18. If the other parent is no longer living, the court would appoint a guardian.
If Deena remarries, her new spouse will automatically become her 401k account beneficiary unless the spouse signs a waiver. This is not something that Greg and Deena can provide for in a Marital Settlement Agreement as it requires the future consent of a third party. This automatic rule does not apply to IRA’s. If Greg remarries, he can continue to designate the children as beneficiaries.
Wills and Guardianship Designations for Minor Children
Wills would not apply to non-probate assets but would allow Deena and Greg to direct distribution of other assets as well as to designate alternate guardians for Brian and Lindsey in the event that the other parent predeceases them.
Living or Testamentary Trusts
Greg and Deena can also consider establishing one or more trusts for the benefit of the children. Either a living trust, or a testamentary trust established under a will, might be appropriate. Trusts have designated administrators (trustees) who manage trust assets for beneficiaries. A trustee could disburse assets to the children periodically. Trusts can also protect assets from creditors. This can be helpful for parents with minor or young adult children and critical for parents with special needs children. Special needs trusts can protect social security disability payments and provide support to a disabled child or adult. It is possible to name a trust as the beneficiary of a retirement account. It is important, however, to first understand the full financial ramifications of such a decision. Both a financial advisor and a trusts and estates attorney can be helpful in this regard.
Life Insurance to Protect Minor Children
Either or both parents can also take out life insurance policies for the children. Life insurance can protect children from potential loss of a parent’s support. This is one of the simplest and most popular options for estate planning during divorce.
Coordinating Estate Planning with Educational Planning for Minor Children
Deena and Greg feel that in their case, estate planning must be intertwined with educational planning for Brian and Lindsey. They therefore decide to move on to discussing educational issues before making any decisions. As their mediator has told them, there are circumstances under which divorced parents in New Jersey may be held responsible for funding post high school education for children. Divorce mediation is therefore a good forum for them to work out any disagreements about future plans. Courts tend to uphold agreements between parents about college education contributions, as long as they are specific and clear. The wording of an agreement is integral to its enforcement, so attorney review before finalization is critical. In our next post, we will look at some of things Greg and Deena will want to keep in mind.
If you and your spouse or former spouse would like to discuss either estate planning or educational planning in divorce with one of our experienced family mediators now, take advantage of our initial consultation and contact us today.