As I covered in my last blog post, I recently took an exam that featured three (3) hypothetical case studies. The goal was to identify and address key issues of estate planning faced by each client, each one representing common financial and family circumstances.
In today’s blog, we consider Ms. Leslie Jones.
The Client’s Story
Leslie is a 35-year-old divorced mother of two. Her children are nine and seven years old, and her ex-husband is estranged. There has never been any shared parental custody, child support, or spousal support, nor is there any expectation that he will ever contribute financially in any way. Leslie works as a registered nurse, with an annual salary of approximately $75,000.
Leslie’s estate consists of the following assets (after liabilities):
• Residence: $500,000
• 401(k): $20,000
• IRA: $10,000
• Cash and Savings: $10,000
• Miscellaneous Personal Property: $5,000
Other than a $400,000 mortgage loan secured against her residence, Leslie has no other significant debts.
Leslie’s has the following estate planning goals:
- She is primarily concerned about the future of her children and their welfare; and
- She wishes to identify and name a trustee to care for her children (who can manage their money), if something were to happen to her; and
- She wishes to make certain that her children have sufficient money to pay for at least their monthly care, food, and education expenses; and
- She wishes for any unspent money that would go to your children to be held for them until they reach age 25 years old, at which time “they can have whatever remains.”
Review of Existing Estate Planning
It is very important that we have information as to what, if any, estate planning is in currently place. Has Leslie made a Last Will and Testament, and if yes, what are its provisions? Has she made a Revocable Living Trust, and if yes, what are its provisions?
From a review, we learn that Leslie does not have an estate plan. However, given her age and to protect her children, it is advised that she promptly engage in estate planning. In doing so, it is recommended that the following key issues be considered, with a focus on putting in place protections for Leslie’s children should she pass or become mentally or physically incapacitated.
A Revocable Living Trust and/or Last Will and Testament
A Revocable Living Trust and/or Last Will and Testament should be designed and drafted. Even if a Revocable Living Trust and/or Last Will and Testament were in place, the document(s) should be reviewed to determine if any updating is necessary. Many people have engaged in estate planning, but their documents are years old and have not been reviewed recently. In such circumstances, the document provisions may no longer meet the person’s needs.
In Leslie’s case, an “old” Last Will and Testament made when married may have provisions that are no longer valid. Further, she will want her planning to provide for her children’s financial needs, to put trusts in place for their protection given their young ages.
That said, a Revocable Living Trust and/or Last Will and Testament is just one component of the overarching estate plan that it is recommended Leslie design and make.
Divorce Review
When a divorce happens, consideration must be made to unraveling the existing estate plan and separating the interest of the husband and wife. While the terms to a Last Wills and Testament are, by operation of law, modified when a divorce happens, a Revocable Living Trust is not, leaving the possibility that a former spouse can still take under it. Therefore, a Revocable Living Trust should be revoked or otherwise amended in such circumstances.
Review of Leslie’s divorce decree is recommended, including its provisions regarding the separation of property. Likewise, title to her assets should be reviewed, including how her home is owned. What are her beneficiary designations? A review of her 401(k) plan, its provisions, and beneficiary designations is also recommended. And information as to when the 401(k) plan came into place, including whether that was before, during, or after your marriage ended should be considered.
Retirement Savings
As indicated above, Leslie has a 401(k) plan and an Individual Retirement Account (IRA) in place, with some money saved. A thorough review of these retirement savings plans should be performed, to make sure beneficiaries are properly listed and the ownership of the accounts is transferred to the right persons in the event of her death or incapacitation.
Power of Attorney, and Healthcare Proxy/Living Will with HIPAA Release
To avoid a potential guardianship, it is recommended that Leslie made a power of attorney. Moreover, her wishes for medical care in the event Leslie becomes incapacitated should be clearly stated. A health care proxy, living will, and HIPAA Release should be prepared.
Guardianship for the Children
Leslie made it clear that she would want her brother to care for her children, if she predeceased them while they are minors. However, it seems that her brother does not handle money well. Therefore, separation of the guardianship from the trusteeship should be considered. Who might serve as trustee should be thought through, as well as the trustee’s obligations to simultaneously protect her children’s moneys while providing for their needs.
Other Estate Planning Issues
There are a variety of other issues to cover in Leslie’s case:
• Life insurance
• Disability insurance
• Financial asset protection (including her house)
• Probate concerns in her home state of California
• General due diligence
Life insurance can play in important role in estate planning, by providing funds to pay taxes, increased liquidity, the fuel of now available funds, and more. Moreover, it is received income tax free. Given Leslie’s young age and good health, the cost for term life insurance should be inexpensive, and it is recommended that term life insurance be procured to satisfy her children’s financial needs in the event of her death.
Here, Leslie’s financial and estate planning needs are clear, and goals identifiable – primarily, to care for her children if something should happen to her. As her attorney, I would walk through each step of the estate planning process with her, including the details for protecting her assets while simultaneously providing for her children’s care should she no longer be able to care for them herself.
To read my full legal proposal for this particular case study, download it below:
If you are looking to develop or review/update your estate plan, contact me today for an introductory legal consultation.
