401k Retirement Plans and Divorce

401K Retirement Plans and Divorce.
   

A divorce settlement can be excruciating. It is not always patient; it is not always kind. It can be rude. Self-seeking. Easily angered. And if you've developed a comfortable nest of 401k funds, you may find these benefits at the center of your divorce settlement maelstrom.

   

I've seen 401k participants who've been abandoned by their spouses. Participants who've been left with kids to support and a household to run. I've also seen participants with huge account balances doing irrational things - like forbidding plan administrators to work with their spouse's divorce lawyers - all in an attempt to keep their spouses from getting any of the retirement benefits.

Your desire to protect your funds may be self-seeking. Or it may be a matter of survival. But either way, your spouse has the legal grounds to claim all or part of your 401k benefits in a divorce settlement. And in most cases, you'll have to find a way to make a fair and equitable split of the funds. By being organized, prepared and knowledgeable about your legal options and rights, you can split your 401k reasonably.

Know Your Plan, Know Your Options

When deciding how to divvy up your 401k account with your soon-to-be ex, start by discussing options with your plan administrator. A lot of what you can do with your 401k is directed by the plan.

Each plan has its own set of benefit provisions and administrative rules. While some plans divide earnings by percentage, others divide by shares. And while some permit a distribution of the ex-spouse's portion at the time of the divorce, others require recipients to wait until retirement. Before you talk to your lawyers and financial planners and accountants - and well before your divorce decree is drafted - you need to do your own research into your plan's guidelines. And don't expect anyone else to do it for you, because in many cases, they won't.

The Equitable Split: Four Common Options

Once you've researched your plan administrator's rules and stipulations, you'll likely have one or more of the following options for dealing with your 401k in the divorce decree.

Option 1: You keep all of your 401k, and your spouse takes other marital assets of comparable value.

This option is sometimes cited as the least complicated from the attorney's point of view, but it requires careful research and financial calculations. If you choose this route, you'll need to consider at least two economic factors to ensure that you and your spouse remain on equal financial footing: 1) your long-term tax consequences and 2) the current and long-term values of the assets being divided.

You'll need to subtract the imputed tax - the tax you'll eventually have to pay on the amount in your account - from the value your 401k will hold at the time of your retirement.

On the other side, your soon-to-be ex will want to weigh the long-term value of the 401k against the long-term value of the assets he or she is receiving. For instance, if your 401k is worth $100,000 at the time of the divorce, and you have a fairly long time horizon until retirement [during which your account will earn compound (tax-deferred) interest], your 401k may be worth much more than $100,000 at the time of your retirement. Your ex will want to ensure that his or her share of the marital assets will be equally valuable over the long haul.

Option 2: You and your ex-spouse split the 401k assets.

If you want to split your 401k account with your ex rather than hashing out a division of marital assets equal in value to the 401k, then you will need a Qualified Domestic Relations Order. A QDRO (pronounced "quadro") is a court order that creates the right for an alternate payee (in this case, your ex-spouse) to receive all or part of your plan account. The QDRO must be a judgment, decree or order that is made pursuant to a state domestic relations law and relates to the provision of child support, alimony payments or marital property rights.

The least complicated procedure is often for the QDRO to stipulate that your 401k plan will be split into two accounts. This would enable you to continue to manage and contribute to your account as before, while your ex-spouse could make investment choices for his or her account, but not contribute to it. When you retire and become eligible to receive distribution of your funds, most 401k plans are set up so that your ex-spouse will also be eligible for distributions.

If you choose to divide your 401k, you may have to iron out issues such as repaying an outstanding loan, and how to allocate any earnings or losses that occur between the date of the divorce and the date the QDRO is made effective by the plan administrator.

The drafting of a QDRO is a sensitive spot because many divorce lawyers don't investigate a particular pension plan's guidelines before giving advice to clients on separation agreements, they often submit inadequate QDROs to plan administrators. And if the QDRO contains vague language or doesn't conform to plan guidelines, your plan administrators will reject it. It will then have to be re-drafted by your lawyer or your ex-spouse's lawyer. This, of course, results in additional fees. And more emotional hardship.

Because of problems with QDROs, I've seen lag times of several months - or even years - before QDROs were accepted by plan administrators and the 401k plans were actually divided. It takes an emotional toll. People feel like their divorce will never go away.

The moral? Understand your plan administrator's guidelines for splitting the 401k before your attorneys begin drafting the QDRO. Share this information with your attorneys. And begin the drafting process early in your discussions, so you'll have time to get it accepted by the plan administrator as part of the divorce settlement.

Option 3: You liquidate the portion of your account that is needed to satisfy the QDRO, and you give your spouse a lump sum.

This option is generally available only if you meet the rather complex legal requirement to permit such a distribution. Because of the tax consequences, this will probably be the least desirable option for both you and your spouse. Except in a few extreme situations, liquidating is not a good idea. But if you are the one trying to get part of your spouse's 401k, and you need the cash to pay off credit card debt or to maintain a separate household while your divorce is pending, this may be the least ugly of an unattractive array of options.

If it is your account, and part of it is liquidated for your spouse, you might want to make certain that your spouse is liable for the tax consequences. Your agreement needs to be clearly drawn so that the language clealry reflects that the tax liability is borne by the spouse receiving the benefits.

Option 4: Roll the portion of the 401k awarded to the ex-spouse into an IRA.

This option is only available if you've left your company or you're over the age of 59 ½. The benefit here is that a rollover permits you to remove your ex's share from your 401k plan without any penalty or tax liability. It also gives your former spouse an opportunity to choose from a wider array of investment choices, and to exercise more self-direction in account management.

If Both Spouses Have 401k Accounts

If you each have your own 401k, the division will depend on the dynamics between the two of you, says Johnson, as well as your account balances. Some couples can't agree on anything but a 50/50 split of all assets, including both 401ks. Other couples are happy to avoid the QDRO paperwork and simply each keep their own 401ks. In cases where one spouse's 401k balance is much larger than the other's, a solution may be for the person with the smaller balance to receive part of the other person's account.

A Kinder, Gentler Divorce

The financial storms that swirl around a divorce settlement can wreak havoc on your pocketbook, your emotions and your dignity. I've seen some difficult stuff.  I've seen participants who haven't acted with the necessary respect and knowledge, and I've watched them lose everything.

It doesn't have to be this way. By making it your goal to be knowledgeable and fair-minded when negotiating the split of your 401k, you can protect an equitable share of your financial assets. And you can keep an even larger share of your emotional well-being.

Seven Tips To Being In Control

You must enter into the process of splitting marital assets with your eyes open. You need to be fully informed. If you're not careful, you can end up losing your whole benefit.

The following tips can arm you with the knowledge you need to avoid both headache and heartache when splitting your 401k.

1. Ask your CPA and your financial planner for advice. Because tax consequences and liability will be different for each participant depending on age, income bracket and other factors, it's essential that you discuss the specifics of your situation with a finance and accounting professional.

2. Ask your plan administrator for model copies of QDROs.

3. Ask your plan administrator for guidelines and a checklist for preparing the QDRO. Some large employers will provide QDRO kits to help you. When researching your plan's guidelines, amass all the literature you can, and read it carefully.

4. Give both sets of lawyers copies of all guidelines and documents you receive from the plan administrator.Make it your job to ensure that both sets of attorneys are familiar with your plan's guidelines. It's essential that the claim submitted complies with the plan,  and it's all too common for claims to be filed erroneously.

5. Make sure that QDRO is prepared at the time of the divorce.

6. Sign the QDRO when you sign the separation agreement. Your divorce decree will be one crucial step closer to finalization once you sign the QDRO. And if you don't sign it with your separation agreement, you'll be one step further from bringing your divorce to closure.

7. Factor your spouse's benefits into your negotiations. The options and provisions for splitting a 401k apply to all retirement benefits. By factoring your spouse's retirement benefits into the negotiations, you may be able to hold on to a larger portion of your 401k.

The information provided here is informational only,  intended to help you understand the general issue, and does not constitute any tax, investment or legal advice. You are advised to consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

All the best in 2015.

#divorce
#401k


Advice for Simplifying a Divorce

Advice for Simplifying a Divorce

Divorce is never easy, but getting a good divorce attorney to assist can save time and heartache.

Divorce is never going to be easy, no matter what you do. Despite your best efforts, it is an emotionally trying time that is made more complicated by finances and, if you have children, custody proceedings. While there is nothing you can do to take the pain away from divorce, there are steps you can take to cut down on its complexity:

Find a good lawyer.

This may seem like a no brainer, but it has to be said. If you choose to take the first rock-bottom priced lawyer you can find, then chances are you will be getting what you paid for. Look for a family law lawyer that has a good track record with divorces in the courtroom. Do some research, both online and by asking the advice of friends and family, especially those that have recently gone through a divorce. While a divorce lawyer is not cheap, choosing the right one is essential if you want to simplify your divorce, and subsequently your life. A good lawyer will take over your case and help you to avoid making poor decisions that could result in the divorce taking too long, or not ending in a way that is fair to your needs.

Give your spouse back their possessions. 

Make your divorce easier by not having to decide who gets every single little thing. When your spouse moves out, give him or her back those items that are rightfully theirs. Try to divide up as much of the items in your house as is possible to avoid having to spend long hours debating who gets what. You have to decide what is worth fighting for. If it’s a family heirloom you have sentimental ties to, that’s one thing. But if you find yourself battling over a TV you can easily repurchase in the future, just let it go. It’s not worth the headache.

Get your finances in order.

When you sit down to talk to your lawyer, be prepared by giving them a full portfolio of your assets and debts, especially those that you hold jointly with your soon to be ex-spouse. You want to make sure that you are not stuck with debt in your name that should be shared with your ex. Having your finances in order will assist your lawyer in being able to create a plan of action for your divorce. The quicker they are able to figure out a settlement, the sooner you will be able to move on with your life.

Be prepared to give.

In the end, fighting over every little detail of a divorce will only prolong the agony. Look over your shared assets and decide what is important to you and what you are willing to give up. Going to the bargaining table with the intent of being able to give up a few possessions in order to make the proceedings simpler is sure to save time and heartache. Remember, possessions are just things, and can always be replaced. Your time, happiness and emotional stability are much more valuable in the long run.

All the best in 2015.


Will in a Box: The Dangers of Estate Planning Software Programs

 

                I recently came across an Article written by TODD C. RATNER, Esq., an attorney practicing in Springfield, Massachusetts. I am often asked whether or not the online Estate Planning software programs are an easy and cost efficient way for the layperson to prepare their own Estate Plans.  If you are one of those individuals considering either preparing your own estate plan online, or purchasing software to prepare it at home, I urgently advise you to read Attorney Ratner’s Article. I assure you it will be time well spent.

 

 

WILL IN A BOX: THE DANGERS OF ESTATE PLANNING

SOFTWARE PROGRAMS

 

By: Todd, C. Ratner, Esq.

             "The recent sophistication of software has contributed to an increase in homegrown estate planning. These mass-marketers of legal services misinform people into thinking that they are saving money and that they are receiving sound legal advice. This is simply not true.

            As an estate planning attorney, I felt an obligation to learn more about these mass-marketers of legal services. As such, I visited the Web sites and researched the software applications of several well-known estate planning services. One of them called itself a ‘Legal Documentation Service.’ The service purported to “save time and money on common legal matters … and create reliable legal documents from your home or office.” Another purported to “help protect your family and your assets, and save on legal fees.”

The process of preparing the documents among these companies was similar. Each required you to answer a series of questions, either online or via their software package, and your documents will be prepared either instantaneously or within 48 hours. However, one software-based company suggested that you read an accompanying book, which was hundreds of pages in length. Although, you may not need to read the entire book, I do not understand how the public can decipher which parts to skip over and which to read thoroughly with only a basic understanding of estate planning. This seems like a hefty burden on the consumer and not quite the time-saver that the company publicizes.

Intrigued, I moved forward. I started answering the will questionnaires of several services, and due to my own thorough understanding of the intricacies of estate planning, I was perplexed that my options were limited on these questionnaires. Among other issues, I specifically wanted to better understand my options regarding the inheritance distribution alternatives for my children:

 ■Could the distribution ages be staggered so that the children would not receive a windfall at age 18?

 ■Could I separate principal and interest?

 ■Could my children approach the trustee for health or educational needs prior to the set distribution age?

So, I called the telephone number provided on one of the Web sites, and I spoke to a young woman who was very pleasant. But when I asked if she could provide me with examples of how I could distribute my assets to my children in the event that I survive my spouse, she simply stated, “You can distribute any way you wish.” Although, this may be somewhat accurate, it did not truly answer my inquiry. I then asked if she was a practicing attorney, and she answered that she was not.

This was just the first of many questions that I had about the questionnaire. Another question regarded whether or not I was required to state my desire for organ donation and cremation in my will instead of my health care proxy. The representative answered that I am only able to insert this information into the will. Many attorneys suggest that this language be included in one’s health care proxy because that document is usually reviewed prior to the will. As such, the will may be read by your loved ones well after your body has been buried, and therefore, your intent will not be adhered to. But several of these companies do not allow this flexibility.

Additionally, with many services, nothing prevented me from including a disabled child, who would be receiving governmental assistance, as a beneficiary under the will. As experienced estate planners know, the receipt of assets by a disabled individual on governmental assistance most often disqualifies them from governmental benefits.Tne company uses the tag line: “We Put the Law on Your Side,” a claim that a law firm cannot make under the marketing rules that govern the legal profession. Nevertheless, the company claims to be a leading legal Web site. Huh? The people that work on the documents are not attorneys and they cannot, by law, give legal advice.

To further illustrate this point, one Texas court went so far as to declare that a software-based mass-marketer of legal documents constituted the unauthorized practice of law because its process was too interactive and sophisticated. Most companies do a review, making sure that all answers are completed in the questionnaire and that all spelling is correct. These minor tasks are akin to a very narrow role as a proof-reader of the consumer’s data entries. This has to be limited by law, since no attorney is involved in this process. These companies hope that you will never read their ‘disclaimer’ or ‘terms of use disclosure.’ One such disclaimer provides that they are not providing any legal advice, that their documents may not work in your situation, that their documents may not be valid in your state, and that you agree to hold them harmless for any consequences resulting from your choice to use their services rather than seeking the advice of an attorney. Another disclaimer provides that “this product is not a substitute for … an attorney” and “we’ve done our best … but that’s not the same as personalized legal advice” and “if you want help understanding how the law applies to your particular circumstances, or deciding which estate planning documents are best for you and your family, you should consider seeing a qualified attorney.” How can this provide the end-user with the confidence that their estate planning documents are both legally binding and appropriate to their particular situation?

Probate law is strict and unforgiving. Good estate planning attorneys work diligently to keep abreast of changes in the law through memberships in such organizations as the National Academy of Elder Law Attorneys Inc., the Estate Planning Council of Hampden County, and through extensive, continuous reading and legal research. Creating your own legal documents provides a false sense of security, and the inaccuracies are usually only discovered when it is too late to do anything about them.

 

Most people need the perspective that an impartial, experienced estate planning attorney provides. You are playing with fire if you engage the services of these companies for the following reasons:

 ■These programs largely disregard specific laws that can dramatically affect your estate;

 ■Your unique issues and circumstances can only be flushed out and addressed through consultation with an attorney; and

 ■You are not securing the experience and the knowledge of an attorney trained to handle the specific circumstances of your estate.

 

Another inaccuracy that I found regarded the fee structure. One company claims that: “With [the company’s] lawyer-free service you can save up to 85% off the rates an attorney would charge for the same procedure.” Upon a review of what the company claimed to be an estimated fee that an attorney would charge for the preparation of the will, I was flabbergasted. I can only speak for my firm, but our fee is approximately 4.5 times less than the estimated fee quoted on the Web site.

Moreover, one company suggests that its service is equivalent to the services of an attorney, which is undoubtedly inaccurate as outlined above. In fact, a Colorado attorney boasts that he loves these online and software companies because he has been retained by individuals to correct mistakes included in documents prepared through one of these companies, and he has earned more than what he would have if he performed the work in the first place.

 

In conclusion, the subjects that typically matter the most to you; your health, your family, and your finances warrant the attention of an experienced, trained professional who will put their bar license and malpractice insurance on the line to provide you with the advise, counsel, opinions, and recommendations that are essential to drafting a proper estate plan. People generally create estate plans for the peace of mind that they provide. The question is whether or not a software program and/or an unlicensed, uninsured and largely unregulated document preparer can provide you with the peace of mind that your estate plan was done appropriately and addresses your specific needs."

 

 

Thank you Attorney Ratner for preparing this article.

 

 

To Sue Or Not To Sue

To Sue or Not to Sue

If you are a business owner or even in your personal matters you have probably encountered a situation where you have tried to decide whether or not you should sue someone for something that they did to you. When you are considering this question there are actually two separate questions you really need to ask.

Does Bringing Suit Make Financial Sense?

The first thing to consider when deciding to bring a suit is whether or not filing a lawsuit makes financial sense. When considering this you need to understand the potential costs of litigation. Despite what you see on television a civil lawsuit does not wrap it self up neatly in a one hour period of time. You also do not get to court immediately after filing.

The Rules of Court provide a process that every case must go through before a trial. This process will most certainly takes months and it is not uncommon for a civil case to go well beyond a year before a trial ever occurs. During the process you will be involved in drafting initial court papers, investigation of the case (which is called discovery), as well as potential motions and other legal hearings; all before you ever have a trial. Given the amount of work involved you can understand how this can get very expensive. It is not uncommon for civil cases to costs tens of thousands of dollars. So obviously the motion important decision is whether proceeding with your case makes financial sense.

You do have some options if your case does not warrant this level of financial commitment. Most if not all states have a small claims court where smaller disputes can be resolved. In Massachusetts all lawsuits under $7,000.00 are eligible for small claims court. The process for small claims court more resembles Judge Judy or the People Court than the regular process. You usually get a hearing scheduled quickly where you can present evidence to the Judge. In Massachusetts and most other States, there are no juries in small claims court, and the process is a lot more, shall we say, user friendly.

Given these costs, what you as the potential plaintiff need to consider is the potential judgment you receive going to be enough to justify the cost of the litigation. If so then you next must consider the legal basis for the case.

Does My Claim Have Legal Merit?

The second question to ask is whether your potential claim has legal merit. This determination is very fact specific as each case is different. In order to properly make this decision it is often wise to consult with an attorney who has knowledge of the area of the law.

However, you should not expect the attorney to be able to provide an immediate, easy answer. As stated, this determination is often fact specific so the attorney will often have to review documents and discuss the facts with you and/or other witnesses.

After the facts are determined it is also likely the attorney will need to conduct research on existing statutes or other court decisions to determine whether or not the claim is valid. This is an important part of determining whether or not the claim has merit. Without this research the attorney can not provide quality legal advice.

If "Yes", then what?

If the answer to both of these questions is yes than it probably makes sense for you to file your lawsuit and pursue the case. However, there is one final caveat, you should also make sure that the person who are suing has assets to satisfy the debt. Even if you are successful in the case you will only get a piece of paper that says someone owes you money. You still must collect the money from the Defendant.  This is also a factor to be considered prior to deciding to file suit.

Does the Defendant have any assets which may be used to satisfy any judgment against them? Or, is the Defendant what we call "judgment proof" -- meaning, after you have "won" your case against them, they have no assets or income to satisfy the judgment? If that is the case,  then, although, as in Massachusetts, your judgment is good for 20 years, it is still only as good as the paper it is written on until assets are available to satisfy it.

This is where the sound, practical guidance of an experienced trial attorney will serve you well.  I have successfully managed suck matters for 18+ years. If you or anyone you know finds themselves in a position of deciding whether or not to sue,  my office is available 24/7 to provide assistance.

THIS HOLIDAY SEASON: A BRIGHT AND HOPEFUL FUTURE

THIS HOLIDAY SEASON: A BRIGHT AND HOPEFUL FUTURE

 

 

                The Holidays Season is upon us. It’s a time to gather with family and friends, and enjoy the accompanying spirit of comfort, hope, and good will. It’s a time for reflection upon what is “most important” to each of us. A time to reassess our current circumstances as measured against our future goals. This can be difficult for many even as a mere proposition. For whatever reasons, many find it difficult to navigate through the everyday stresses associated with the Holidays:  financial setbacks; lost love ones; family/friendship and the uncertainty of it all. For those who have either just forged their way through the process of divorce, are on the precipice of jumping into the process, or perhaps even navigating their way through the process now, these stresses are exponentially compounded.

 

             I have represented clients through the process of Divorce for the past 17 years.  Over those years, I have witnessed the anguish experienced by the parties and its long-lasting effects – especially during the Holiday Season.  In speaking with clients who I have represented, they have shared with me many kernels of wisdom which they gathered after going through the process which enabled them to cope and, ultimately, overcome the many of difficulties associated with Divorce.

 

       1.      Breathe

           

            Divorce imparts uncertainty and, among many, uncertainty breeds despair. We all know that Despair is a dark and lonely place.  If you enable it, it will shackle you in place and just as you catch and hold your breath when you are afraid, you forget to breathe and move.  You must understand that these thoughts are dependent upon the past which was, itself, bound in uncertainty. But now, just as you open your eyes and catch your breath to each new day, envision that you are now awakening anew: your slate is clean. Your future is a blank canvass whereupon you are now free to create. Create a new you.  Awaken to the endless possibilities that are now available to you; breathe in the fresh new breath of your future and feel the power it imparts.

 

2.      Gather Together and Tend To Your Assets

 

            Of course, when I use the term assets, many will automatically think to themselves: “Here comes the lawyer-boy side of Jim.”  I laugh a little with the thought. However, as well all know, those kinds of assets are of fleeting quality. They don’t define your place in the world or WHO you are, they are merely a reflection of A place in A time where you’ve been – and  through the process of Divorce, their true value comes to light as they are relegated to mere numbers on a pink or purple piece of paper to be handed to the Court.  The assets I am speaking of are the only true assets in the sense that they contribute to who you are:  your family, your friends, and your sense of belonging. Each of these assets all work in combination with the other.  Your families are your roots, your friends are your branches, and your sense of belonging is the air you breathe.  Cultivate and repair your roots, and prune the branches which no longer contribute to and increase the majesty that is you. Stand tall in the new air you breathe. Your assets will now fortify you as you forge off into your new future.

 

3.      Recreate You

 

            The circumstances of Divorce are the result of a multitude of personal relationship issues. I will not attempt to list them all out here. What I will do, however, is ask you to evaluate those circumstances as objectively as you can. This is the first step towards recreating you. Evaluate, comprehend, and accept your strengths and weakness in the relationship. What did you have too much, and not enough, of? What prevented you from being able to change these circumstances? What was it that held you in place, unable to move? This understanding is your NEW strength and the NEW YOU.    There is an inherent power in this understanding.  No longer are you bound in the past. No longer are you imprisoned in the strife of an unhealthy relationship.  No longer are you stuck in one place. Did you want to go out dancing more? Go out dancing! Did you want to spend more time with family and friends? Do it! Did you want to embark on a new career path? Well? Your potential and the possible ways to achieve that potential are boundless.

 

4.      Share the New You

           

            There is no doubt that there is an alienation that accompanies the process of Divorce. Former associations are splintered [if not outright severed] and an identity comfort zone which was tied to those associations is gone. You now feel alone and, well, ambiguous.  This is normal. However, do not let this become your new comfort zone. Perhaps you were too comfortable with those old associations. Perhaps you allowed those associations define who you were. If so, this new disassociation is just what you needed. You needed to be confronted with this ambiguity to fully comprehend that you had lost yourself. Now you can rise above those ties and venture upon a new future as the real you. Rather than allowing your associations to define you, now YOU define your surroundings. You are free. Share this freedom Surround yourself with those who you know love you for who you are, and not what you are or what you have and whether you are happy or sad; invite those into your world who are going to increase you and reinforce your potential in every conceivable way; don’t be afraid to laugh and smile more than you ever have; be tolerant, be caring, be kind; be industrious; be creative; and most importantly, share this new you with the outside world.

 

                Of course, I have shared these thoughts with the intention of providing insight from people who have navigated though the troublesome process of Divorce to guide those now facing the same process. However, upon closer observation, each of these insights applies equally to all, regardless of our circumstances.

 

            With that in mind, The Law Office of James Thomas Kinder wishes each of you a Happy, Healthy, Safe, and Bright, Holiday Season and beyond.

 

 

 

 

 

Peace and Love

WHEN SHOULD YOU CONSIDER UPDATING YOUR ESTATE PLAN?

WHEN SHOULD YOU UPDATE YOUR ESTATE PLAN?
Happy Monday to all -- well, it's actually Tuesday, but it certainly feels like a Monday. I've had a few inquiries regarding when client's should consider updating their Estate Plans. Below are a few guidelines which, hopefully, address some of those questions.

It's a good idea to update your estate plan every few years or after the occur...rence of significant life events such as marriage, divorce, the birth of a child, or adoption. Even if you haven't experienced any of these events since you last updated your estate plan, there may have been changes in tax laws or changes in your financial situation that necessitate a reevaluation of your estate plan.

Your desires as far as how your property will be distributed are likely to change over the years, especially as certain events occur in your life. For example, if you get a divorce, you probably don't want to make the same bequest to your former spouse as you did when you were married. In some states, provisions regarding an ex spouse in your will can be disregarded, and the remaining portions of your will followed. In other states a will that is created prior to a divorce will be deemed invalid after the divorce.

The birth or adoption of a child is another life event that will require you to update your estate plan. Even if your will already provides for children, it is a good idea to update it each and every time you have a child.

Other significant events that will require you to update your estate plan are marriage, re-marriage, the death of a beneficiary, and the death of an administrator or executor. Most states provide for a statutory share of the estate that will go to a surviving spouse. If this statutory requirement is not in keeping with your estate planning desires, you will need a to have a valid pre-nuptial or post-nuptial agreement to avoid it.

This becomes particularly important for individuals in a second marriage who have grown children from a first marriage. In this situation, you may want to provide for the comfort of your current spouse during his or her lifetime, but you will want to make sure that your children ultimately inherit your assets. Without proper planning, your current spouse's children could end up inheriting your assets, instead of your own children.

Another thing that tends to change over the years is your financial situation. If your current estate plan was made even a few years ago, your net worth may have changed enough that you will need to incorporate more estate tax planning into your estate plan. Also, tax laws are constantly changing, and some changes may necessitate updating your estate plan.

Finally, you should reevaluate your desires from time to time. You may find that you've changed your mind about a variety of issues addressed by your estate plan. Do you want a different person to be the administrator of your estate, rather than the one who is currently named in your will? Did you grant a health care power of attorney to one of your children and now that child has moved to a different state? Is there something about the way one of your beneficiaries is leading his or her life that would make you want to put their bequest into a trust rather than granting it outright. You may have become aware that one of your children has trouble managing money and you fear their creditors might end up with the inheritance.

If you already have an estate plan in place, you deserve congratulations for planning ahead and being prepared. But you also need to remember to update it from time to time as your situation or needs change.

Please remember that this answer is provided in the spirit of public education, not as legal advice. If you require legal advice for a particular situation, you should consult an attorney.

Spousal Lifetime Access Trusts

In late 2012, a new estate planning strategy emerged - the so-called "Spousal Lifetime Access Trust" (or SLAT for short). The basic concept of the SLAT was relatively straightforward: it would function like a bypass trust, but be funded during life instead of at death, with the intention of using it to take advantage of the then-current $5.12M estate tax exemption before it dropped back to $1M as was scheduled for 2013.Ultimately, the estate tax fiscal cliff didn't happen, but the SLAT remains valid in 2013 and beyond for a new purpose: planning around state estate taxes, and the mismatch between the numerous states that have only a $1M state estate tax exemption and no gift tax, while the Federal gift and estate tax exemptions are at $5.25M. Given this "decoupling" of the state estate tax from its Federal gift tax - and the lack of any state gift tax backstop - couples have a unique opportunity to manage or avoid state estate taxes by creating "supercharged bypass trusts" in the form of SLATs funded during life.The caveat to the strategy is the "reciprocal trust" doctrine, which can cause SLATs to become "uncrossed" and taxable in the original donor's estate. Fortunately, reciprocal trust treatment can be avoided. Unfortunately, though, the rules to avoid reciprocal trust treatment are based on the facts and circumstances of the situation, and consequently a focus for the IRS and estate planning attorneys in the coming years may be figuring out how best to avoid the reciprocal trust doctrine without actually ruining the client's financial and estate planning goals.Nonetheless, though, the reality remains that the SLAT may be increasingly popular in the coming years, at least until states implement a gift tax, recouple to the Federal gift and estate tax system, or just repeal their state estate taxes entirely.

Purpose And Prior Use Of SLATs 

The basic idea of the Spousal Lifetime Access Trust (SLAT) is that it functions similar to a bypass trust, providing access (albeit limited, just as with a bypass trust) to income and/or principal for the needs of a surviving spouse. The difference, however, is that a SLAT is funded via gift while the donor is still alive, as opposed to a bypass trust that is funded by bequest when someone passes away. As with a bypass trust, the SLAT can provide access to just a spouse or a spouse and children, may automatically distribute income or make income distributions discretionary, and may prevent any distributions of principal or also allow principal distributions at the trustee’s discretion (which in turn may or may not be limited to distributions for health, education, maintenance, and support, depending on the trustee). The fundamental goal, similar to a bypass trust, is to get assets into a trust that can still provide some financial assistance to a beneficiary, but done in a manner that those assets - and any future growth upon them - will not be included in the beneficiary's estate.SLATs became especially popular in late 2012 asa vehicle to receive $5.12M gifts from high-net-worth clients who wanted to take advantage of the then-current gift tax exemption which would have potentially dropped down to only $1M in 2013 with the looming fiscal cliff. For instance, imagine a couple that had $20M of total net worth. Under 2012 law, they had combined $10.24M of exemptions, leaving only $9.76M exposed to estate taxes. With the exemption scheduled to fall down to $1M in 2013 though, there was a risk that their estate tax exposure would rise from only $9.76M to a whopping $18M (exacerbated further by the fact that the estate tax rate was scheduled to increase from 35% to a top rate of 55%!). To avoid this result, the couple could each fund $5.12M into a SLAT for the benefit of the other spouse in 2012, reducing their assets outright down to $9.76M and limiting their exposure to estate taxes in 2013. Of course, such gifting would utilize the couple's entire lifetime exemption, but it was viewed as far more favorable to use the whole exemption when it was $5.12M, than wait and risk only being able to use a $1M exemption in the future!

SLATs in 2013 And Beyond

Of course, the need for a SLAT to plan for a potentially-declining estate tax exemption ended with the American Taxpayer Relief Act, which permanently locked in the 2012 estate tax exemption and rate going forward, and won't be necessary again for such purposes until/unless a new law is passed that will definitively schedule the estate tax exemption to be reduced (notably, the President's 2014 Budget did include such a recommendation to take effect in 2018, although it remains unclear whether the proposal will gain any momentum). However, even without a looming decrease in the estate tax exemption, it turns out that under current law there's another popular reason for some clients to consider SLATs: the mismatch between the Federal gift tax exemption and state estate tax exemptions.The issue at hand is that there are still 22 states (soon to be 21) that have a state gift or inheritance tax, but only one of them (Connecticut) actually has a gift tax. About half a dozen have some type of gift-in-contemplation of death rule (which essentially states that gifts made shortly before death will still be included in the decedent's estate as though the gift never occurred), although their rules and details vary. For the rest of the states, there simply is no gift tax, even though many of these states have an exemption of only $1M. The opportunity this creates: to plan for state estate taxes using SLATsinstead of bypass trusts.For instance, imagine a couple that has a combined net worth of $4M (held as 50/50 between the couple). The couple currently has no exposure to Federal estate taxes, but live in a state that applies a state estate tax of 16% on assets above $1M. If the husband passes away, he can leave up to $1M in a bypass trust for his wife, with the remaining $1M left outright to his wife (and eligible for the marital deduction). Going forward, though, the wife now has $3M of net worth, which exposes her to a potential estate tax of $320,000 (the excess $2M above the state exemption at a 16% rate). However, if the husband chooses to fund a SLAT, he can put all $2M into a trust for his wife's death before he passes away; as a result, his wife will only be exposed to state estate taxes on her own personal $2M net worth, which is only $1M above the threshold and thus only exposed to $160,000 in estate taxes. The net result - by using a SLAT, the husband can put allof his assets into a SLAT to keep them out of his wife's estate, instead of being constrained to "only" the $1M state estate tax exemption that would apply when funding a bypass trust at his death.Notably, SLAT strategies may also become very popular for higher net worth clients as well. After all, if the client’s goal is to fund a bypass trust with the Federal $5.25M exemption, doing so at death can result in a state estate tax liability of $680,000 (at 16% state estate tax rates on the excess $4.25M that goes into a bypass trust but is above the state estate tax exemption); however, if the bypass trust as a SLAT is funded during life instead, the client may be able to put the entire $5.25M into the trust without any of the $680,000 state estate tax exposure!One challenge of using SLATs is that, because neither spouse is deceased yet, it’s not always clear which spouse should fund a SLAT – the husband for the wife, or the wife for the husband? To the extent that it’s intended as an alternative to a bypass trust with a higher dollar amount, the goal may be to fund a SLAT from any spouse in poor health – and anticipated to pass away soon – for the benefit of a surviving spouse, truly establishing a “super bypass trust” funded during life to avoid future state estate taxes. In other situations, though, this may not be feasible, either because gift-in-contemplation-of-death rules require that the trust be funded sooner rather than later, or simply because both spouses are in reasonable health and it’s not clear which may pass away first (but there’s a desire to take some planning action). The easiest resolution to this is to simply have both spouses create SLATs for each other with some of the assets (so that each spouse removes some assets from his/her estate). In this approach, each spouse would keep enough such that the spouse’s individual assets that are kept, plus the SLAT assets for his/her benefit, would be enough to maintain his/her lifestyle as a surviving spouse. The important caveat, though, is that IRS rules are not favorable to so-called “reciprocal trusts."

Avoiding The Reciprocal Trust Doctrine

The so-called "reciprocal trust" doctrine essentially states that if Person A creates a trust for B, and Person B creates an identical (i.e., reciprocal) trust for A, that the courts can "uncross" the trusts and treat the situation as though each person created a trust for his/her own benefit. Thus, if a husband created a $5M SLAT for his wife and the wife created a comparable $5M SLAT for her husband, the IRS may well claim that the end result is simply that each person made the equivalent of a $5M trust for themselves... which would cause the trust to be included in each individual's estate under IRC Sections 2036 and/or 2038 (since the deemed donor to the trust is the beneficiary of the trust and/or has some deemed control of it), and defeat the estate planning purpose of the strategy. Notably, the rule would only apply to the extent the economic interests overlapped - thus, for instance, if husband put $2M into a SLAT for wife, but wife put $5M into a SLAT for husband, only the $2M would be at risk for being uncrossed. Nonetheless, that still largely defeats the purpose of at least the husband funding a SLAT.As a result, in situations where there's a married couple, it's necessary to plan the structuring of SLATs around the potential for the reciprocal trust doctrine. As shown in the earlier example, in some situations there may not be a need or desire to create SLATs in both directions in the first place, such as where the husband is in very poor health and there is only be a desire to have the husband fund a SLAT before he dies (but the healthy wife doesn't need to fund a SLAT in reverse). Where there is a desire to create two SLATs, techniques to help keep them separate include: different trustees or co-trustees; different rights to the trust (e.g., one might have access to income, but the other only to principal); different beneficiaries (e.g., one might be for just the spouse, while the other might be for spouse and children); different powers (e.g., one might have a special Power-of-Attorney to change the distribution of assets to certain family members or charities); fund with substantively different assets (e.g., one trust gets cash and securities, and the other receives a share of the family business). Another strategy to avoid the rule is simply to space out the trusts in the first place; if one is created now, and the other isn't established until years from now, it's difficult for the IRS to claim they were purely reciprocal (although obviously the caveat is that waiting too long may diminish the benefit of the strategy, but that "risk" is part of what substantiates the trusts aren't reciprocal!).Unfortunately, the “reciprocal trust” doctrine is ultimately up to the judgment of a court, if challenged, which means there are no “safe harbor” rules to follow to guarantee the strategy will be safe. As a result, expect to see a lot of focus from the estate planning community in the coming years to figure out how to structure SLATs to most easily avoid reciprocal trust treatment, while being “as reciprocal as possible” to avoid or minimize any disruption on the client’s overall financial and estate planning goals.At some point in the coming years, states will likely close their state estate tax "loophole" - either by establishing a gift tax to backstop their estate tax exemption, creating a robust gift-in-contemplation-of-death rule to reduce at least the use of deathbed SLATs, recoupling to the Federal system to take advantage of the Federal gift tax system (including the IRS' enforcement of it), or just outright repealing their state estate tax. Until then, though, the SLAT remains a remarkably viable to manage or avoid state estate taxes while staying within the Federal gift and estate tax rules.