Though a different set of laws governs estate planning and family law, family law and estate planning issues frequently intermingle. While this may be the case, it is essential to understand that attorneys who primarily focus on one area may not be prepared to recognize issues within the other area.
1. Married Couple with an Estate Plan Seeking a Divorce
An example of when these two items cross is when a married couple with an existing estate plan decides to pursue a divorce. When this occurs, it is essential to look at the specific estate planning documents to evaluate how they will impact and be impacted by asset division.
Irrevocable Trusts are an excellent tool for couples, especially those with high net worths. Several examples exist of how irrevocable trusts may affect high net worth couples including: Couples who have created an irrevocable trust to assist with tax planning while retaining control over the asset’s distribution. You may have a spouse who is the beneficiary of an irrevocable trust created by a relative.
Regardless of how the trust is set up or utilized, it’s imperative to understand the trust in full to best assist in distributing or splitting the assets. If a revocable trust exists, your family law attorney must know of its existence and have the opportunity to review the specific document to determine when, how, and why this specific irrevocable trust exists.
Depending upon your specific circumstance, an irrevocable trust may be completely exempt from consideration in the divorce proceedings. Alternatively, if you are the present income beneficiary of an irrevocable trust, the income you receive from the trust may be counted by the court when analyzing the parties’ need or ability to pay spousal or child support, or disparity in income and access to funds when analyzing an attorney fee request.
In specific scenarios, you may also be the beneficiary of an irrevocable trust that requires the distribution of principal at specific intervals. During marriage, it is critical you maintain the separate property character of any distributions. For example, suppose you receive a distribution from an irrevocable trust, and you commingle that distribution with a community property asset. In this instance, you lose your claim to that separate property distribution during the divorce process.
Another area of interest is wills. Wills alone, unlike Irrevocable trusts, will not have any bearing upon the asset division during a divorce. Per California case law, a will is not evidence of any person’s intent to make a gift or create community property since it is not yet in effect. A Will’s effective date is the date of death of the Testator (the person who wrote the will).
With a Living Trust (also known as a Revocable Trust), the trust’s specific language is critical to how it’s treated. Married couples can place both community property and separate property into the same trust. Doing so does not automatically change separate property into community property. If your trust contains a mixture of community and separate property, you must notify your family law attorney and provide them with a copy of the document for review. A knowledgeable estate planner will create multiple accompanying asset lists and create a clear delineation of assets within the trust to ensure no ambiguities in the assets’ characterization.
So long as the property’s character does not change from separate to community property, the asset will not be subject to division (though there may be separate reimbursement claims, an issue for another post). When a trust identifies an asset as separate property, and an accompanying document such as a deed changes the character from separate to community, then this may serve as evidence of an intent to create community property subject to division by the Family Court. Unlike an irrevocable trust, a living trust does not remove an asset from your estate. Instead, with this trust, the trust creators retain all rights of ownership over the property. Consequently, all community property in a living trust remains subject to the family court’s jurisdiction and asset division.
2. Concerns of Married Couples or Individuals with Adult Children
People seeking estate planning services are often not only worried about their divorce, but about a possible divorce in their child’s future. A parent(s) can exert a degree of control to protect their assets from a child’s possible future divorce. As described above, depending upon the individuals’ net worth, an irrevocable trust may exist for a child’s benefit. With the right terms, this can minimize the exposure the assets face during a divorce.
In instances where an irrevocable trust is not appropriate, individuals may create what is known as a spendthrift trust. Spendthrift trust provisions allow you to leave money to your beneficiary with limitations that prevent the money from being legally considered theirs. The beneficiary has access to the money for specific ascertainable standards such as their health, education, maintenance, and support.
When the beneficiary needs access to the funds, the beneficiary contacts the trustee and explains their needs. If, after evaluating the request, the trustee determines this expenditure is an appropriate use of the trust funds, then the trustee issues payment directly to the institution or service provider. The money is, therefore, never directly in the control of the beneficiary. This process protects the trust funds from creditors, bankruptcy, or being co-mingled and divided in a divorce. The critical detail here is: the beneficiary never has full access to the funds. If the beneficiary can never go to the bank and withdraw all funds for his use, the funds remain protected from creditors and divorce.
A spendthrift trust is not appropriate in every situation. For example, a client was worried their child was in a cult. This client was concerned that if the child inherited money outright, they would donate the money in full to the cult. For that reason, a spendthrift trust was enacted with distributions according to only ascertainable standards. After that child’s lifetime, the sibling and the grandchildren would inherit what remained.
3. Blended Families
Another time that family law and estate planning can meet is with blended families. Each blended family will have unique priorities and concerns. Common concerns include ensuring that community property created in a new marriage does not deprive children of a previous marriage of their inheritance.
a. Support Issues
In cases of blended families, a key concern can arise from one spouse’s child and spousal support obligations from a previous marriage or relationship. Child support can be of particular concern because there are circumstances where a child support obligation extends past the parent’s death. In this case, the estate becomes responsible for paying some or all of the remaining child support.
4. Married couples with separate wealth
Before getting married, it is appropriate for couples who have accumulated separate wealth or have a previous marriage or children from another relationship to consult with an attorney about a prenuptial agreement. While a prenuptial agreement isn’t the solution for every couple, merely consulting with an attorney before marriage can provide insight into the various issues that may arise during or after a marriage. While financial conversations can be stressful, couples may reap considerable benefit from discussing these possible future scenarios.
A prenuptial agreement can serve as a supporting document to an estate plan. when coupled with an estate plan, both documents serve to cover events such as divorce or death. By speaking to an attorney before the wedding, you can identify what legal tools will best complement your specific needs and protect your assets as you embark upon your new marriage.
What to look for in an attorney
Each person and each family will have a different set of needs and goals. For all of us, issues of family law and estate planning can intermingle. If you have concerns about how these issues are present in your life, it is advisable to seek an attorney’s counsel. One benefit of working with the attorneys at Gomez Edwards Law Group is that we designed our firm to serve our client’s needs in both family law and estate planning. The attorneys at Gomez Edwards Law Group are skilled at identifying these crossover issues while guiding you through your case and will ensure your constant protection.
For a consultation, call 1-408-413-1200 or visit gomezedwardslawgroup.com.