Introduction: Welcome to the Bryn Mawr Trust wealth management podcast, providing commentary on what’s moving the financial markets, financial planning, and other timely business and monetary topics. Please welcome your host, Jennifer Fox, president of BMT Wealth Management.
Jen Fox: Hello everyone. Today we’re here to talk about state planning considerations in divorce divorces a difficult time of life. It’s a difficult subject area and there are definitely many issues. One needs to think about when going through a divorce. Obvious issues involve custody of children and the division of assets. We’re here today to discuss another, perhaps less obvious but also important issue, namely estate planning considerations in a divorce. Joining me today to discuss the topic is Steve Klammer, senior vice president and director of wealth advisory services at Bryn Mawr Trust. Steve has extensive experience both in the financial services industry and in previously practicing law in the trust and estates group at pepper Hamilton, a large Philadelphia law firm. Welcome Steve.
Steve Klammer: Thank you Jen.
Jen Fox: So I think it’s important to perhaps start at the beginning of this conversation and not necessarily talk about all of the custody issues or specific division of assets, but can you outline exactly what you mean by estate planning?
Steve Klammer: That’s a great question. I like to explain it as addressing a couple of specific areas. The first is planning for incapacity. Incapacity is when you’re unable to do things for yourself. So if you’re laid up in the hospital, if you’re in a home, things of that nature, which you know are specific to your situation. Sometimes you need someone to name someone to handle your affairs, whether it be pursuant to a power of attorney pursuant to a living will. Those are documents that you may do in terms of estate planning from an incapacity perspective cause you need to plan for that, that potential. The second is planning for death and that’s much more common I think in the thought process. And with playing for death, it’s really planning for the orderly transfer of assets. I think that’s the critical point. It’s also naming who is the controlling person in handling that for you. But it’s, you don’t want to rely on what the state individual state laws say as to how the assets go at your death if you don’t have a will. This is your opportunity to name who the recipient is, to name who’s in charge, to put any parameters around it, whether you want to create trusts, whether you want to have outright transfers. This is your chance to define that.
Jen Fox: So Steve estate planning is important no matter the size of your state and whether or not you’re subject to estate taxes because it’s planning for the transfer of wealth. Not necessarily always planning estate taxes.
Steve Klammer: Absolutely it many estates may not have a state tax involved, but you still need to plan even if your, your assets are minimal. It’s still important to have those documents to ensure the orderly transfer of the assets because without them it gets more complicated and it’s more expensive and your beneficiaries will appreciate that.
Jen Fox: Absolutely. So going to the topic of the day, what should someone go, going through a divorce, be thinking about when it comes to estate planning?
Steve Klammer: Yeah, I think in a divorced, you know, so many things are going through your mind and it’s an emotional time as well. And estate planning is hopefully something that you think of. And if you have a divorce attorney, hopefully it’s something that divorce attorney reminds you about if you’re not thinking about it yourself. There’s a couple of things I definitely would suggest that you think about in the process. The first is who do I want to put in a position of control? You may already have estate planning documents and your spouse may be named as that person that’s in control right now. You may no longer desire to continue that as a result of the divorce, if not that spouse, who do I want now put some thought to that? Maybe, maybe it’s a sibling, maybe it’s a parent, maybe it’s a trusted friend, maybe it’s a corporate fiduciary.
Steve Klammer: Lot of alternatives. But that’s something that’s really important to think about in the thought process. Also, you know, very important, who do I want to take care of the children? If you have minor children, that’s one of the main drivers for people to do a state planning documents is to name a guardian for their children. In a divorce situation. I think you have to be mindful that your spouse, who you’re divorcing, if they survive you, they will still have likely have rights to be guarding over the children, to take care of the children. So you’re really focusing on if something happened to both of you, while one or more children are still minors. But that’s critical. That’s the most important. Who’s gonna take care of your children? Right. Very important thing.
Jen Fox: And so Steve, just a quick question on that. So as you’re looking at the guardian for the minor children, and as you said, the surviving spouse will likely continue to have their parental rights. Is that something that still needs to take into context? Any complicating or complicated custody agreements?
Steve Klammer: Well, that’s definitely part of the, the divorce agreement. And one of the things that I think is important to do as well is you go to an estate planning attorney, put that estate planning attorney in touch with your divorce attorney because there are definitely overlapping issues that will be in the divorce agreement, not just the the custody of the children, but also, you know, for instance, perhaps there’s life insurance, the who maybe has an alimony obligation or a child support obligation. What happens if that spouse passes away? A lot of times there might be the element of life insurance to handle that situation, to supplement, you know, and keep the cash flow continuing to the recipient. So definitely it’s, I think it’s an important consideration, divorce agreement, but there are others as well. Got it.
Jen Fox: Got it. And I think the insurance component is important, especially if that helps maintain the lifestyle of the surviving family. If that was something that they were counting on.
Steve Klammer: Oh, absolutely. With without it, you know, the, the spouse that’s the wealthier spouse that maybe has higher income that all of a sudden isn’t there. The surviving spouse who’s in charge of the children, how are they going to weekend’s mean? Right? that’s solved by life insurance sometimes. I understand. And, and in addition, Jen, one of the additional thoughts I think that someone should definitely be thinking about when I’m going through a divorce is who do I want to receive the assets now? And how do I want to structure it? You know, perhaps you have a well now that leaves everything to your spouse. Well, if you’re divorcing that spouse, you might not want to have them in that position anymore. If they’re not in that position. Who do I want to receive the assets? If I have children, likely that their recipient, if they’re younger, do I need trusts for them? If I have trust for them, what pay out ages, all sorts of issues that are, you know, the difficult issues to think about, especially during a challenging time of going through a divorce, but they’re still important. And, and the estate planning attorney can, can help you with those can, you can rely on their experience as to what they’ve seen before. So it’s not something where you have to have decisions the second you walk into the attorney, but they are important things to think about.
Jen Fox: So let me ask you a question on the trust for children. You know, it seems pretty clear that you would exclude the divorcing spouse but in the trusts for children, does that provide some protections for the children in the event that it’s a contentious divorce?
Steve Klammer: I think definitely does. But for it to come into play, keep in mind that the spouse would have had to pass away. So at that point you would have this surviving spouse, the, the individual that you’re divorcing and the children’s still there. So the protections are in place for you naming who the trustee of that trust is. You may choose not to name the spouse that you’re divorcing as trustee. You may choose to name a sibling. You may choose to name a corporate fiduciary family friend, but it’s probably a different person than your the spouse that you’re divorcing. And hopefully it’s someone that can work with the spouse that you’re divorcing. So the children’s needs are met, the children’s needs are communicated to the trustee, the trustee can assist with getting the monetary needs. I’m satisfied. Sure.
Jen Fox: Got it. And then what if I’m in a situation where I’m getting a divorce and I don’t have children?
Steve Klammer: Yeah, it’s a great question. In that situation, think you still need to think about who the recipient of your assets you want. You desire them to be. The, the name of that person may change. It might be a, a sibling, might be a niece or nephew, might be your parents. Might also be charity. Lot of situations where someone doesn’t have any children in the name of charity. And when you do that, even with the charity, there are different planning things that you could do a trust for a charitable type of trust as an example. If you name a sibling, maybe you give them an income interest in the funds for their life. And ultimately it goes to nieces and nephews. So there are still important topics to talk about, not just who it would be going to, but how it’s structured.
Jen Fox: Got it. So with all of those decisions that I need to make. And in addition to all of the decisions that come naturally with a divorce, what are some of the actions folks going through a divorce should take?
Steve Klammer: Yeah, I think the number one is get to an estate planning attorney as soon as possible. Now that estate planning attorney, who should that person be? If you already have estate planning documents, you may already know someone. However, that person may have also drafted your spouses documents at the same time. So they may have a conflict of interest there. So you might want to consider going to a different person than the person that originally drafted the estate planning documents for you and your spouse.
Jen Fox: So much like your divorce attorney, where each spouse should have their own divorce attorney. It may make sense for each spouse to have their own estate planning attorney as well.
Steve Klammer: Correct. And also the estate planning attorney should be introduced to the divorce attorney as I think I mentioned before, because it’s important as early in the process for the estate planning attorney to work with that attorney. You know, what’s what with the children, how are the finances going to be handled? What if there is an untimely death issues like that to coordinate with each other. And the estate plan attorney should also receive a copy of the final divorce agreement because the estate planning attorney will want to make sure that you comply with your obligations under that divorce agreement. Got it.
Jen Fox: So as you start to think of some of the other actions folks going through a divorce should take, it does also sound that an element of overall financial planning is really critical to this process to help determine some of the solutions that you and I have had chatted about so far. So for example, the, the life insurance consideration to continue those support obligations might be best addressed through a financial planning process to determine what makes the most sense.
Steve Klammer: I think a financial planning for early either spouse in a, in a divorcing situation. And it’s bigger than just life insurance. It’s okay. My cash flow is going to change here. Either I’m potentially receiving alimony and child support or potentially paying alimony and child support. All of a sudden from one household or two households. So there are more expenses generally speaking that you need to be mindful of. So I think overall looking at your, your cash in cash out at a minimum to see how that’s all gonna work as important. In addition, you know, within the realm of financial planning, part of what the estate planning attorney would help you with is redoing your documents. So we talked about a will for instance, a, a power of attorney. You mentioned the case of incapacity.
Steve Klammer: There’s also a living will, you may have already named your spouses, the healthcare provider for you. You may want to revisit that. Additionally, beneficiary designations is something people don’t always think about. If you have an existing life insurance policy, maybe it’s a group policy at work group term policy. If you have a retirement plan 401k at work and I a little IRA at the bank maybe a payable on death account. Those are all controlled by something called beneficiary designations and it passes outside of your will and you need to change the beneficiary designations to someone other than a spouse. If that’s what you desire. And with regard to like your 401k plan at work or your group life insurance at work, you’d contact your human resource department to assist with getting you the forms for that. If it’s an IRA at an institution, you need to call up the institution in order to get the appropriate form. Uh but there’s a separate form outside the will to accomplish that. If you change your will but you don’t change your beneficiary designations, you haven’t accomplished everything.
Jen Fox: So there’s a lot of followup and follow through that’s required to make sure that it’s all buttoned up and is really achieving your goals and objectives for your family.
Steve Klammer: Absolutely. I think as it may sound a little bit morbid, but you have to think about if I pass away, think about every asset. Think about how will it go. The divorce agreement will handle the joint assets, but assets in your individual name, whether they be your bank accounts, whether it be you know, a separate piece of real estate, but also assets that aren’t per se, assets in your hand right now, such as a life insurance policy, that designation on that or a retirement plan, you know, that you are not touching right now because you’re not 50, nine and a half that the beneficiary and that is receiving those assets just like a beneficiary under a is receiving assets.
Jen Fox: So what are some other factors that I should be thinking about? That may have other implications to estate planning during divorce?
Steve Klammer: A couple. One is it really, some of these are state specific. Every state has different laws and some are similar, some are not. For instance, some States have some laws called elective share rights, elective share rights. It varies again from state to state health spelled out. But basically the premise is that these rules allow you or don’t allow you to disinherit a spouse. So, for instance, if I’m married, I decide, you know, I want name my child is the sole beneficiary of my estate and I take out my, my spouse. Well, the law says, Hey, you can’t completely do that. The spouse has some rights to some of the assets in many of these States. It’s a third of the assets and there’s a special formula as to what’s included, what’s not included. But basically it’s the inability to completely cut out a spouse.
Steve Klammer: That’s not to say you shouldn’t do that in the will and the divorce situation. Let that spouse make that claim and get whatever the formula calculates. It’s, they won’t be 100%. So you’re, you’ll be in a better situation if you do a, just address your state plan. But you just have to be mindful that there is the potential for it not to be exactly how you envisioned it to be. Secondly there’s also I think you need to look at the, whether there are automatic post divorce elimination of a spouse as a beneficiary in some of the States. And by that I mean if you don’t change your documents and your spouse is still named, do they still receive it even if the divorce has been finalized? Many States say no. You wanna change your planning documents and not rely on that because by changing your planning documents, you’re also naming who the recipient is and you’re setting up the orderly transfer, the assets, the structure. It’s not going to the default provisions. You do not want to rely on the default provisions in most States. It’s not going to go to the state, it’s going to go to other family members, depending upon how close they are in terms of relation to you. However, you still want to be the one that makes that decision.
Jen Fox: So as you’re going through the divorce process, what’s the timing for doing all of this? Because it sounds like you’re recommending and suggesting that kind of get that estate planning attorney on board pretty early so that they can communicate with their divorce attorney. But is there a timing of how all of these documents get get filed and deter and signed?
Steve Klammer: Oh, I have an estate planning background, so my answers yesterday as to the timing. But then the reality of it is, you know, you want to put the divorce attorney in touch with the estate planning attorney as early as you can and they can talk about timing issues with regard to that. My personal belief is that I would be changing my documents as soon as I called and I’m recognizing that I may have to change it a second time later on depending upon what we ultimately agreed to in the divorce agreement.
Jen Fox: So it sounds like revisiting these documents several times through the process.
Steve Klammer: I think so. I think once sort of immediately to handle the issues that are right there and then a second time at least is prudent to do because you want to comply with whatever you’ve agreed to and it may be a little bit different than what you had put in the documents when you first re-did them.
Jen Fox: Gotcha. So any other suggestions before we close our podcast for, for today?
Steve Klammer: Well, I think I’m the last one really is you know, a lot of situations when, when there is a couple of divorcing, one of the two and perhaps both intends to remarry in the very near future. And you know, if, if you do have a situation like that, definitely consider whether you do a prenuptial agreement this time it should make things easier hopefully less painful and hopefully more equitable. Ultimately. So that would be my advice is if you’re in a situation where you re-marrying, you know, think about racing that topic.
Jen Fox: Well, there’s a saying that we have in estate planning world is that many first marriages don’t have prenups, but most second marriages do. So that planning is, is very appropriate. So Steve, thank you so much for your time today. This is very helpful information for any of our clients going through a difficult time with divorce.
Steve Klammer: My pleasure.
Closing: This has been a production of Bryn Mawr Trust. Copyright 2019. Visit us online at bmt.com slash wealth. The views expressed herein are those of Bryn Mawr Trust as of the day recorded and are subject to change without notice. Guest opinions are their own and may differ from those of Bryn Mawr Trust and its affiliates and subsidiaries. This podcast is for informational purposes only and should not be construed as a recommendation for any product or service. B and T wealth management provides products and services through Bryn Mawr Bank Corporation and its various affiliates and subsidiaries which do not provide legal tax or accounting advice. Please consult your legal tax or accounting advisors to determine how this information may apply to your own situation. Investments and insurance products are not bank deposits, are not FDIC insured, are not backed by any bank or government guarantee and may lose value. Past performance is no guarantee of future results. Insurance products not available in all States. Any third party trademarks and products or services related thereto mentioned in this podcast are for discussion purposes only. Third party trademarks mentioned in this podcast are not commercially related to or affiliated in any way with BMT products or services. Third party trademarks mentioned in this podcast are not endorsed by BMT in any way. BMT may have agreements in place with third party trademark owners that would render this trademark disclaimer not relevant.