Oftentimes I get a call from a potential client with a general estate/tax planning issue. It begins as a general request for advice. What is the best way to transfer a piece of property for property tax purposes? Are there income tax issues when receiving property? What is the estate/gift tax exemption amount for this year? Et cetera. Later, the issue develops into what I learn is a concerned family member–often a beneficiary of an elder family member’s estate–who wants to ensure that the elder family member’s estate plan will distribute in the most beneficial manner for some overarching family goal. Here’s where my job gets dicey. If I have recommendations for any estate planning modification, who would be my client here?
When someone comes to me to draft his/her estate plan, that question is answered fairly easily. The person or couple seeking the estate plan is my client. Not their heirs, not their family members, etc. However, when, for example, a concerned nephew calls me wondering if his 90-year-old aunt did her estate plan properly so that certain goals are accomplished (keeping property in the family, saving on property taxes, etc.), what then? Well, if I give the nephew legal advice with the purpose of meeting his goals, then certainly I cannot then represent the aunt in modifying her estate plan in accordance with her goals. There is a huge potential for an actual conflict of interest. Similarly, if I tell the nephew, “Sorry, pal, have your aunt call me”, then I can then talk directly to the aunt, but my advice might be that her estate plan is just fine and in accordance with her wishes.
The point here is that if someone calls an attorney for legal advice concerning someone else’s estate plan (even if it is a family member), the attorney is restricted in what he/she can do without the risk of a conflict of interest. The attorney can only suggest estate planning modifications to the person whose estate plan is the subject of the call. It’s not a good idea to make estate planning suggestions based on a concerned beneficiary’s call. So, if you’re assessing your family’s estate plan situation, be sure to direct the Grantor (the person making the anticipated gift) to call the attorney directly.
Everyone should have a will; especially people with young children. It does much more than give your property away. It nominates a person who will act on behalf of your estate. It nominates a guardian to care for your children. And, yes, it also distributes whatever property you have left after paying creditors to your desired beneficiaries. They’re also cheap and easy to create. But some studies have concluded that over half of our nation’s population dies without a will.
Well, those of you without a will are in luck. The State Bar of California (the state agency in charge of licensing and regulating the state’s lawyers) has a will template for anyone to fill-in-the-blanks. Then, voilà! You now have a will. Follow the instructions attached to the will template for details.
There are some websites that can draft a will for you for a small fee, like LegalZoom. Those are fine, too. What’s important is to have a will.
What’s in it for me? Why am I telling people visiting my site to go elsewhere to have their will drafted?
Well, there’s nothing in it for me besides providing information for free. I get nothing out of this. The truth is that I don’t make much money off of drafting wills, anyway. If I planned on making a living by solely drafting wills I’d have to either charge a lot more than these other companies or bring in so much bulk business that I’d be running myself ragged drafting wills. I do draft wills, but often in the context of a more comprehensive estate plan. I would prefer that everyone explore their estate planning options, but the purpose of this post is to get as many people as I can to draft a will.
And now the obligatory legal caveats: Drafting your own will without the advice of an attorney comes with risks. A valid will is a legal document, and everyone should be sure to understand the legal effect of whatever testamentary documents he or she creates. Feel free to contact me if you need more detailed information.
I was summoned for jury duty yesterday. Almost no one I told could believe that a lawyer would (a) be summoned for jury duty; or (b) that, even though I was called in to serve, they would even want a lawyer on a jury. Well, it’s true. Lawyers are not exempt from jury duty (they used to be in the old days). Coincidentally, the judge handling the trial was summoned for jury duty the following day! Although most trial attorneys would not want a practicing attorney empaneled on a jury, there are some instances where lawyers are left on the panel.
This was my first time being called in to serve. The following are some observations from my first time in the potential juror pool.
1. Most potential jurors’ frustration with being called in was exacerbated by their general ignorance of the trial process.
You’re supposed to show up at 8:30 a.m. All the potential jurors are to meet in the jury assembly room. In Redwood City, it’s this DMV-esque room just behind the court cafeteria, on the basement level. In there, you will find a group of half-awake, bemused, book/kindle carrying people who are already trying to conjure up reasons as to why they shouldn’t be there. We ended up waiting almost two hours before being sent up to the department where the trial will be held. People were vocally annoyed with the delay. I could sense a general disapproval of the court process. I wish the jury assembly person could explain what exactly is going on at this time. Oftentimes, just before jury selection, attorneys on both sides will often discuss settlement proposals, evidentiary issues, witness issues, etc. Some times these discussions will greatly shorten trial time, or even dispose of the matter altogether. Potential jurors should want these discussions to take place. I just wish it was explained to the room.
2. People are terrible at following very simple directions.
The summons has on it very simple directions. One is where to park, and which part of the summons to use as a parking pass. The other direction is to bring the summons with you. There were a handful of people who were confused about parking, and didn’t even bring the summons with them. How these people raise children, or clothe themselves, is beyond me.
3. Having a humorous judge immensely improves the juror experience.
Judge Buchwald presided over this particular trial. He is a former trial attorney, with a lot of experience, and really interesting anecdotes. As counter-intuitive as it may sound, not all trial judges have actual trial experience, especially in both civil and criminal settings. I know, I never understood how that works, either. Judge Buchwald was pleasant, friendly, self-deprecating at times, most importantly, funny. He treated jurors as people with lives, families, jobs, and personalities… you know, as regular people. He understood and acknowledged that our jury system is in place for a reason, that he believes in that reason, and that the people there to serve on the jury probably would not choose this activity for leisure time fun.
4. Personal injury cases are very polarizing amongst the potential jurors.
This particular case involved a traffic collision at the intersection of Hwy 92 and 101. The plaintiff was suing the defendant for injuries sustained in the collision. However, the plaintiff’s attorney made it clear that only general damages were being sought. That means that only “pain and suffering” damages were being sought. Not money for bills, for damaged property, etc. But, only money for the pain and suffering as a result of the accident. That was a polarizing issue. Some potential jurors who were interviewed either felt very strongly for awarding general damages, or very strongly against awarding such damages. It was enlightening, to say the least. A lot of potential jurors were involved in car accidents where they sustained injuries to themselves or in which family members sustained injuries, and depending on the outcome of their personal experience, they held strong opinions for or against recovery in a collision. Needless to say, the litigants exercised their peremptory challenges accordingly. For example, those that were strongly against an award of general damages were quickly excused by the plaintiff. Similarly, those that felt anyone with an injury should be compensated to the fullest extent of the law was quickly excused by the defendant.
5. If you’re a party in a lawsuit, and you’re in jury selection, be mindful of what you do on your laptop.
While jury selection takes place, one panel is randomly selected from the pool (for example 13 of 65 called in) to sit in the jury box. As jurors from that panel are either excused for cause or hardship, or excused because of lawyer peremptory challenge, then another random member of the pool is selected to fill the vacancy, and on and on. The other 52 people sit in the court’s gallery (the “audience” section). The parties in the trial sit at the tables directly in front of the gallery, with their backs to the gallery, and they face the witness stand and the judge’s bench. While jury selection is going on, the plaintiff himself was on his laptop “Googling” each jury member. I didn’t find it to be particularly appealing, and I don’t think the other potential jurors found it tasteful. Now, I do think it’s wise to look into the background of the people deciding your case, but I think there is a time and place.
6. Lawyers are not always disfavored jurors.
Most of my (non-lawyer) friends were perplexed that I spent from 8:30am until 4:00pm in jury duty, only to be excused. “Why were you even summoned?” “You weren’t excused immediately?” “Don’t you know how to get out of jury duty?” We have to serve. We also only get excused if we have a really good reason (a hardship, scheduling conflict with a pre-paid vacation, illness, etc.) or you are excused based on one of the lawyers using their peremptory challenges. However, lawyers aren’t automatically disqualified. And sometimes they even remain on the panel! In this case, a retired corporate attorney was kept on. He was an attorney who used to work for Pillsbury, a very large firm, representing small to medium sized banks. Since then he has gone on to be a jazz pianist. And before being an attorney he was a philosophy professor. He seemed like an interesting guy. He seemed intelligent, he had no where else to be, and he wasn’t a trial attorney. He stayed on. Another juror was a young woman who stated that she went through her first year of law school, but she had flunked out. Her husband will be taking the bar next week. She stayed on as well.
7. You know you’re in the Bay Area when…
Color me shocked, but apparently there is a software industry somewhere around here. I kid you not, almost EVERY potential juror called into the jury box was either a software engineer, in software sales, worked at a “tech start up” or was married to someone who did one of those jobs. Yes, I know we are in Silicon Valley. But, Jesus Cristo, there was an abundance of the word “software” in that jury selection transcript.
I’ve always wanted to serve on a jury. I still have yet to serve. And I should really be careful what I wish for. It was a long day of waiting, but I found it to be interesting and illuminating. People involved in jury trials really believe in that system of justice. I’m still torn one way or another. But, after all that vetting of potential jurors, I must admit that it felt somewhat ridiculous that all of these resources were spent, all of these people’s lives were disrupted, and so much time and energy was spent for someone to prove his allegations that he is entitled to pain and suffering damages because of a collision at the intersection of 92 and 101. But who am I to screen the merit in a civil damages case?
I’ve recently encountered a potential client who recently moved to California from the east coast. She is married, no children. She and her husband have an existing estate plan (revocable trust, wills, powers of attorney, health care directive) prepared and drafted by an attorney in the east coast state while the couple resided there. The couple have since moved to California, sold their house on the east coast, and purchased a home in California. The purchase of their home here reminded them that they may need to update their estate plan. Or do they?
There are a couple of issues when you move from one state to another. Besides all the hassle of updating essentially every piece of information short of your social security number, there are now issues of jurisdiction. Since you reside in a new state, you are now protected, and subject to, a different state’s laws. For example, a couple of issues that are solely dictated by state law are marriage, divorce, and property laws.
Let’s go back to the example above with the east coast couple moving to California. East coast states are not community property states. Their estate plan was created in the east coast state, contemplating that state’s laws, after the couple married. This is presumably fine for purposes of federal estate taxes, since federal law applies the same way in California as it does in any other state or territory. But what if the couple get divorced after they move to California? What is the character of the property? What about the wills, the powers of attorney, and the health care directives? Are those documents valid in California?
There are now two options: (1) Don’t do anything; the documents are valid in the east coast state and demonstrate the couples’ wishes under the laws of the state in which they resided at the time the estate plan was done; or (2) Scrap all of the east coast estate plan and do a very similar plan contemplating California law.
Option (1) is certainly cheaper and easier. They merely deed the California house to the trust, and voila, done. It’s probably not the clearest and surest way to proceed, though, especially if there are defects in the documents under California law. Option (2) is essentially doing a totally new estate plan, but without a lot of the discussion regarding goals and strategy, etc. We all certainly hope we don’t move from state to state very frequently. It’s tough to physically move, let alone completing all the related paperwork. However, when you move from one set of laws to another, it’s definitely a good idea to assess the consequences on your estate plan, marriage, children, job, benefits, finances, etc. You definitely don’t want to one day realize that what you thought was s0lely yours is now partially owned by someone else.
The two most frequent types of calls I receive from potential new clients are the following: (1) Calls from people wondering the cost of an “estate plan”; and (2) Calls from people insisting that he/she needs a “living trust” and wondering the cost of creating a living trust. On their face, the calls seem sensible. We’ve all heard that if you “put” your property into something called a “trust” then you’ll avoid bad words like “probate” and “taxes”. It sounds like a no-brainer. However, the majority of callers throwing around buzz words and wondering price only indicate to me that there is missing a general discussion about what the hell we are even talking about. What is an estate plan? What is a trust? Does anyone really need these things?
What is an Estate Plan?
An “estate plan” is a general term for the arrangements you have made for your property after death, and sometimes for your person and property during some moments of your life (think: coma). An estate plan may include documents such as wills, trusts, powers of attorney, and health care directives. Estate plans may reference or include financial planning such as life insurance policies, retirement planning, and family partnerships. Estate plans may also last well beyond your death (ever heard of “trust fund kids”?). So, as you can imagine, it’s tough to really price an estate plan. It can be very simple–a will, a power of attorney, and a health care directive–or very complicated, employing all those words used in the prior sentences. It really comes down to your goals and wishes.
That being said, my blanket advice is that everybody should have a will and advanced health care directive, at the least. A will is useful because you can nominate an executor (the person who will be “tying up” all your loose ends, paying your creditors, filing your tax returns, etc.), you can distribute your property to your chosen beneficiaries (and more importantly exclude your undesired beneficiaries), and you can nominate a guardian in the event that you have minor children that you leave orphaned. A health care directive lets your doctor know who you appoint as your agent to make decisions on your behalf in the event that you are alive, but unable to make your own decisions (again, think coma). One main benefit of a directive is to avoid the Terri Schiavo incident, where a patient’s parents’ want different medical treatment than the patient’s husband. A health care directive also instructs your agent on end-of-life decisions (“pulling the plug”), on burial instructions, ceremonial instructions, organ donations, autopsies, etc. It’s a great document and easy to prepare. The cheapest and quickest way to draft one is to get a form from your doctor.
So, uh, do I need a living trust or what??
My estate planning experience has repeatedly taught me one thing: people LOVE trusts. They want it, and they want it badly. The word conjures up associations with wealth, control, security, and freedom from taxes. The reality is that it’s not for everyone, and they sometimes create more problems than solutions. The following are the main reasons why holding property in trust may be a good idea. If you don’t fall within one of the following reasons, chances are that you probably don’t need a trust as part your estate plan.
1. Avoid Probate. The word “probate” seems to cause fear in the minds of many, but not many people actually know what it is. When a decedent’s estate (fancy word for “dead person’s property”) goes through probate court, the court appoints someone to marshal and value the estate assets, to pay any creditors, and to distribute the property to the rightful beneficiaries. That’s it. The appointed person is usually the executor named in the will, or someone who petitions the court in the event there is no will (called an administrator). This process can take between 9 and 12 months, depending on the complexity and size of the estate. It can also cost a significant amount in fees. For an estate worth a $1 million, the estate will need to pay the executor/administrator AND his/her attorney about $24,000 EACH. Keep in mind that in the Bay Area, having just one house in the estate pushes the value of the estate to at least $600,000. Property held in trust, for purposes of probate, will not be counted as estate property. So the property is not subject to the probate procedures. This reduces the value of the estate–so lower fees–and also allows for the property to pass at a significantly sooner time.
2.Avoid Estate Taxes. The ‘T’ word! There it is. Just how property is taken “out of” your estate for probate purposes, oftentimes placing property in a trust will also take it “out of” your estate for estate tax purposes. This isn’t always true, so be sure not to assume all property held in trust is always estate tax free. Avoiding estate taxes is more recently becoming a not-so-important reason to hold property in trust. Since December 2010, Congress has allowed for a $5 million exemption for estate taxes. This means that unless you die with over $5 million of property, you will not be subject to federal estate taxes. If you’re reading this blog, you don’t own $5 million worth of property. The exemption level has a sunset provision (meaning that it terminates) this December. Last I checked this is an election year, so keep your eyes on that exemption amount come New Year’s Day.
3. Control Beyond Death. A power of attorney and health care directive both last until death. This means that once you die, any power of attorney you have out there or health care directive both terminate. Conversely, a will does not speak until death. You can have in your will that you give to your daughter your red Ferrari, and you neither need a daughter nor a Ferrari for the will to be valid (however, one may question your sanity). Once you die, the will “speaks”. However, once probate is closed, that’s it. A trust allows you to control your property from “beyond the grave”. A trust, unlike a will, must be funded with property you currently own, and it must name beneficiaries who currently exist. Beyond that, you get to dictate its terms. If you die with a minor child, you can provide that the child’s necessaries are covered but that no trust property is distributed until the child graduates college… or until the child marries… or whatever you want (so long as it’s legal and not against public policy). Minors are prohibited from owning property. They can’t legally enter into contracts. So, if you have a minor child and have a will leaving the minor property, the property will either need to be placed in a blocked account until the minor turns 18, or someone else will need to hold the property for the minor when you die. Both are rotten situations. The former requires that property sit untouched and uninvested for what could be years, and the latter requires an unreal level of faith in another human being to act in the best interest of your now-orphaned child. A trust allows someone to have control over his/her property beyond death, including providing for minors. The same can be true for pets. (Yes, there are pet trusts).
Phew! That’s a lot to digest!
What was intended to clarify the muddy waters of estate planning seems to be confusing in itself. I hope this post has at least been a good starting point for thinking of an estate plan for what it is–a tailored arrangement done during life to account for your loved ones and your property when you die. It’s not just for the wealthy. Indeed, with some strategic life insurance policies and effective estate planning anyone can care for their family in the event of an untimely death. Please do not hesitate to contact me to discuss any of the above in more detail.
Planning For Death (of a Marriage) Using Estate Planning Tools: Removing Spousal Support as a Contested Issue in a DivorcePosted: August 15, 2011
One could say that we rarely live in the present. We are either preoccupied with demons in our past, or busy planning for and anticipating future events. Paraphrasing John Lennon, the present is what happens when we’re busy worrying about the future. Since there is not much we can do about the past, we utilize therapy to cope with it. But we can still affect the future, though, and all the uncertainties that come with it.
As a society, we have tried to calculate the probability of every occurrence. Actuaries work day and night trying to figure out which cars get in the most collisions in each region of our country. Life insurance companies try to determine how long we are all going to live. Floods, earthquakes, fires, theft, health—you name it, we have statistics about them. Our financial institutions attempt to speculate with our markets, resources, and commodities. Our political machine tries to anticipate what the electorate most desires in the coming election cycle. And our retailers try their best to learn consumers’ innermost desires.
As individuals, we have become more astute and sophisticated as it relates to personal planning. We plan to have children. We save money for their education. We plan for our retirement. A smaller percentage will plan for their deaths by way of an estate plan. The irony of it all is that the one certainty in all of this—death—is the one least anticipated.
After reading the preceding three paragraphs, you may notice one glaring omission. In modern society we have two “d” words: death… and divorce. Aside from death, divorce is probably the second most likely event in all those described above (single people excluded, obviously).
It is tough to determine an accurate divorce rate from state to state, no matter what any statistic says to the contrary. Not every married couple divorces in the same state in which they married. For example, Nevada (because of Reno and Las Vegas) probably has a disproportionate number of marriages performed there than divorces. One source states that in Las Vegas alone, almost 120,000 marriage ceremonies are performed each year. For a state of 2.6 million people, the divorce rate in Nevada, based on number of marriages, would be extremely low. However, we can likely agree, at least anecdotally, that divorce rates are higher in the early 21st century than they were in the early to mid 20th century.
Divorce is often not in the planning equation. We have tools in the form of agreements to anticipate divorce, such as cohabitation agreements, prenuptial agreements, and postnuptial agreements. However, for whatever reason, nuptial agreements are commonly taboo, associated with some sense of distrust, greed or being cold-hearted.
In many divorces, the specific issue of spousal support (commonly referred to as “alimony”) harbors much of the malevolence associated with a divorce. Although California has been a “no-fault” jurisdiction for over four decades, the issue of spousal support amplifies a lot of the resent and bitterness that lay in the background of the court action, which can be part of an acrimonious divorce.
Divorce should be an event that is planned for, but hopefully never experienced. Specifically, the issue of spousal support—frequently an issue that causes a lot of resent between divorcing spouses—should be dealt with using common estate planning tools. By planning for spousal support that may be part of a potential divorce, using many of the tools commonly used for estate planning, spouses can contain many of the messy issues related to a contested support issue.
Spousal Support – Background
As a general rule, as long as husband and wife are living together, they owe each other a mutual duty of support. The mutual spousal support duty during marriage operates independently of the spouses’ marital estate or financial circumstances. The spouses’ respective support obligations are not conditioned on the existence of community property or income. However, during divorce proceedings, a court has the ability to award a support order to one of the spouses. The trial court has broad discretion in making the order. The propriety of a spousal support award (whether to order it and, if so, its terms) is judged broadly by the parties’ “circumstances” in reference to the standard of living established during their marriage and their respective needs and abilities to pay.
Without going into the specifics of the factors that must be analyzed in order to shape the support award, courts apply a formula that calculates an initial (temporary) spousal support order. This calculation is often performed using court-authorized software applications. The software generally deducts a percentage of the lower-earning spouse’s net income from the higher-earning spouse’s net income. The remaining amount is the support obligation that the higher-earning spouse must pay to the lower-earning spouse until final resolution of the case, or modification/termination of the court order, whichever happens first.
Problems Spouses Face With Spousal Support Orders
Spousal support orders often create or amplify acrimony between two ex-spouses. A strong possibility is that financial issues were the cause of the breakdown of the marriage. Whatever the reason for the divorce, when one spouse is ordered to pay the other spouse after-tax money, every month, it tends to rub the higher-earning spouse the wrong way. Two main problems result from spousal support orders.
First, spousal support orders can fuel a spiteful fire. Spousal support orders create a disincentive for the lower-earning spouse to find a job if he or she is unemployed, or to seek out better opportunities if he or she is under employed. The lower-earning spouse could choose to benefit from his or her higher-earning spouse’s net income rather than to go and get a job. This would also create a spiteful burden on the higher-earning spouse.
Second, fewer dollars are left for minor children or other important expenses. With every dollar spent on spousal support, it equals a dollar fewer to be used toward the children’s expenses, or toward expenses that may indirectly benefit the children of the spouses, like a nice place to live close to a good school.
Additionally, family resources are often expended on attorneys during the divorce to prove the parties’ incomes in order to determine the appropriate spousal support amount. Time and money, both which the parties will never see again, are wasted contesting the singular issue of spousal support—an issue that is as much emotional as it is pecuniary.
The days of Ward and June Cleaver are long over. In this sophisticated, and more expensive, day and age, two incomes are commonly required to run a middle class household. Spousal support orders create strife, undue burden, and acrimony in an already stressful situation.
Using Common Estate Planning Tools to Avoid Spousal Support Orders
In general terms, a spousal support order creates an income interest for the lower-earning spouse in the parties’ joint net revenue stream. In crudely general terms, it’s much like an annuity or income interest from a trust. The legislature decided years ago that two former spouses owe each other a duty to support each other in the event of a divorce instead of laying the burden on taxpayers (public benefits for the lower-earning spouse). This assignment of burden is justified and well reasoned. However, the spouses should plan better to avoid splitting the limited net income pot at the time of divorce.
Spouses, and business partners, often have to deal with the idea that neither partner is immortal. To that end, partners typical purchase life insurance. The thinking is usually summed up with the phrase “you never know”. Divorce should be treated with the same care. You never know.
Spousal support orders in divorce proceedings should be treated like a cross between retirement and death. It is like retirement in that you never know what your financial situation may be like in the future. It is like death in that you never know when it’s going to happen.
Financial institutions could offer programs that are like individual retirement accounts. Spouses can then make either pre-tax or post-tax contributions to the account. The funds are invested in a diversified portfolio. Conditions are placed on the account such as early withdrawal penalties, minimum contribution limits, maximum contribution limits, et cetera.
The current method of dealing with spousal support in a cash-poor household, via current financial products like qualified retirement accounts or life insurance policies, the spouses would have to withdraw the funds early, paying a penalty, or borrow against the funds, creating a debt obligation that may end up being as burdensome as the spousal support order itself.
With a spousal support contribution account, in the event of a divorce, the parties are then allowed access into this “joint” account. The lower-earning spouse would have a greater share than the higher-earning spouse. The longer the spouses remain married, the larger this fund becomes. In many respects, the marital union itself has a “retirement” account. If the spouses never divorce, conditions can be placed on the account regarding the manner in which the funds can be used with both spouse’s consent. For example, the spouses can decide to put the funds toward an adult child’s down payment of a home. The idea would be that toward the latter end of a marriage, the expenses are lower and the likelihood of a drawn-out acrimonious divorce is ostensibly lower.
A spousal support contribution account can also accept contributions from sources other than the spousal income. This fund can be treated in conjunction with each spouse’s estate plan. It can have a life insurance quality to it as well, whereby the fund is distributed upon one spouse’s death to the surviving spouse. If both spouses pass simultaneously, it can have a designated beneficiary, which could be their family trust or surviving children.
A spousal support contribution account is no free lunch. It certainly cannot contemplate every situation in which spousal support would be unexpectedly warranted.
First, a spousal support contribution account is most effective with long-term marriages, as the funds have had time to grow into a sizeable amount. A spousal support contribution account will do little good for a marriage of shorter than, say, five years, for example. It may provide for some relief to the higher-earning spouse, but the account is presumably not very large five years in.
Second, the contribution account does little to provide an incentive for the lower-earning spouse to obtain gainful employment. Said another way, a “deadbeat” spouse can still sit back and collect the income from this account upon divorce. That being so, the account provides clarity to both spouses as to the finite amount set aside for support. More importantly, the amount in the fund is pre-determined. It has been contributed into over the course of the marriage. A spousal support order would require the higher-earning spouse to compensate the lower-earning spouse on the fly, regardless of current financial obligations.
Third, in light of the recent economic downturn, one of the first expenses that would likely be cut by a struggling family would be a spousal support contribution fund. Unless the divorce is very likely to happen, contributing to a spousal support account when a family is having a tough time making ends meet would be absurd. Therefore, spouses would likely not contribute to this fund when times are tough. Ironically, when times become tough is when spouses usually contemplate dissolving the marriage.
Fourth, with all other contributions—retirement accounts, children’s savings, general savings, daily expenses—the spouses will need to determine an appropriate amount to contribute to the spousal support fund for the fund to be worthwhile. As mentioned above, planning for divorce is not the top priority for most people. It comes in a distant fourth to death, retirement, and children’s savings. That being said, even if both spouses contributed a collective $500 per month, that is a $6,000 contribution annually which could be rather sizeable after even ten years.
Divorce usually gets paid short shrift when it comes to marital planning. The specific issue of spousal support can prove to muddy the waters of the river that is divorce. For the higher-earning spouse, this means being in the unfavorable position of literally paying your soon-to-be ex-spouse’s way. For the lower-earning spouse, spousal support means using the double-edged sword that is not looking for work and requiring your spouse to pay you after-tax monies.
One way to ease stress on the back end is to “amortize” it over the course of the marriage. With such estate planning devices like qualified retirement plans, annuities, life insurance policies, and other similar financial products, people are able to plan for death, injury, and the inability to work due to old age. However, divorce oftentimes creates similar hardships. Thus, estate planning techniques should be employed to anticipate a potential future obligation such as spousal support. If a joint contribution fund is employed, the spouses will have transparency and clarity as to the nature and extent of a spousal support obligation in the event of a divorce. Additionally, if divorce never occurs, the spouses will ostensibly have a sizeable asset with which to invest or distribute. Divorce, and related issues such as spousal support, should be treated in the forefront of a marriage and not in the shameful backroom. Divorce is a fact of life that carries with it substantial economic and emotional turmoil. It would be absurd not to plan for it.
 All references in this post to divorce and marriage also include related concepts for registered domestic partners. Although the accurate legal term for “divorce” is “dissolution”, I will refer to dissolution by its common name of “divorce”.
 The scope of this post is limited to the issue of spousal support as it relates to a divorce and does not touch upon issues related to child support. Child support may just as easily arise out of circumstances unrelated to marriage or divorce. As such, it is a much more complicated issue than this post would like to address.
 See Cal. Fam. Code §§ 4320, 4330(a); Marriage of Meegan (1992) 11 Cal. App. 4th 156, 161.
The Law Office of Matthew M. Shafae will be changing its name and location as of August 1, 2011. I am proud to announce that the practice is growing and the legal advice is flowing. Please update your contact information to reflect the following:
ShafaeLaw (formerly Law Office of Matthew M. Shafae)
1156 El Camino Real
San Carlos, CA 94070
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I look forward to providing the same great legal services at our new location. Feel free to stop by and say hi!
In the last post, I raised some issues regarding most people’s approach to marriage. I touched on aspects of marriage that significantly impact both spouses’ lives and yet most people feel it is taboo to even discuss nuptial or cohabitation agreements. In this post, I will raise issues stemming from divorce. Specifically, how divorce impacts a newly-single person’s estate plan. Please note that the following assumes the following facts: the marriage was for over 5 years, there are young children from the marriage, and there were some assets divided between the ex-spouses, and the ex-spouses are both currently employed.
(Part I can be found here.)
Divorce: So you’re newly divorced. Congratulations! That must have been a strange, emotional journey. But, alas, you’ve made it to the other side–granted, a helluva lot poorer–but you’ve made it nonetheless. What’s even more important is that your minor children can move on with life and just be a kid again.
There are few issues, though, that are imperative to address before you get too happy over in divorceville. Mainly, now that you are single, did you make sure to cover all your bases with respect to your “new” estate plan? What I mean is that you don’t have a wife anymore, but you still have children. If you were to keel over and die right this second, what would happen to your 401(k), stocks, savings, car, house, etc.? Did you think that they would go directly to your children?
Yes and no. I guess the first question is, “Do you have a will?”
No will: Anytime someone dies without a will, his/her property is distributed to heirs as determined by what’s called an “intestacy statute.” By default, in California, a dead person’s property first goes to a surviving spouse. You got rid of that person. Next, it goes to one’s surviving children. Bingo! That’s what you wanted, right? Almost. Children under 18 years of age cannot hold property. Therefore, all that property going to a minor is frozen by the court, and promptly released to that child upon turning 18 years of age. That’s bad in two respects. One, the property is frozen (i.e., no one can do anything with it, including investing it). Two, an 18 year old will come into a whole lotta cash when he/she is way too young to do smart things with it. That’s bad all around.
Will: Phew! Ok, so you at least have a will in place. Well, if that will provides for a minor taking property, see above.
On a similar note, imagine if you listed your ex-spouse as a beneficiary to those things that do not pass through your estate when you die (e.g., 401(k), pension, life insurance, etc.). Without changing that beneficiary to someone else, that ex-spouse you took your time and money to get rid of is now the proud beneficiary of all of those assets!
If you were thinking, “Ah, who cares? It all goes to my kids someday anyway.” That’s a bit short-sighted. What if your ex-spouse re-marries with someone who has children from a previous relationship? Well, all of those assets that just passed to your ex-spouse upon your death may end up going to someone else’s children! The bottom line is that now is the time to declare what you want done. Once you’ve died, well… “speak now or forever hold your peace.” I’m sure you remember that one from your wedding day.
So what’s the solution, then?
First, upon final judgment of divorce, notwithstanding what was decided during the divorce, a newly-single person should review all of his/her beneficiary designations, all insurance policies, all deeds, and all forms of title. Make sure it’s consistent with your divorce and with your wishes. Second, think about seeing an estate planning attorney to discuss appropriate estate plans for you now that you are single, have minor children, and want to make sure your wishes are carried out post-death. One way is by way of a trust, where someone else holds property for the benefit of your minor children. Maybe just a thorough will suffices.
The bottom line is that you are a newly single individual charged with the task of caring for minors. Single parents do this all the time. They try their best to get by. However, you’re different. You used to be married. You’re used to a certain lifestyle. You’ve accumulated quite a bit of assets, and debts, that are now crudely divided. You worked hard to get through your divorce. Death is another form of divorce, where life leaves your body and takes all of your property with it. Don’t leave it up to chance.
A lot of people view life in terms of “chapters” or “stages” or “steps”. Some people view life as a series of events, each impacting the next in some fashion. Still others just get up in the morning, do stuff until they are tired, and then sleep at some point. (The latter will not be addressed in this blog post, and frankly, if you are in the latter camp, you are probably reading this post by sheer chance). Whatever the approach, there is some level of planning to each person’s life. The most effective planning takes into account one’s current circumstances and attempts to anticipate as many future circumstances as possible.
Most of life’s changes happen incrementally over time in small, almost unnoticeable steps. For example, it would be tough to pinpoint when hair started to grow on our legs, or on which day we had our first crush on a boy or girl. Similarly, it’s tough to pinpoint a single day in the middle of high school and identify exactly how we felt, looked, etc., without a photo or journal entry to remind us. We often have those feelings where we think, “Wow, how did five years just fly by?”
However, there are a few distinct events in a person’s life where he/she is irreversibly different (in some legal manner, of course) immediately upon the occurrence of that event. Some examples, in no particular order, are reaching 18 years old, marriage, having children, divorce, and of course death.
Each of the above events carry with it certain legal ramifications. The most important being taxes, holding property, and inheritance rights. Two events that I am particularly interested in discussing here are marriage and divorce, for obvious reasons. Here, in part I, marriage will be addressed. In part II, I will address divorce.
Marriage: So you just got married. Congratulations! Wow, that’s fantastic. You know that everything is different now, right? I know, you still think that nothing’s changed, that you’re in love blahblahblah and you guys just made it formal.
Well, you’re wrong.
When both of you go to work, every single dollar you earn after you say “I do” is half-owned by your spouse. Anything you purchase with that money that you’ve earned during marriage is also half-owned by your spouse. Likewise for any debt. And what if you die without a will? Well, by default, everything you owned when you were alive automatically goes to your surviving spouse. Things are significantly different now. The IRS won’t even let you file your tax return without telling them what your spouse is going to do. Things are so different now that you and your new spouse now have special privileges that your single friends don’t have. For example, if you and your spouse have secrets that only you guys know, nobody can make you testify against the other. Pretty cool, right?
It’s all really cool unless or until you two develop problems. Those problems could stem from trust issues, resent, boredom, finances… really just about anything. Here’s another cool facet of marriage: only one spouse, unilaterally, needs to decide that this arrangement isn’t for him/her. That’s right, on any given day, one spouse can petition to dissolve the marital bonds. No consent is needed from the other spouse. No warning is necessary. No reason is even demanded by the courts.
With marriage intertwining two lives in such a comprehensive manner, and that arrangement so easily dissolved, why then risk not being clear with your spouse about expectations that you have for each other and for your marriage? It’s a fair question, really. Your spouse is ostensibly the person you are closest to in life. You should be able to talk about anything with each other, right? Any partnership has clearly defined expectations. Any team (either athletic or workplace) has clearly defined roles and clearly defined expectations for each team member. Every marriage should as well.
Those expectations can be, and should be, documented. Commonly documented agreements between spouses are called “pre-nuptial” agreements for those who are not married yet, and “post-nuptial” agreements for those who are already married. I favor “post-nuptials” for people in their first marriage because it’s tough to guess what someone’s role should be when you have never been married before. Most people erroneously associate nuptial agreements with some sort of strong-arm tactic employed by a higher earning spouse for avoiding paying any support to the lower earner spouse. It’s seen as fundamental distrust between two spouses. But why?
Many things can be detailed in a nuptial agreement. Property issues can be addressed. Support issues can be addressed. Handling liabilities after a potential divorce can be addressed. The emphasis should be placed on the fact that these issues are being addressed before any ill feelings toward each other. Imagine that your spouse was diagnosed with some rare, fatal disease. The doctors aren’t sure whether, or for how long, your spouse will remain living. But they say there is a good shot that an experimental new treatment may just do the trick. So you and your spouse do what any reasonable team would do: plan for the worst and hope for the best. You two plan the worst case–the treated spouse dying–and then do whatever they can to keep the treated spouse alive. So the couple write wills, draft health care directives in case one or both of the spouses are incapacitated, and most likely make pre-planned funeral arrangements. It sounds so reasonable, doesn’t it? Why deal with this stuff when things turn for the worse? The best part is if the sick spouse is fully treated, this stuff will never come up or take effect! So, really, there’s no harm in doing it.
The same should be, but is not, true for marriages. No, your marriage is not a rare, fatal disease. But the same approach should be employed. Who knows whether your marriage lasts 70 years, 1 year, 3 days? No one knows. What we all know, though, is that the time to reasonably and objectively dissolve any partnership is not when the partners are most emotional and irrational. That in itself is an irrational thing to do. Dissolution should for the most part be pre-determined. I truly believe discussing the possibility of dissolution early on in a marriage, and educating yourself on the legal ramifications of marriage, will help maintain a stronger marital bond. Those that discuss the potential of divorce when the times are good will likely benefit from the open, candid discussion. Plus, wouldn’t you like to learn of your partner’s hang-ups earlier rather than later?
Marriage is not just a “formalized” relationship. It’s not just a ceremony that costs the same as a down payment on a house. It’s a legal relationship between two people. All the love and religion are merely backdrops. Because when it comes down to divorce, all the love and religion in the world aren’t going to be worth much in a court of law. Get educated. Plan for the worst and hope for the best.
Coming soon… Part II on the effects of divorce.
Thanksgiving just passed and the holidays and New Year’s Day are upon us. These are times traditionally spent with family and loved ones. However, those of us in the family law realm know that it can also be a time of stress, conflict, and emotionally charged situations. I want to take an opportunity just to add a bit of perspective.
Oftentimes people feel trapped and helpless in their family situations. Whether or not this is reality is immaterial, since experiencing the feelings are bad enough. Please take a deep breath and a step back the next time you decide that you want to escalate conflict. Let’s work together as a community and society to remove conflict from family situations.
Let’s face it, if you’re standing in a court room, both sides have already lost (whether it’s time, money, dignity, or all of the above). Sometimes relationships don’t go as we planned, or change into something else altogether. And sometimes things just run their course and it’s time for people to go their own way. But there is no requirement for conflict.
“Fear is the path to the dark side. Fear leads to anger. Anger leads to hate. Hate leads to suffering.” –Yoda
Be brave, and don’t hate. Happy Holidays.