Are you aware of the consequences of naming your children beneficiaries of your life insurance policy?

You have done a wonderfully responsible thing by purchasing life insurance to protect your children in the event that something happens to you. You sleep better at night knowing that you have protected their financial futures. Have you thought of everything?

You filled out the paper work and named your spouse as the first beneficiary. Did you name a contingent beneficiary?

Of course you did, because you know that your children would need the financial support the most if both you and your spouse passed away at the same time. A horrible thought, but one you have accounted for with your plan. (For considerations involving the guardianship of your children click here)

Naming your children as contingent beneficiaries of your life insurance policies can actually have several unintentional consequences - two that I want to address here.

• The proceeds of a life insurance policy naming minor children as beneficiaries will pass through probate

You decide who will get your life insurance payout by using a mechanism called a beneficiary designation. This is efficient element of life insurance because it means that the life insurance payout will not pass through the probate process and instead will be paid out directly to the named beneficiary by the insurance company. (In fact, a beneficiary designation will actually trump your will, so be aware of those considerations as well).

However, if the proceeds of your life insurance are directed to a minor child as a contingent beneficiary, the insurance company will NOT pay out the proceeds directly to the minor. We can all agree that most of our children probably wouldn’t be thinking about how to reinvest the money – so its is a good thing they wouldn’t end up with it outright at a young age.

What this ultimately means is that proceeds of your life insurance payout would pass through the probate process. Without going into all of the negatives of the probate process, what this means is that a judge will decide who will controls the life insurance proceeds and when your child receives them.

Now that their minor kids are involved in the probate process, the issue that distresses most of my clients is the fact that their children’s names will now be part of a public probate court proceeding where any hustler or predator could learn how much money they are set to inherit.

Don’t unintentionally expose your minor children to the probate process on account of not understanding how beneficiary designations work.

Want to speak with me about what you can do to ensure that your beneficiary designations are set up correctly? Click the button below to schedule a 15 minute informational call with me!

• If you have designated your child as beneficiary of your life insurance policy, the court will distribute the entire proceeds of the policy outright to your child at the age of 21.  

This means that your (technically adult) child will be given a large chunk of cash to do whatever he or she wants to with it.

I ask my clients to consider what they would have done with a $600k or $1.5m check on their 18th or 21st birthday. This unpleasant thought usually elicits some nervous laughter from the parents. What is even worse, is that in this nightmare situation our children would not even have the benefit of the guidance of their parents at this time. They would be on their own and with a lot of cash in their pocket.

After two minutes of contemplating this, we know that our children would probably irreparably damage their chances of having a fulfilling and productive life within a very short amount of time. Anyone would with that much spending power and no life experience or wisdom to temper it.

Understandably, my clients are usually interested in taking steps to protect the proceeds of their life insurance policies for their children’s benefit in a private trust, not a limited, court sanctioned one. This not only addresses the privacy issue discussed above but allows their financial needs met immediately, but restricts access to large chunks of money until later in life.

My firm also works with them to establish a trust that can protect their children’s inheritance for life, not only from themselves but from lawsuits, divorce and bankruptcy. This is very rewarding for me because I have personally witnessed the negative effects on a young person when they come into a large amount of inherited money outright.

If you are interested in having a discussion about any of these issues and you would like a personalized review of your beneficiary designations, please click the button below to schedule a phone call with me. I look forward to speaking with you!

Don't Make Any of These Six Mistakes When Nominating Guardians for Your Children

As parents, we have all shuddered to think what would happen to our kids if we passed away suddenly. Eventually, we all decide to do the responsible thing and put a plan in place to protect our children. Since the stakes are so high, we want to implement a totally comprehensive solution that cover all the angles if the unthinkable ever happened.

Most attorney’s simply recommend that you appoint a guardian in your will to “solve” this issue. Is that really enough? The discussion should not be quite this open and closed as this. Who will raise your children if something happens to you is an extremely important consideration – and not one you should gloss over. Likewise, how this horrible transition would be handled legally and logistically is another. It gets complicated very quickly. Therefore, failing to put the required amount of thought and into this issue may cause you to make one the six common mistakes I see below.

1.       Naming a couple to act as guardians and failing to define what should happen if the couple breaks up or one of the partners passes away. In the event that one of your nominated guardians passes away, have you considered if the other would have the emotional and physical capacity to raise your children as well? If the couple you have nominated has gotten a divorce, do you want to insert your grieving, shocked children into that situation? This is something think about and put into your guardianship documents.

2.       Only named one possible guardian. What if something happens to your first choice? The plan you design to protect your children should be iron-clad and have several contingency plans. You do not want a court to be forced to make this decision without your guidance.

3.        Have not considered financial resources when deciding who should raise your children. Your guardians do not have to (and often should not) be financial decision makers for your kids. Many times I have clients that write off perhaps the best choice to raise their children because they don’t think that couple or individual could financially support the added burden. This is not the correct thought process and I work with my clients to develop a plan that allows them to name the best guardian, regardless of financial resources.

4.       Only have a Will, which means the Court will decide how to distribute your money, it’s totally public and doesn’t protect your money from their divorce and lawsuits. If you have life insurance proceeds or other assets you would leave to your minor children if you passed away, these will be processed by the probate court in your county. Many parents do not like the idea of anyone off the street being able to learn the exact date that their children will be receiving a large sum of money outright. If this is a priority for the parents I help them develop a plan that would keep their assets totally private for their children and also protect them from lawsuits, creditors and divorce even when the children grow up.

5.       Did not exclude anyone who might challenge your guardian decisions or who you know you’d never want to care for your kids. If  you have family that might challenge your nominations in court, it may be a good idea to specifically exclude that family member so that the court will recognize that you specifically did not want them considered to be your children’s guardian. Often times the thought that they may have access to some of the children’s inheritance will bring these relatives out of the woodwork so to speak. I work with my clients to confidentially exclude these relatives just in case the situation presented itself. The relatives will never know such a document exists unless it is needed.

6.       Only named guardians for the long-term and did not make any arrangements for the short term if you were in an accident. What would happen in those immediate hours until your permanent guardians could arrive? This is a scary and often overlooked situation. I like to protect my clients children with additional temporary guardianship options in their direct area that would have a better chance of quickly being on the scene if needed – especially if your my client’s choice of permanent guardian lives any distance away from the family home.

If you feel like your plan may have overlooked some of these issues I would love to speak with you further. I only take a limited number of clients per month, but would love to speak with you by phone to hear about your specific situation and whether I could be of service to you. I would be happy to provide you with some personalized advice about appointing guardians whether we end up working together or not.

Learn more about how to protect your children by booking your call below!

The Real Cost To Your Family: Not Planning For Incapacity

When it comes to estate planning, most people automatically think about taking legal steps to ensure the right people inherit their stuff when they die. And these people aren’t wrong.

Indeed, putting strategies in place to protect and pass on your wealth and other assets is a fundamental part of the planning equation. However, providing for the proper distribution of your assets upon your death is just one part of the process.

And it’s not even the most critical part.

Planning that’s focused solely on who gets what when you die is ignoring the fact that death isn’t the only thing you must prepare for. You must also consider that at some point before your eventual death, you could be incapcitated by accident or illness.

Like death, each of us is at constant risk of experiencing a devastating accident or disease that renders us incapable of caring for ourselves or our loved ones. But unlike death, which is by definition a final outcome, incapacity comes with an uncertain outcome and timeframe.

Incapacity can be a temporary event from which you eventually recover, or it can be the start of a long and costly event that ultimately ends in your death. Indeed, incapacity can drag out over many years, leaving you and your family in an agonizing limbo. This uncertainty is what makes incapacity planning so incredibly important.

In fact, incapacity can be a far greater burden for your loved ones than your death. This is true not only in terms of its potentially ruinous financial costs, but also for the emotional trauma, contentious court battles, and internal conflict your family may endure if you fail to address it in your plan. 

The goal of effective estate planning is to keep your family out of court and out of conflict no matter what happens to you. So if you only plan for your death, you’re leaving your family—and yourself—extremely vulnerable to potentially tragic consequences.

Where to start

Planning for incapacity requires a different mindset and different tools than planning for death. If you’re incapacitated by illness or injury, you’ll still be alive when these planning strategies take effect. What’s more, the legal authority you grant others to manage your incapacity is only viable while you remain alive and unable to make decisions about your own welfare.

If you regain the cognitive ability to make your own decisions, for instance, the legal power you granted others is revoked. The same goes if you should eventually succumb to your condition—your death renders these powers null and void.

To this end, the first thing you should ask yourself is, “If I’m ever incapacitated and unable to care for myself, who would I want making decisions on my behalf?” Specifically, you’ll be selecting the person, or persons, you want making your healthcare, financial, and legal decisions for you until you either recover or pass away.

You must name someone

The most important thing to remember is that you must choose someone. If you don’t legally name someone to make these decisions during your incapacity, the court will choose someone for you. And this is where things can get extremely difficult for your loved ones.

Although laws differ by state, in the absence of proper estate planning, the court will typically appoint a guardian or conservator to make these decisions on your behalf. This person could be a family member you’d never want managing your affairs, or a professional guardian who charges exorbitant fees. Either way, the choice is out of your hands.

Furthermore, like most court proceedings, the process of naming a guardian is often quite time consuming, costly, and emotionally draining for your family. If you’re lying unconscious in a hospital bed, the last thing you’d want is to waste time or impose additional hardship on your loved ones. And this is assuming your family members agree about what’s in your best interest.

For example, if your family members disagree about the course of your medical treatment, this could lead to ugly court battles between your loved ones. Such conflicts can tear your family apart and drain your estate’s finances. And in the end, the individual the court eventually appoints may choose treatment options, such as invasive surgeries, that are the exact opposite of what you’d actually want.

This potential turmoil and expense can be easily avoided through proper estate planning. An effective plan would give the individuals you’ve chosen immediate authority to make your medical, financial, and legal decisions, without the need for court intervention. What’s more, the plan can provide clear guidance about your wishes, so there’s no mistake or conflict about how these vital decisions should be made.

What won’t work

Determining which planning tools you should use to grant and guide this decision-making authority depends entirely on your personal circumstances. There are several options available, but choosing what’s best is something you should ultimately decide after consulting with an experienced lawyer like us.

That said, we can tell you one planning tool that’s totally worthless when it comes to your incapacity: a will. A will only goes into effect upon your death, and then it merely governs how your assets should be divided, so having a will does nothing to keep your family out of court and out of conflict in the event of your incapacity.

The proper tools for the job

There are multiple planning vehicles to choose from when creating an incapacity plan. And this shouldn’t be just a single document; instead, it should include a comprehensive variety of multiple planning tools, each serving a different purpose.

Though the planning strategies you ultimately put in place will be based on your particular circumstances, it’s likely that your incapacity plan will include some, or all, of the following:

A comprehensive healthcare directive: An advanced directive that grants an individual of your choice the immediate legal authority to make decisions about your medical treatment in the event of your incapacity. This document also may provide specific guidance about how your medical decisions should be made during your incapacity.

Durable financial power of attorney: A planning document that grants an individual of your choice the immediate legal authority to make decisions related to the management of your finances, real estate, and business interests.

Revocable living trust: A planning document that immediately transfers control of all assets held by the trust to a person of your choosing to be used for your benefit in the event of your incapacity. The trust can include legally binding instructions for how your care should be managed and even spell out specific conditions that must be met for you to be deemed incapacitated.

Don’t let a bad situation become much worse

You may be powerless to prevent your potential incapacity, but proper estate planning can at least give you control over how your life and assets will be managed if it does occur. Moreover, such planning can prevent your family from enduring needless trauma, conflict, and expense during this already trying time.

If you’ve yet to plan for incapacity, meet with us as you’re an attorney who focuses on this typ of planning right away. Tramm Law Firm, PLLC can counsel you on the proper planning vehicles to put in place, and help you select the individuals best suited to make such critical decisions on your behalf. If you already have planning strategies in place, we can review your plan to make sure it’s been properly set up, maintained, and updated. Contact us today to get started.

5 Estate Planning Must-Dos if You’re Getting Divorced—Part 2

In the first part of this series, we discussed a couple of the most critical updates you must make to your estate plan if you’re getting divorced. Here, we’ll cover the last three of these must-do planning tasks.

Because getting divorced can be overwhelming on so many different levels, updating your estate plan often takes a back seat to other seemingly more-pressing priorities. But failing to update your plan for divorce can have potentially tragic consequences, some of which you may have never even considered before.

In fact, it’s critical that you update your plan not only after the divorce is final, but as soon as you know the split is inevitable. Until your divorce is final, your marriage is legally in full effect, so if you die or become incapacitated while the divorce is still ongoing and you haven’t updated your plan, your soon-to-be ex spouse could end up with complete control over your life and assets.

For example, if you suddenly die of a heart attack while the divorce is ongoing and never got around to changing your estate plan, it’s quite likely that your future ex would inherit everything. And if that’s not bad enough, if you were to become incapcitated in a car accident during the divorce, the very person you’re paying big money to legally remove from your life could be granted complete authority over all of your legal, financial, and healthcare decisions.

This is something your divorce attorney won’t think to bring up, but it’s literally one of the most critical matters you need to handle if you’re ending your marriage. Last week, we discussed the first two estate planning changes you must make—updating your power of attorney documents and beneficiary designations—and today we’ll share the remaining three.

3. Create a new will

You should create a new will as soon as you decide to get divorced, because once you file, you may not be able to change your will. Rethink how you want your assets divided upon your death. This most likely means naming new beneficiaries for any assets that you’d previously left to your future ex and his or her family. And unless it’s your wish, you’ll probably no longer want your ex—or any of his or her family—listed as your will’s executor or administrator, either.

Some states have community-property statutes that entitle your surviving spouse to a certain percentage of the marital estate upon your death, regardless of what’s in your will. This means if you die before the divorce is final, you probably won’t be able to entirely disinherit your surviving spouse through the new will. While each state has nuanced law related to this issue, the states that have community property are Louisiana, Arizona, California, Texas, Washington, Idaho, Nevada, New Mexico, and Wisconsin.

However, it’s almost certain you wouldn’t want him or her to get everything. Given this, you should update your will as soon as possible once divorce is inevitable to ensure the proper individuals inherit the remaining percentage of your estate should you pass away while your divorce is still ongoing.

And should you choose not to create a new will during the divorce process, don’t assume that your old will is automatically revoked once the divorce is final. State laws vary widely in regards to how divorce affects a will. In some states, your will is revoked by default upon divorce. While in others, unless it’s officially revoked, your entire will—including all provisions benefiting your ex—remains valid even after the divorce is final. In Minnesota, by default, a divorce automatically revokes a provision that leaves property to an ex-spouse.

In light of this legal landscape, it’s critical that you consult with us as soon as you know divorce is on the horizon. We can help you understand the law and how to best navigate it when creating your new will—whether you do so before or after your divorce is over.

4. Amend your existing trust or create a new one

If you have a revocable trust set up, you’ll want to review and update it, too. Like wills, the laws governing if, when, and how you can alter a trust during a divorce can vary, so you should do it as soon as legally possible. In addition to reconsidering what assets your ex-spouse should receive through the trust, you’ll probably want to replace him or her as a successor trustee if they are so designated.

And if you don’t have a trust in place, you should seriously consider creating one, especially if you have minor children. Trusts provide a wide range of powers and benefits unavailable through a will, and they’re particularly well-suited for blended families. Given the likelihood that both you and your spouse will eventually get remarried—and perhaps have more children—trusts are an invaluable way to protect and manage the assets you want your children to inherit.

By using a trust, for example, should you die or become incapacitated while your kids are minors, you can name someone of your choosing to serve as successor trustee to manage their money until they reach adulthood, making it impossible for your ex to meddle with their inheritance.

Beyond this key benefit, trusts afford you several other levels of enhanced protection and control not possible with a will. So you should at least discuss creating a trust with an experienced lawyer like us before ruling out the option entirely.

5. Revisit your plan once your divorce is final
During the divorce process, your main planning concern is limiting your soon-to-be ex’s control over your life and assets should you die or become incapacited before divorce is final. Given this, the individuals to whom you grant power of attorney, name as trustee, designate to receive your 401k, or add to your estate plan in any other way while the divorce is ongoing are often just temporary.

Once the divorce is final and your marital property has been divided up, you should revisit all of your estate planning documents and update them accordingly based on your new asset profile and living situation. From there, your plan should continuously evolve along with your life circumstances, particularly following major life events, such as getting remarried, having additional children, and/or when close family members pass away.

Don’t wait; act now!

Even though divorce can be one of life’s most difficult transitions, it’s vital that you make the time to update your estate plan during this trying time. I would welcome the opportunity to review your plan with you immediately upon realizing that divorce is unavoidable.

5 Estate Planning Must-Dos if You’re Getting Divorced—Part 1

Divorce can be traumatic for the whole family. Even if the process is amicable, it involves many tough decisions, legal hassles, and painful emotions that can drag out over several months, or even years.

That said, while you probably don’t want to add any more items to your to-do list during this trying time, it’s absolutely critical that you review and update your estate plan—not only after the divorce is final, but as soon as possible once you know the split is inevitable.

Even after you file for divorce, your marriage is legally in full effect until your divorce is finalized. That means if you die while the divorce is still ongoing and you haven’t updated your estate plan, your soon-to-be-ex spouse could end up inheriting everything. Maybe even worse, in the event you’re incapacitated before the divorce is final, your ex would be in complete control of your legal, financial, and healthcare decisions.

Given the fact you’re ending the relationship, you probably wouldn’t want him or her having that much control over your life and assets. If that’s the case, you must take action, and chances are, your divorce attorney is not thinking about these matters on your behalf.

While some state laws limit your ability to completely change your estate plan once your divorce has been filed, the following are a few of the most important updates you should consider making as soon as possible when divorce is on the horizon.

1. Update your power of attorney documents for healthcare, financial, and legal decisions

If you are incapacitated by illness or injury during the divorce, who would you want making life-and-death healthcare decisions on your behalf? If you’re in the midst of divorce, chances are you’ll want someone other than your soon-to-be ex making these important decisions for you. If that’s the case, you must take action. Contact us now; don’t wait.

Similarly, who would you want managing your finances and making legal decisions for you? In light of the impending split, you’ll most likely want to select another individual, particularly if things are anything less than friendly between the two of you. Again, you have to take action if you do not want your spouse making these decisions for you. Don’t wait, contact us if you know divorce is coming.

2. Update your beneficiary designations

Failing to update beneficiary designations for assets that do not pass through a will or trust, such as life insurance policies and retirement accounts, is one of the most frequent—and tragic—planning mistakes made by those who get divorced. If you get remarried following your divorce, for example, but haven’t changed your IRA beneficiary designation to name your new spouse, the ex you divorced 10 years ago could end up with your retirement savings upon your death.

That said, in most states, once either spouse files divorce papers with the court, neither party can legally amend their beneficiaries without the other’s permission until the divorce is final. Given this, if you’re anticipating a divorce, you may want to consider changing your beneficiaries prior to filing divorce papers. If your divorce is already filed, you should consult with us to see if changing beneficiaries is legal in your state—and in your best interest.

Finally, if naming new beneficiaries is not an option for you now, once the divorce is finalized it should be your number-one planning priority. In fact, put it on your to-do list right now. Let me know if I can help!

Next week, we’ll continue with part two in this series on the critical estate-planning updates you should make when divorce is inevitable.