Consider this story. Beth’s divorce from her husband was recently finalized. Her most valuable assets are her retirement plan at work and her life insurance policy. She updated the beneficiary designations on both to be her two minor children. She did not want her ex-husband to receive the money.
Beth passes away one year after her divorce. Her children are still minors, so the retirement plan and insurance company require an adult to be appointed to receive the inheritance Beth left behind. Who does the court presumptively look to serve as the caretaker of this money? In most cases, it will be Beth’s ex-husband, who is now the only living parent of the children. (In some states, this caretaker of the money is called a guardian, whereas in others it is the conservator. The title does not matter as much as the role, which is to manage the funds on behalf of a minor, since the minor is not legally able to handle significant assets or money. In Missouri, the proper title is “conservator,” though a “custodian” can also be designated to look after particular assets in appropriate circumstances.) While Beth’s ex-husband might be a trustworthy person in some relationships, he may not be in all, and unfortunately costly litigation would be required to address misuse of the money in most cases.
Sadly, stories like Beth’s are all too familiar for the loved ones of divorced people who do not make effective use of the estate planning tools. Naming a beneficiary for retirement benefits or life insurance or having a will can be a good start. However, the complexities of relationships post-divorce often render these basic tools inadequate. Luckily, there is a way to protect and control your children’s inheritance fully.
Enter the Trust
A trust allows you to coordinate and control your estate in a way that no other tool can. For those who are not yet familiar, a trust is a legal arrangement for managing your property while you are alive and quickly passing it at your death. There are a few key players in the trust. First, there is the person who created the trust, often called the Trustmaker, Grantor, or Settlor (this is you). Second, there is the Trustee who manages the assets owned by the trust (usually you during your life and then anyone you select when you are no longer able to manage the assets). Finally, the Beneficiaries are the people who receive the benefit of the trust (usually you during your life, and then typically children or anyone else you choose). In some cases, a “trust protector” can also be provided for or appointed to exercise great power to amend the trust in many ways after you have passed away to allow flexibility and advanced tax planning.
How a Trust Protects Your Children’s Inheritance after a Divorce
A trust protects your children’s inheritance in a few distinct ways:
- Since you select the Trustee, you can choose someone other than your ex-spouse to manage the assets. In fact, you can even state that the ex-spouse can never be a Trustee, if you wish. If Beth had a trust, she could have named her brother to be Trustee after her death. Her brother (rather than her ex-husband) would then be in charge of the children’s inheritance.
- Since you select the Beneficiaries, you can determine how the trust assets can be used for them. You may have long-term goals for your beneficiaries, such as college, purchasing of a first home, or starting a business. When you share your intent, your Trustee can invest the assets appropriately and ensure your legacy is used the way you want, rather than the assets being potentially wasted or used in a thoughtless way. If Beth had a trust, she could have instructed how she wanted the inheritance used, rather than leaving it to the whims of a court and her ex-husband.
- A fully funded trust avoids probate, so your children do not have to deal with the cost, publicity, and delay that is all-too-common in probate cases. Although “plain” beneficiary designations, like the one that Beth used, also avoid probate, they may still open the door for a guardianship or conservatorship court case, especially when your children are minors, unless a proper custodianship designation is made under the Missouri Transfers to Minors Law. However, even a custodianship will terminate at age 18 or 21, depending upon the circumstances, leaving the full value of the assets directly in the hand of a teenager. A fully funded trust avoids these guardianship and conservatorship cases and also the risk of an irresponsible beneficiary receiving control assets too soon. This means more money for your intended beneficiaries and less for the lawyers and courts.
If you are divorced, it is essential to make sure your plan works precisely the way you want. Every situation is unique, but we are here to help design a plan that achieves your goals and works for your family.
