Trusts and debt payment

I am often asked whether creating a living trust will allow the creator to avoid their debts: their mortgage, their credit cards, their other loans and secured debt.  The short answer?  No.

Living trusts are generally created to avoid probate, estate taxes, and allow one generation to pass assets along to the next generation with a minimum of hassle and expense.  Once you pass away, your successor trustee still has to determine what your debts are, pay them from your estate, assess taxes, and then distribute your assets according to your wishes.

What my debt-averse clients may be thinking of is a spendthrift (or asset management) trust, which does in fact protect the assets in the trust from the beneficiary’s creditors.  Spendthrift trusts are used when an individual or couple want to leave money to someone, usually a child, but don’t want to leave a large amount outright, or all at once.  So, for example, the beneficiary gets a certain percentage or amount at regular intervals (or for specific expenses, like education or health or living expenses), but is not entitled to the entirety of the money until a certain time or age.  In this case, should a creditor come after the child and the money in the trust, so long as there are restrictions placed on the disbursements to the child, then the trust money will be protected against the creditor.  This can mean  a great deal when, for example, there are millions in the trust and the beneficiary gets into a serious car accident with large liability.

In general, however, living trusts do not let you get out of paying your debts. The only way to get out of paying your debts is to not leave enough estate to pay them…which I would not recommend to anyone!


When to update your estate plan

I am often asked when an estate plan should be updated, and in fact I have written on it before.  But it is important to revisit from time to time, particularly when there are new estate laws as there are now.  In general terms, an estate plan should be reviewed in two instances:

  1. Each time there has been a birth, death, marriage, divorce, acquisition or disposition of property or a business in the family, and
  2. Every 1-2 years.

By “review” I don’t mean we need to dig up the binder (you do have a binder, right?), and pore over it, page by page.  No.  What I mean is that we need to think about what is in our estate plan.  You should know it in detail because your lawyer explained it so well to you during the process!  So, you want to review who your beneficiaries are, and whether the property distribution you’ve selected still is appropriate.  You want to review who is your successor trustee/executor, as well as who acts as your agent on your powers of attorney.  Have you changed your mind about your advance directive?  These are the questions you should ask yourself, and it really should not take more than 20-30 minutes.  Go through any changes in your family, and see if those changes, or anything else that has happened in the last year or two, make you want to change your estate plan.

In addition, if you have created your estate plan in the last five years, you may want to contact an estate planning attorney now to make sure your estate plan is still the most appropriate for you given the new laws and tax exemption.

In any event, if you have an estate plan that was created before 2008, or powers of attorney created before 2003, you really need to get an update, or at least an opinion on whether an update is necessary.  I don’t know about other estate planning attorneys, but I don’t charge for an estate plan review, even for those estate plans I’ve not created myself.  So what do you have to lose?

Financial issues in California divorce

Since we’re talking about California divorce this week, I thought I’d add a note on finances, since they seem to be at least one of the top reasons for divorce. Untangling your financial lives can be really tough, even out of court.  Here are some things to consider:

During divorce:

Tax implications – what are the tax implications of your filing status as you go through divorce?  What are the implications of your asset division?

Expert fees – what are your attorney/accountant/child custody evaluator/financial advisor fees going to be?

Support – there are tax implications to paying and receiving child and spousal (or family) support in California. If you just take the highest/lowest amount because funds are tight, you may be in trouble later.

But the divorce process is just the beginning.  You also have to consider the financial aspects of your post-divorce life.  You need to consider these things as soon as possible, and not wait until it’s happened.


Cost of living adjustment – here’s still the same bills, but only one of you is paying them.

Change in auto/home/health insurance costs

Increase in “combined” costs.  Did you share a Netflix account?

Lower savings and discretionary income due to the tightened financial belt.

Loss of assets in the divorce – that retirement home may be gone.

Needing/getting new employment – what do you do if you’ve never worked?

Reduced retirement income or savings – you may have thought you were set for retirement…now what?

The theme for this week seems to be planning.  Planning is you’re thinking of divorce, and planning if you’re in the process of divorce.  Don’t let the process or anything that happens in the process to take you by surprise.  It doesn’t have to if you know what to look for and where to look. Need more help? Click here to make an online appointment.

Your status as ‘married,’ ‘divorced,’ or ‘single’ in California divorce

In California, you are either single or married. If you’re single, you can be never married, widowed, or divorced.

After you file for divorce, you are still married until you have a Judgment of Dissolution of Marriage. This can happen no earlier than six months and one day after the Respondent is served with the Petition. Sometimes, divorce cases are resolved very quickly, and the parties submit their Judgment paperwork far earlier than the six month waiting period. In that case, the Judgment comes back with a date of divorce in the future. This is helpful for planning divorce parties.

Very frequently, however, divorce cases last far beyond the six month period. When that happens, one or both of the parties sometimes want to dissolve their status and become divorced. The case can continue, but the parties themselves will become single as opposed to married to each other. This is often an emotional decision, but sometimes there are practical reasons, such as when one spouse wants to remarry or wishes to terminate status for tax reasons.

Dissolving status before the rest of the case is over is called a bifurcation. You can ask the court to bifurcate your status, but you first have to ensure that certain requirements are met. First, both parties have to be taken care of for health insurance reasons. Second, you have to complete your Declarations of Disclosure (which will be the subject of a posting coming soon). Finally, you have to join any pensions of the parties. These are the main considerations, in addition to the six month waiting period.

Getting a divorce? Tax tips

I don’t often write about taxes, but today seems to be tax day, with my last post about the dependency exemption in child support.  It is a common question from my divorcing clients regarding the timing for divorce filing on taxes, and how to file taxes when in the process of divorce.  In addition, many of my clients are interested to know that child support is neither deductible the the payor nor included as income for the recipient.  Unlike spousal support (alimony), which is both deductible and included as income.  Here is an article I read recently that tackles these tax questions and more in a very readable format.

Child support and the dependency exemption: Who claims the child?

In a divorce with children, the issue of child support arises, generally, very quickly.  I’ve written about child support before, but today wanted to tackle the issue of the dependency exemption.  There are still many couples that have one parent as the primary wage-earner and one parent who is the primary child care provider.  In the event of a divorce, the wage-earner finds him- or herself trying to balance work and child rearing, and the child care provider must face both sharing the joys and obligations of child upbringing as well as heading out into the job market.

In a first divorce hearing in California when the couple has children, the issue of child support is frequently on the table.  In California, child support is calculated using a software program, and the two main factors considered are timeshare spent with the child(ren) (stated as a percentage) as well as each party’s income.  Once child custody and visitation is worked out, at least on a temporary basis, then child support can be calculated.  Often, the higher wage-earner is looking to claim the child for tax purposes because the higher wage-earner will receive a higher benefit from that exemption.

What may be unclear to both parties, however, is the way child support is calculated in California.  The software program takes each party’s gross income (that’s income before taxes) and the program itself calculates your taxes.  Therefore, the program is designed to know which party will receive the highest benefit from the child exemption as well as what the benefit is.  In California, too, it is presumed that the parent with the highest percentage of timeshare with the child will receive the tax exemption.  This presumption can be shifted to the lower-timeshare parent, however not without consequences.  Because the dependency exemption confers a benefit on the party who claims it, generally when the lower-timeshare parent claims the child, this results in a higher dollar amount of child support paid.

Therein lies the rub.  I have had many clients who have insisted that they claim the child for tax purposes, but once the amount of increase in child support becomes clear, their tune changes instantly.  In cases where the lower wage earner makes little to nothing, however, most courts will generally order the dependency shift because the lower earner gets no or almost no benefit from the exemption.

Which would you prefer?  A lower monthly amount of child support or the dependency exemption?  In most cases, it depends on the specifics of the situation, timeshare, and incomes…yet another reason why there are no “easy” divorces.

Changing your name in divorce

In California, it is up to the wife to decide whether she wants her former name back in divorce (if she took her husband’s name).  The husband has no say and cannot ‘prohibit’ her from keeping the name.  The name change is one of the many issues in divorce that need to be taken care of once the divorce is final, and can be overlooked or deemed too much trouble, like estate planning and updating your life insurance, retirement beneficiaries, etc.  But these aspects of your life post-divorce are critical, and here is a great article about name change issues.

Child and spousal support (alimony) in California divorce

Nearly every divorce involves some kind of support, whether it is for the child(ren) or for one of the spouses.  In addition, finances are often one of the most hotly contested issues in a divorce in California.  Here is an overview of this potentially contentious issue:

Looking back to see the present

Today’s repeat guest blogger is Sarah Tolson, a Certified Financial Planner with her office in Danville. Her bio and contact information are below.

With the unemployment rate remaining persistently high, it might be easy to become discouraged over the progress of the economic recovery. But if you are looking for signs of a recovery, the employment situation is the last place to look — literally.

Employment is typical of a class of economic indicators, called lagging indicators, that are poor at predicting how the economy will perform in the near future. However, when it comes to providing confirmation that a particular trend is in place — whether it be a recovery or a recession — lagging indicators can play a vital role. Here’s a roundup of some common lagging indicators and why they can provide useful information for investment decisions.

Rising unemployment is usually one of the final signals that a recession has begun, and rising employment is among the last indications that an economy is recovering. In both situations, it’s difficult to miss the influence of human emotion in the business cycle. During a slowdown or a recession, employers may cut back on other expenses in order to avoid layoffs for as long as possible. And when conditions begin to improve, employers may avoid hiring until they are confident that the recovery is sufficient to justify additional labor costs.

Corporate Earnings
Earnings are a lagging indicator because they reveal past performance. Most publicly traded companies release their quarterly earnings one month or more after the quarter has ended. So even though stock prices are technically a leading indicator, actual corporate earnings performance may say little about what to expect in the future. However, if economic activity seems to be faltering, yet no recession has been officially declared, economists may look at earnings and other measurements of business revenue for confirmation.

The Conference Board Lagging Index®
Perhaps the most important lagging indicator, which actually gets little attention, is The Conference Board Lagging Economic Index. As with other lagging indicators, this index is most useful when compared with leading and coincident indicators. Coincidentally, The Conference Board also produces coincident and leading indexes, which makes comparisons convenient.

The lagging index tracks average duration of unemployment, manufacturing and trade inventories to sales ratio, labor cost per unit of manufacturing output, the average prime rate, outstanding commercial and industrial loans, ratio of consumer credit outstanding to personal income, and the consumer price index for services.1 Changes in these seven variables are averaged to arrive at an index value.

Although some experts consider the lagging index to be a lackluster source of information, economists tend to pay close attention when it shows something other than a confirmation of the direction of the leading and coincident measures. A divergence suggests that the stock market may have misinterpreted the direction of the economy.

Lagging indicators rarely make headline news, but they are an important source of information. We can help you keep an eye on these and other indicators.

1) The Conference Board, 2010.

Sarah Tolson, Certified Financial Planner™ recipient, is passionate about building the next generation of her family’s legacy of personalized financial planning; and she is committed to helping professionals create wealth-building plans tailored to their age, goals, and life circumstances.
4115 Blackhawk Plaza Circle, Suite 100, Danville, CA 94506
phone: (925) 736-3024 / fax: (925) 736-3026

Sarah Tolson is a registered representative of and offers securities, investment advisory, and financial planning services through MML Investors Services, Inc. Member SIPC. (2121 N. California Blvd. #395, Walnut Creek, CA 94596 (925) 979-2300). CA Insurance License #OF43069.

Beyond estate planning: Long-term care insurance

When I work with my clients to complete their estate plans, including their living trust, their powers of attorney, their wills, and other documents, I talk to them about other areas of their life where they should “get their affairs in order.”  One of these areas are long-term care insurance.  While this is not a service that I provide personally, I consider it part of my job to at least alert my clients to the other areas of their life that may need attention in preparation for retirement and beyond.  Many individuals just don’t have the correct information to be able to make informed decisions, so I try to bridge these gaps so my clients can make the best decisions for them.

Long-term care insurance is insurance that helps to pay for your care as you get older.  Very few of us are going to go from healthy and active one day to dead the next.  Most of us will decline more slowly as age starts to take its toll on our bodies.  Perhaps driving or climbing stairs will become difficult, and then perhaps we’ll need to use a cane or walker.  Medicare will not help you unless and until you are housebound and confined to your bed (generally).  During that phase of your life where you are slowing down, if you don’t have long-term care insurance, you have two options:  you can pay for it ($20,000/month or more) or depend on your family and friends to help take care of you.  Not many older individuals have an extra $20,000/month to spare, so paying for it is nearly impossible.  Depending on family can be an option for some, but I think many who have the ability to think about it ahead of time do not want to place this burden on their family.  Even those who cringe at the thought of having a stranger come into their home can understand the need for their caregiver family member to have a break from the care giving.  Long-term care insurance helps to pay for in-home care (or assisted living), can help to relieve family care givers, and help to save your finances when you can’t work anymore.  If you get it at a young age, it’s quite reasonable to pay for, and both you and your family will be grateful you had it.