Planning, collaboration are key to handling life's challenges
I was surprised to see a dear client couple on my schedule. The family had just been in for a planning and strategy meeting a little over a month earlier, so it was unusual to see them back in the office so soon.
I looked at their pre-meeting notes; there were no hints as to their visit in the system. "Maybe they want to do a bucket list trip or buy a car," I thought as I reviewed for the appointment. The couple was in their mid-70s, were extremely active and very family focused. They had two daughters, both in their 40s, and half a dozen grandkids between them.
As I walked into the room, I could immediately sense the stress. "What's going on guys?" I asked as I sat down. They side-eyed each other, as if each was expecting the other to do the reveal. "Our daughter is getting a divorce, and it's a terrible situation," the wife uttered, almost choking up as she said it.
"Oh no," I answered, seeing on their faces they didn't care to share details, so I didn't ask. "We are worried about our estate," the husband added. "We want to make sure the divorce doesn't impact the legacy we want to leave to our grandkids."
I had worked in collaboration with the attorney who had drafted their estate planning documents, and I had his cell phone number. I could tell they felt the issue was urgent, so I suggested we get the attorney on the phone for this conversation. Fortunately, he answered the call.
The attorney listened intently to their concerns while I could tell he was pulling their documents up on his computer screen. Their family trust was funded with their bank accounts, non-retirement investment accounts, their home, and some undeveloped lake house lots they owned up north. Their daughter was not listed as the successor trustee, which is the individual or institution charged with administering the trust after they, the grantors, passed or became incapacitated.
After looking over some details he relayed their family trust contained language that would prevent assets held in the trust from being considered marital property in the event both clients passed before the divorce was settled. He said the successor trustee was empowered with trust provisions to disallow distributions that could be subject to any divorce proceedings and could even distribute funds to their grandchildren without impacting the divorce process. The couple was clearly relieved, and the attorney reassured them no additional planning was required on his side to mitigate the situation.
"So, what about the IRAs?" was the next question from the husband's mouth. Like many families in Northwest Indiana, about 65% of the family's wealth was held in IRAs and Roth IRAs. "Well, that one is a bit more complicated," I replied. The attorney on the phone mumbled in agreement. I let him take the ball from there.
"We don't typically recommend naming a family trust as the beneficiary of an IRA," he stated. I confirmed the primary beneficiary of all the family IRAs was the surviving spouse, but the contingent beneficiaries if both spouses passed were the daughters. I chimed in that naming a trust as an IRA beneficiary came with some unideal limitations and some administrative challenges.
The attorney continued, "Under Indiana's 'one pot' legal theory, if the daughter were to inherit the IRA before the divorce was settled, it is possible the asset could be considered a marital asset and subject to the settlement." The family clearly didn't like the answer. "So, what can we do?" the wife asked.
I thought a minute. "We could use a trusteed IRA for your daughter's share of any IRAs or Roths. It's not a tool we use all that often, but in this case I think it could be a solution." "Go on," the husband replied.
A trusteed IRA is an IRA in which the custodian (the firm that holds the money) also serves as a trustee to the accounts. Having a trustee in place enables the control of distributions and could keep the assets out of the marital estate of the beneficiary. The distribution and access provisions of the trusteed IRA are established by the original IRA owner, and the custodian/trustee then implements the terms of the trust as instructed. The trusteed IRA also locks in the original beneficiaries and contingent beneficiaries, which could ensure the grandchildren also ultimately benefit from the IRA.
The husband clearly liked the idea. "What's the catch?" he asked. "Well, the trustee relationship does involve additional cost, but this additional cost only comes into play after both spouses pass. We can establish the trusteed IRA provisions now, and when the divorce is settled, assuming no one has passed, we can change it back to directly benefit your daughter without the trustee. The process is pretty easy, and quick."
"Let's do it," they both replied, and we got to work. While the painful road was still ahead, I was glad to send my friends home with at least some solutions and peace of mind. Life has a tendency to throw curve balls, but with planning and collaboration sometimes even the toughest situations can be manageable.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
