(Q & A) Tax and Estate Issue

Dec 2017


Dear Rick:
Earlier this year I got divorced. We were only married a little over a year and we never filed a joint return. Last year at tax time, because we were having difficulties, my accountant recommended I file a separate return, which I did. It turns out that my ex-husband did not file a tax return last year. My first question to you is do I have any responsibility for that? I owe him some money as part of our settlement, and I want to make sure that before I pay I’m not going to have any tax liability. My second question deals with my estate plan. When I got married, my husband had a son from a previous relationship. I had started the process of adopting the child; however, I never went through with it. My question is I still want to leave the child something from my estate; however, I don’t want my ex having anything to do with the money. What would you recommend?


Dear Tammy:
I think your accountant gave you wonderful advice with regard to last year’s tax return. When you file a joint tax return there is joint liability and since you were having difficulties with your husband it made sense not to do a joint return. Yes, maybe it cost you a few extra dollars in taxes; however, you have peace of mind which more than offsets any additional tax liability.

Since you did not file a joint tax return you have no liability with regard to your ex-husband. If the IRS determines that he owes money, it is not your responsibility. Therefore, there is no problem paying your ex what he is owed.

From an estate planning standpoint, once again, you are under no legal obligation to leave anything to his son. If you had legally adopted the child then you would have some responsibility. You still would not necessarily have to leave him any money; however, you would have to mention him in your estate planning documents. If not, the presumption would be that you forgot about him and thus, he would be able to have a claim against your estate.

Since you want to leave something to the child, but you don’t want your ex-husband having control of that money, my recommendation would be to create a trust for that child. In the trust you can provide how you want the child to get the money and at what ages. For example, you can say that if the child is over 25 years of age he gets his inheritance paid directly to him. However, if he’s under 25 the money stays in the trust, subject to the terms of the trust and under the management of the trustee.

The trustee is the individual in charge of running the trust. The trustee doesn’t have to be related to the child; rather, it could be anyone you choose, or it could even be a couple of different people. In addition, you can also use the services of a bank to act as a professional trustee. The bottom line is in a trust you set the terms and conditions as to how the money is spent, and your ex-husband doesn’t’ have to be involved.

One of the beauties of a trust is that you set the terms and conditions based upon what you think is right or wrong. With trusts you have great flexibility as to what you can do. In addition, the trust that you would be creating, since it takes effect upon your death, ensures that whatever you choose to do now can be changed in the future by you. If for some reason you decide on a different distribution schedule or whom you want to run the trust, you can easily make changes. The trust only becomes irrevocable upon your death. Therefore, I believe a trust gives you the most amount of flexibility to accomplish your goals.

Many people are under the mistaken belief that trusts are only for the very wealthy; that is not the case. Trusts are very effective vehicles to control your money past your death. The key to trusts is that in the great majority of situations, you remain in total control of your money until you pass. That means, at any time, you can change the terms of the trust including revoking it. As far as I’m concerned you should always remain in control of your estate.

Good luck!


If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com