CDA CDA Estate Planning & Post-Divorce Financial Transition 2 — Questions and Answers
Question 1: What is a revocable living trust and what advantage does it offer in post-divorce estate planning?
- An irrevocable trust that permanently shields assets from future creditor claims
- A trust that holds assets during life, avoids probate at death, and can be amended or revoked at any time by the grantor (Correct answer)
- A court-administered trust established to hold assets for minor children during divorce
- A specialized trust that eliminates estate taxes for high-net-worth divorcing individuals
Correct answer: A trust that holds assets during life, avoids probate at death, and can be amended or revoked at any time by the grantor
A revocable living trust allows assets to pass to beneficiaries without probate and can be amended to remove an ex-spouse as trustee or beneficiary after divorce.
Question 2: If an ex-spouse is named as successor trustee of a revocable living trust, what must the divorced client do?
- Nothing — the divorce automatically removes an ex-spouse as trustee in all states
- Execute a formal trust amendment naming a new successor trustee per the trust's amendment procedures (Correct answer)
- Dissolve the trust entirely and establish a new one with updated beneficiaries and trustee
- File a petition in probate court to judicially remove the ex-spouse as trustee
Correct answer: Execute a formal trust amendment naming a new successor trustee per the trust's amendment procedures
The trust must be formally amended to name a new successor trustee, as divorce alone does not automatically change trust terms in most states.
Question 3: What is the purpose of a healthcare proxy (or healthcare power of attorney) and why is updating it critical after divorce?
- It assigns ownership of healthcare-related personal property between the divorcing spouses
- It designates someone to make medical decisions if you are incapacitated — an ex-spouse in this role could have serious consequences (Correct answer)
- It controls who receives health insurance proceeds if you die during the policy period
- It authorizes release of your medical records to a future employer or insurance underwriter
Correct answer: It designates someone to make medical decisions if you are incapacitated — an ex-spouse in this role could have serious consequences
A healthcare proxy grants your agent broad authority over medical decisions, and retaining an ex-spouse in that role post-divorce could lead to decisions that conflict with your wishes.
Question 4: What is a 'special needs trust' and when might it be relevant in a divorce involving a disabled child?
- A trust created to reduce alimony obligations owed to a disabled former spouse
- A trust holding assets for a disabled individual that preserves their eligibility for government benefit programs like Medicaid and SSI (Correct answer)
- A trust established by the state to receive child support payments for a disabled child
- A court-mandated fund reserved for the private school tuition of a child with special needs
Correct answer: A trust holding assets for a disabled individual that preserves their eligibility for government benefit programs like Medicaid and SSI
A special needs trust allows a disabled child to receive assets without disqualifying them from needs-based government benefits such as Medicaid and SSI.
Question 5: After divorce, a client wants to ensure young children inherit their estate rather than a potential future spouse. Which estate planning tool best accomplishes this goal?
- Joint tenancy with right of survivorship on all major financial accounts
- A testamentary trust created within the will that holds and distributes assets to children at a specified age (Correct answer)
- Adding children as co-owners on all bank and investment accounts immediately after divorce
- Transfer on death (TOD) designations naming the children on each financial account
Correct answer: A testamentary trust created within the will that holds and distributes assets to children at a specified age
A testamentary trust created in the will can hold assets for minor children managed by a named trustee and distributed on a schedule the client controls.
Question 6: In post-divorce estate planning for blended families, what is a QTIP trust (Qualified Terminable Interest Property Trust)?
- A trust that holds qualified retirement plan assets after a QDRO is processed
- A trust that provides income to a surviving spouse while preserving the principal for children from a prior marriage (Correct answer)
- A trust qualifying for the unlimited marital deduction when assets pass to a second spouse
- A federally established trust for surviving spouses of active-duty military personnel
Correct answer: A trust that provides income to a surviving spouse while preserving the principal for children from a prior marriage
A QTIP trust is often used in blended family situations to provide income to a surviving spouse while ensuring the principal ultimately passes to children from a prior marriage.
CDA CDA Estate Planning & Post-Divorce Financial Transition 2
What is a revocable living trust and what advantage does it offer in post-divorce estate planning?