Anyone who’s ever gone through a divorce will likely agree that the ordeal was emotionally draining. However, many times the drama does not end when the marriage does. While estate planning is a responsible thing or families to do, there are some estate planning issues to be considered following divorce.
Most of the time, the husband and wife seeking to end their marriage are no longer interested in their ex-spouse getting an inheritance from their estate OR leaving their children in a position to be disinherited due to the fact that their ex-spouse may re-marry following the divorce. If their original plan was to leave everything to their spouse and then to their children, their spouse may still get everything if they do not modify their estate plans following divorce.
Following a divorce, the items below should be amended unless the client chooses to leave everything to his/her ex-spouse:
- Beneficiary designations for the following financial instruments:
- Employer retirement plans
- Individual Retirement Accounts (IRA)
- Life insurance
- Health savings accounts
- Transfer on Death (TOD) investment accounts
- Payable on Death (POD) bank accounts
- Health care powers of attorney and living wills
- Powers of attorney
- Revocable trusts
- Advanced estate planning structures such as irrevocable trusts
Powers of Attorney (General and Advanced Medical Directives)
If you’re getting a divorce then you probably don’t want to leave the legal authority to make decisions regarding your health and/or finances in the hands of your ex. Therefore, it is important to make sure documents such as general, financial, and durable powers of attorney, along with advanced medical directives, are changed as soon as you are divorced.
Guardianship & Re-marriage issues
So what if you die or become incapacitated after the divorce and leave children? In a perfect world, the other parent would assume responsibility for the child. But what if that ex-spouse is unavailable or not fit to take care of the child? If the ex-spouse is likely to assume guardianship, they will be responsible for providing a residence for the child, provide for care and support and education.
If the client is concerned that money left to a child may not be used as the client wishes if the ex-spouse has access, the client can designate in a revocable living trust that the client’s successor trustee provide for specific items out of the funds of the trust such as private school tuition, extra-curricular activities, a car at a certain age, college applications and tuition. A parent can protect a child’s inheritance by having a revocable living trust in place with trustee to carry out the grantor’s wishes as specifically designated. The money would not be paid directly to the guardian, but would truly be for the benefit of the child. This also protects the grantor’s assets, which should be for the benefit of the children, from getting into the hands of the client’s ex-spouse’s new spouse should he or she remarry.
Following a divorce, an ex-spouse may desire to leave assets to care for both the new spouse and the children. In such a situation, the parent should sit down with a financial advisor and an estate planning attorney to assess the options. An easy solution is the use of additional life insurance to assist the parent in his or her wishes to provide for both the minor children and the new spouse. Term insurance can be a low-cost solution to provide these benefits until the children reach adulthood, assuming the parent is insurable.
In most cases, changing these items is as simple as requesting, completing and filing the appropriate form. Since retirement & employer plans often represent the most significant portion of an individual’s net worth and liquid assets, it is particularly important to amend the beneficiary designations on these accounts.
Because assets passed to a named beneficiary pass under operation of contract, this designation supersedes the person’s will and state intestacy statutes. If no changes are made, the ex-spouse who was originally designated as the beneficiary will be entitled to the benefit, despite the existence of a will or trust designating otherwise or a new spouse. Beneficiary designation will always trump a will or intestacy laws.
Ex spouses should also keep in mind that most states have an “elective share statute” which provides that the client’s spouse (whether estranged or not) will automatically be entitled to a certain percentage of the estate. However, through proper planning, there are a number of ways to avoid or limit the assets which are subject to the elective share, and to provide that the estranged spouse does not receive more of the estate than the client wants him or her to. This is another reason it is imperative to re-visit the client’s estate plan following divorce.
In many cases, the family law attorney is not as well-versed in estate planning issues. Their focus is to help the client dissolve the marriage and make decisions regarding asset distribution, custody, child-support and such issues. However, beyond that, it is advisable that the client revisit his/her estate plan with the assistance of a qualified estate planning attorney to help address the issues raised in this article. Estate planning attorneys can work closely with family law attorneys to conclude this final step of the dissolution process.