Estate planning after a divorce can be a complex process, but there are several key factors that you should consider. Even the most amicable divorce requires reviewing and updating your estate plan, as explained in a recent article from yahoo! finance, “I’m Divorcing. Will That Impact My Estate Planning?” First and foremost, it's essential to revisit your overall estate plan and make any necessary updates or changes that result from the divorce. This may include updating your beneficiary designations for retirement accounts, life insurance, and other assets and updating your will and any trusts you may have established. Getting this part of divorce right can have long-term repercussions, even after death.
Last will and testament. If you don’t have a choice, you should get this started. Why? If anything unexpected occurs, like dying while your divorce is in process, the people you want to receive your worldly goods will receive them, and those you don’t want to receive your property won’t. Review your documents where you may have named your ex-spouse if you named them as an executor or trustee of your will or trust. You also want to ensure your “ex” does not receive any assets if you die and has no control over your estate or trust. If you have a will and an estate plan, and if your will leaves all of your property to your soon-to-be ex-spouse, you may want to change it.
Trusts. The first change is to remove your someday-to-be ex-spouse as a trustee if this is how you set up the trust. If you don’t have a trust and have children or others you would want to inherit assets, now might be the time to create a trust.
Review your guardianship provisions if you have minor children. You may choose to name your ex-spouse as the guardian in your will. Even if you don’t, your ex-spouse will most likely serve as guardian of your minor children if you pass away unless he or she is determined by the court to be unfit. However, if you had a nasty divorce or your ex-spouse has mental health or substance abuse issues, you may consider finding an alternate.
Review insurance policies. You’ll want to remove your spouse from insurance policies, especially life insurance. If you have young children with your spouse and share custody, you may want to keep your ex as a beneficiary, especially if the court ordered that. If you received your health insurance through your spouse’s plan, you need to look into getting your coverage after the divorce.
Power of Attorney. If your spouse is listed as your financial power of attorney and your healthcare power of attorney, there are steps you’ll need to take to make this change. First, you must notify the person in writing to tell them a change is being made. This is especially urgent if you reduce or eliminate their authority over your financial and legal affairs. You may only change or revoke a power of attorney in writing. Most states have specific language required to do this, and a local estate planning attorney can help do this properly.
Make sure you consider a trust for minor children. If you do not have trust for minor children, and your ex-spouse is the children’s guardian, they will have control of the children’s finances until they turn 18. Most clients do not want their ex-spouse controlling their children’s monies. You should have a revocable trust that will name someone you choose as a trustee to access and manage the funds for your children if you die.
Review any life insurance requirements in your Divorce Agreement. Review any insurance requirements that your divorce or separation agreements may require. Review your obligation to maintain life insurance under the divorce agreement. Consider a trust if you are required to maintain a policy for your ex-spouse or children and to want to ensure the proceeds of that policy are appropriately applied. Consult with your estate planning attorney and divorce attorney, if necessary.
Check your beneficiary designations. Ensure your 401K, and IRA beneficiary designations are consistent with the terms of your divorce agreement. Often clients forget this step, which can cause unforeseen consequences. It is prudent to have the beneficiary designations updated.
Divide Retirement Accounts. How these assets are divided depends on what kind of accounts they are and when the earnings were received. The court must issue a Qualified Domestic Relations Order (QDRO) before defined contribution plans can be split. The judge must sign this document, which allows plan administrators to enforce it. This applies to 401(k) plans, 403(b) plans, and any plans governed under ERISA (Employment Retirement Income Security Act of 1974).
Review Impact Divorce Has on Estate Taxes. Another essential factor to consider in estate planning after a divorce is the impact on your estate taxes. Depending on your circumstances and the size of your estate, your may need to work with an estate and tax advisor and financial advisor to develop a tax-efficient plan to transfer your assets to your beneficiaries.
If remarrying, consider a prenuptial agreement. People often get remarried shortly after their divorce is complete. If you are considering getting remarried, ensure you have a prenuptial agreement. If you are remarrying, it is advisable to incorporate provisions into your estate plan that account for your needs, your future spouse's needs, and how you wish to deal with your children from your prior marriage
Ultimately, the best action will depend on your needs and circumstances. Divorce is stressful enough, and adding estate planning into the mix may feel overwhelming. It is always a good idea to consult with an estate planning attorney and financial advisor to help guide you through the process and ensure your estate plan meets your goals and objectives. However, doing so will prevent many future problems and unwanted surprises.
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