The Effect Divorce Has on an Estate Plan
Going through a divorce can be a complicated procedure. Not only do you have to deal with the emotional and psychological turmoil of a divorce, but you also have to deal with complex financial and tax issues, which can greatly affect your overall quality of life following the divorce settlement. One thing is clear, though; if you are like most people going through a divorce, you no longer want your ex-spouse to be the beneficiary of your estate or to put your children in a position to be disinherited if you ex-spouse gets married again after the divorce. If what you originally planned was to leave your estate to your spouse and then to your children, your ex-spouse may still get much of what you leave behind if you do not modify your estate plans in the light of your separation.
While a divorce decree often automatically revokes any disposition of property made by your will to your ex-spouse, your beneficiary designations – on things like your insurance and IRA – would not automatically be revoked by your divorce decree. Also, remember that the law considers you to be legally married until your divorce becomes final. If anything happens to you before that divorce decree is issued, your estranged spouse will have the power to make decisions over every aspect of your life. Therefore, during your divorce proceedings, you should carefully review and probably modify the following items in your divorce estate planning unless you still want to leave assets to your ex-spouse:
- – Beneficiary designations – Financial instruments such as your employer retirement plans, Individual Retirement Accounts (IRA), life insurance, annuities, and health savings accounts do not pass through your will, but go directly to the person you have named as beneficiaries. If your spouse is named as a beneficiary, you will probably want to change the person who will get that asset.
- – Will – If you do not change your will, the laws may give your ex-spouse a large part of everything you own. So, you must get a new will that reflects your current wishes.
- – Transfer on Death (TOD) investment accounts
- – Payable on Death (POD) bank accounts
- – Revocable trusts
- – Advanced estate planning structures such as irrevocable trusts
In most cases, these items can be modified by a simple request and submitting the appropriate forms. Since retirement and employer plans may constitute the most significant portion of your net worth and liquid assets, it is especially critical that you modify the beneficiary designations on these accounts, as soon as possible after your divorce. Because these pass to the named beneficiary by operation of contract, as opposed to by probate, your designations supersede your will. If no changes are made, your ex-spouse will be entitled to the benefit, despite the existence of a will or trust specifying otherwise.
Guardianship and Remarriage Issues
If you are concerned that the money you leave to your minor children may not be used as you would like if your ex-spouse has access to those funds, you can specify in a Revocable Living Trust (RLT) that the trustee who takes over in the event of your death pay 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, tuition, etc. Thus, you can secure your children’s inheritance by having an RLT in place with a trustee who will carry out your wishes which you specifically designate. The money would not be paid out directly to the guardian (your ex-spouse) but would be used for the benefit of the children. This also prevents your assets – which should be for the benefit of your children – from getting into the hands of your ex-spouse’s new partner if he or she gets married again.
You should also consider naming successor guardians in the event your ex-spouse does not want to raise the kids or is otherwise unavailable, or if you believe your ex-spouse to be an unfit parent.
How Remarriage Effects an Estate Plan
If you consider a remarriage, you must keep in mind that without legal documentation to indicate otherwise, your new spouse may automatically be entitled to a certain percentage of your estate. This means that you might unintentionally disinherit your children to some degree. Regardless of whether your new spouse assumes the guardianship of your children, he or she may receive one-half of the assets intended to provide for your children.
Complex Estate Planning Changes
If you have advanced estate planning structures such as Irrevocable Life Insurance Trusts (ILIT’s), Qualified Personal Residence Trusts (QPRT’s), and charitable trusts, they will be very difficult, if not impossible, to amend, since the original intent of creating these structures was to make an irrevocable election, usually structured to benefit both husband and wife together.
The Last Word
If you are contemplating divorce and need to consider revision of your estate plan, a qualified estate planning attorney can help. They can help you take proactive steps to reduce legal proceedings costs and tax burdens through trusts and estate planning.