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Estate Planning and Divorce

Posted on June 3, 2014 | by ahrenstech

Going through a divorce can be a traumatic experience — not to mention a time-consuming and expensive one. So it’s no surprise that separating couples often overlook the impact of divorce on their estate plans. But neglecting to update a plan can lead to unintended consequences. This article explains what to do to be sure that the estate is distributed among intended beneficiaries and that powers of attorney also reflect current wishes. A sidebar discusses estate planning strategies for singles.

Estate planning in divorce: Don’t put it off

Going through a divorce can be a traumatic experience — not to mention a time-consuming and expensive one. So it’s no surprise that separating couples often overlook the impact of divorce on their estate plans. But neglecting to update your plan can lead to unintended consequences.

Update your will and trusts

Unless you wish to provide your former spouse with an inheritance, you should — as soon as possible after you decide to divorce — amend your will and any trusts to eliminate him or her as a beneficiary. In addition, unless you’re comfortable with your former spouse administering your estate or controlling your wealth, you should designate someone else as executor or trustee.

This is true even if you live in one of the many states where divorce automatically nullifies any gifts or bequests to an ex-spouse and automatically revokes an appointment of a former spouse as executor or trustee. First, if you die before the divorce is final — even if you’re legally separated — your spouse will still inherit in accordance with your will or revocable trust and his or her appointment as executor or trustee likely will stand.

Second, typically, the laws in these states treat your estate plan as if your former spouse had predeceased you. If you’ve named contingent or residual beneficiaries, any property your spouse would have received will go to them. If not, the property will pass according to the laws of intestate succession. But relying on these laws can be dangerous.

Suppose, for example, that your will leaves all of your assets to your spouse or, if your spouse predeceases you, to your children. If you and your spouse divorce, your children stand to inherit your estate. But what if your children are minors? In that case, the court would appoint a guardian to manage their inheritance and that guardian would most likely be your former spouse.

To avoid this result, it’s best to update your estate plan. In this case, for example, you might want to leave your assets in a trust for the benefit of your children, managed by a trustee of your choosing.

Finally, keep in mind that, in many states, as long as you’re legally married, your spouse will retain elective share or community property rights to a portion of your estate. So while updating your plan soon after you decide to divorce can reduce the amount your spouse will receive if you die while you’re still married, it’s difficult to disinherit him or her completely before the divorce is final.

Change your beneficiary designations

Amending your will or trust isn’t enough if, like most people, you own assets that are distributed on death via a written beneficiary designation. These assets include life insurance policies, IRAs, other retirement plans, payable-on-death (POD) bank accounts and transfer-on-death (TOD) brokerage accounts.

In some states, a divorce automatically revokes spousal beneficiary designations under certain circumstances. But, again, relying on state law is risky. Third parties, which may not be aware of your divorce, aren’t liable for distributing assets to the person named on a valid beneficiary designation form. So, to ensure that your wishes are carried out, it’s best to contact your employers, financial institutions, insurance providers and brokerage firms and submit change of beneficiary forms.

Be aware that, if you’d like to change the beneficiary of a qualified retirement plan to someone other than your spouse, you’ll need to obtain your spouse’s consent. This requirement no longer applies once your divorce is final.

Revoke your powers of attorney

Most married people execute powers of attorney or directives that authorize their spouses to make financial or health care decisions on their behalf should they become incapacitated.

If you’ve signed such documents, and you don’t want your former spouse to exercise such authority, be sure to revoke them. And if you’ve provided copies to third parties, such as financial institutions or health care providers, notify them in writing of the revocation to ensure that they don’t rely on them.

Review your plan

If you recently divorced, or if you’re contemplating a divorce, consult your advisor as soon as possible to review your estate plan. In addition to eliminating your former spouse’s access to, or control over, your wealth, as a newly single person you may need to rethink your estate planning strategies. (See the sidebar “Estate planning for singles.”)

 

Sidebar: Estate planning for singles

If you get divorced, it’s critical to review your estate plan. As a single person, the estate planning strategies you designed with your spouse may no longer be effective. Many of the strategies employed by married couples focus on leveraging their combined gift and estate tax exemptions and making the most of the unlimited marital deduction. But after you and your spouse split up, you’re left with one exemption and no marital deduction.

Consider this example. Jerry and Elaine are married, with two children, and have a total of $10 million in assets — $7 million in Jerry’s name and $3 million in Elaine’s name. They divorce and agree that each spouse will keep the property titled in his or her name.

When Jerry and Elaine were married, the use of the marital deduction, estate tax exemption, and/or portability allowed them to combine their estate tax exemptions (currently $5.25 million each, or $10.5 million together) to shield all of their wealth from federal gift and estate taxes. After the divorce, if Jerry dies and leaves his property to his kids, his estate will be subject to a $700,000 tax (at the current rate of 40%).

Jerry would be well advised to consider strategies that allow him to transfer his wealth at a lower estate tax cost — such as a family limited partnership or grantor retained annuity trust.

Posted in Adult Children, Advisors, Agent for Disposition of Remains, Cemetery Benefits, Elder Exploitation, Elder Fraud, Estate Planning, Long-Term Care Planning, Wills

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