Divorce holds considerable implications not only for your financial future, but also for the future of your loved ones and even your medical care. To that end, it is imperative that you revisit your estate plan as soon as you seek divorce or separation. Keep the following estate planning considerations in mind as you proceed with your divorce.
As soon as divorce becomes a realistic option, begin to examine what it might mean for your estate. Depending on the nature of your separation or divorce, the process could take anywhere from a few months to several years. Do you really want to leave your estate at risk during this time? The possibility of passing away before divorce finalization may seem remote, but it is far from impossible.
In the event you die before your divorce is finalized, the lack of a will could result in your ex-spouse inheriting property you intended for somebody else. Furthermore, it is possible to inadvertently disinherit your own children through your failure to update your will; if your ex remarries after receiving the entirety of your estate, he or she may designate that property to a new spouse or children, thereby cutting your children out completely.
Did you and your spouse sign a prenuptial or postnuptial agreement? If so, it is crucial that you abide by the terms of this agreement as you make arrangements for your will, trust, or other estate planning documents. Analyze your prenup or postnup carefully to determine what you and your spouse owe one another in divorce.
Prenuptial agreements commonly outline which assets are considered separate and which can be deemed marital; this could play a role in property designation during the estate planning process. Prenuptial and postnuptial agreements also commonly set aside property for specific beneficiaries in the interest of, for example, preserving property for children from previous relationships. Make every effort to abide by the terms in your prenup as you proceed with key estate planning documents.
If you are like most divorcees, you will have to switch designated beneficiaries on virtually every account. Depending on your financial situation and where you live, you may need to change beneficiaries for the following policies and accounts:
Keep in mind that your spouse may be appointed as guardian if you select a minor (such as a child or grandchild) as beneficiary.
Do not assume that divorce alone is good enough to imply a change in beneficiary. If your ex is still listed as the beneficiary, he or she is likely to receive property if you pass away.
While you can change beneficiaries for several accounts during the divorce process, certain retirement accounts will remain hands-off by law until your divorce is finalized.
In most states, gifts left to spouses in previous wills are automatically revoked upon finalizing your divorce. Additionally, gifts to your spouse's relatives may also be revoked, depending on the laws in your state.
Automatic revocation of bequests can help as you proceed with divorce, but it is never wise to rely on state law in such situations. Furthermore, assets designated for your spouse can still be granted if you pass away before the divorce is finalized.
Revoking a will and drafting a new one may seem excessively difficult, but the alternative could be a lot worse. While some divorcing spouses are content to rely on contingent beneficiaries listed in wills, this approach is not always as straightforward as it seems. For clarity's sake, it is usually best to start afresh.
A critical component of your new will is an executor you trust. Most spouses list one another as executor, but this generally changes upon divorce. Choosing an executor after divorce can be tricky; common choices include parents, siblings, and adult children. An outside entity can also be named as executor; some people prefer this approach as it could minimize family drama.
Estate holders often set aside property in trusts for fear of putting loved ones through the hassle and expense of probate. Unfortunately, handling trusts during a divorce can be just as complicated. In some cases, however, spouses set up trusts before or during marriage with the intention of protecting assets in the event of divorce.
Classification of trusts as separate or marital property will play a key role in how they are divided upon divorce. Generally, trusts established before marriage are deemed separate property and are therefore not subject to division. Trusts established while married are typically deemed marital property. These trusts may be split, unless one spouse can clearly prove that the trust was intended as separate property.
Another crucial consideration is whether you previously established a revocable or irrevocable living trust. A revocable living trust can be altered once completed. If you are able to update your revocable living trust upon deciding to divorce, you should do so as soon as possible. Unfortunately, if your spouse was listed as a beneficiary in an irrevocable trust, you may struggle to make the changes you so desperately desire.
No matter how angry you feel about your spouse's conduct while married or during your divorce, it is almost never wise—and sometimes virtually impossible—to opt for full disinheritance. This approach could open your ex up to contesting your will and potentially receiving a considerable portion of your estate. In many states, full disinheritance is not even an option until after the divorce has been finalized, even if you write your ex out of your will.
It all comes down to a concept known as elective share, in which your spouse enjoys the right to inherit a portion of your estate while you remain married. Your spouse may automatically be entitled to up to half of your estate. Laws regarding elective share can vary considerably from one state to the next, so determine local legislation before you proceed.
Your will can be used to designate guardians for your minor children in case you die before they reach adulthood. Most spouses, however, continue to designate one another as the children's guardian after marriage, even if one takes on primary custody. If, however, you believe that your ex could pose a threat to your children as guardian, he or she may need to be declared unfit as a parent before you designate somebody else for this important role.
If you become incapacitated at some point in the future, who makes important financial decisions on your behalf? Typically, spouses grant one another durable financial power of attorney, thereby leaving financial choices to each other. A spouse with power of attorney can be authorized to handle a variety of tasks and situations, including:
While some durable powers of attorney include strict guidelines for handling the incapacitated individual's funds, others grant broad powers to the designated agent. This is of grave concern in any divorce, of course, but particularly if your split is not amicable. Thankfully, the process for revoking a power of attorney is fairly straightforward, and it is surprisingly easy to issue a new power of attorney. Keep in mind that you may be required to notify your ex if you choose to revoke your durable financial power of attorney.
What happens if you eventually become incapacitated by illness or injury? Do you want your ex to make critical decisions regarding medical procedures or hospice care? If not, it is imperative that you alter your medical power of attorney as soon as possible.
Do not underestimate the importance of living wills and other end-of-life documents; the lack of such documentation played a central role in the Terri Schiavo case, and Schiavo was still married at the time of her incapacitation. Failure to alter your advance healthcare directive could cause confusion at best; at worst, it could cause years of family drama or contentious litigation, not to mention the personal suffering you could endure if your ex fails to abide by your end-of-life wishes.
How you handle your healthcare power of attorney upon divorce will depend largely on where you reside. In some states, all power of attorney responsibilities related to health care are automatically revoked the moment a divorce is finalized. In other states, a power of attorney can continue after divorce if superseding language is included in the document. In most states, however, a healthcare power of attorney continues until the granting spouse takes steps to revoke it. Either way, it is worth adjusting your power of attorney in advance, as automatic revocation does not occur until the conclusion of the divorce.
While your estate plan may initially take precedence, you may also find it worth your while to discuss estate planning with your parents. Depending on the specifics of their wills or other legal documents, it could be possible for assets to pass to your ex. Trusts established by your parents, for example, may designate both you and your ex as beneficiaries. While this is not so much an action you can take on your own, it is worth discussing the situation with your parents early on so they can revoke or amend documents, if necessary.
If you failed to update your estate plan during the divorce process, it is imperative that you do so as soon as your divorce is finalized. If you have already updated your will or other estate planning documents, additional amendments may be required at this time.
Estate planning during your separation or divorce could be strictly temporary. Sometimes, it is tough to make final decisions during a pending separation, and sometimes it is not even possible. Look carefully at any changes you made during the early stages of your divorce to determine whether additional updates are warranted. Continue to monitor your estate plan, as unexpected issues may arise in the months and years following your divorce.
In most states, retirement account beneficiaries cannot be changed during a pending divorce. After divorce, however, you can proceed with adjustments to beneficiaries for accounts regulated by the Employee Retirement Income Security Act of 1974 (ERISA). A prime example of an ERISA-regulated account is your 401(k). Changing the beneficiary will not, however, alter the portion of retirement savings awarded to your spouse in divorce. That is determined in a Qualified Domestic Relations Order (QDRO) issued by the court.
In addition to changing beneficiaries on ERISA-regulated accounts, consider rolling 401(k) funds into an individual retirement account (IRA). Outside of a select few community property states, spousal rights typically do not apply to IRA accounts. This approach could prove particularly valuable if you eventually re-marry.
Many recently divorced individuals create a new revocable living trust. This is a valuable approach to protecting assets in a second marriage, particularly if your first marriage produced children. A common tactic is directing life insurance proceeds into a trust to be held for children or other beneficiaries.
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