Perhaps no life event imposes a more significant - and urgent - need to
update an estate plan than a divorce. A divorce generally causes a radical
change in both personal finances and planning objectives; in nearly all
cases, both the husband and wife involved in the divorce no longer want
the ex-spouse to be a beneficiary of his or her estate plan. If children
are involved, the need to protect and provide for them following a divorce
is of paramount importance.
Many people incorrectly believe that a divorce automatically nullifies
the estate plans that were in place prior to the divorce. Broadly speaking,
it does not. Here are the top five questions you should ask about your
estate plan following a divorce. Answering these questions now can help
you and your loved ones avoid legal setbacks down the road.
1. How can I ensure that my property and life insurance proceeds will be
passed on appropriately to my children?
Divorce can trigger a need for new estate planning instruments that the
person did not require prior to divorce. For example, while happily married,
a person with children may be comfortable with an estate plan that leaves
all property outright to the surviving spouse, confident that he or she
will use that property (and any life insurance proceeds) for the benefit
of the children. Divorce predictably erodes that confidence, but the underlying
need to provide for surviving minor children remains. Most states, for
example, have had numerous cases involving individuals who failed to change
the beneficiary designation on a life insurance policy following a divorce,
and the policy proceeds ended up being awarded to the ex-spouse.
In such a situation, it is often advisable to revise the estate plan so
that rather than leaving property and life insurance proceeds directly
to the ex-spouse, a trust is established instead - to be administered
by a carefully selected trustee - providing for distributions for the
benefit of the children on a regular and/or "as needed" basis.
2. Who will obtain custody or guardianship of my children when I'm gone?
While many divorced parents are comfortable with the ex-spouse assuming
custody of the children in the event of their death, in some cases (for
example, if the ex-spouse is an unfit parent), this is not appropriate.
A revised estate plan can include the designation of a guardian for the
children which, while not absolutely binding on the courts, may nevertheless
weigh heavily with the deciding judge.
3. If I'm remarrying, how will that affect my estate plan?
Following divorce, you may also need another estate planning document that
many people do not consider to be part of a typical estate plan: the premarital
agreement. The decision to remarry after a divorce can have a significant
impact on a parent's ability to leave property to or for the benefit
of surviving children. Many people are unaware that remarrying in the
absence of a properly drafted premarital agreement may render the remarried
parent unable to leave most or all of his or her estate to children from
a prior marriage because the new spouse is legally entitled to receive
a significant share of the property. You can learn more about how premarital
agreements can help you protect your children's inheritance in this article.
Your premarital agreement can also provide you protection in the event
of a divorce.
4. Have my tax considerations changed now that I'm single?
In high net worth situations, a divorce can also create estate tax considerations
that did not exist prior to the divorce. For example, under current federal
law, an individual can currently pass up to $5.34 million at death without
incurring any estate taxes. While a married couple can take advantage
of both parties' estate tax exclusions (which effectively doubles
the potential tax-free transfer to $10.68 million), a divorced person
has only one $5.34 million exemption. As a result, a person with a net
worth of, say, $8 million may benefit from estate tax planning after divorce
that was not needed while married.
5. What other documents need to be reviewed and updated?
A full and healthy estate plan encompasses multiple documents that need
attention after a divorce. The following documents should be reviewed,
considered and updated:
- Revocable trusts
- Powers of attorney
- Life insurance policy beneficiary designations
- Irrevocable life insurance trusts
- Health care powers of attorney and living wills
- Bank and brokerage accounts with "pay on death" provisions
- Beneficiary designations for individual retirement accounts, 401(k)s, other
retirement plans, annuities and health savings accounts
- Titles to property: After divorce, many people simply fail to re-title
the assets that they are awarded outright in the divorce (e.g., real estate,
vehicles, etc.) into his or her own name, leaving the property in joint
title with the former spouse.
Understandably, after getting through a divorce, you may feel weary of
working with attorneys and legal documents. However, it's one of the
most important times to update an estate plan - or create one, if you
had no estate plan previously. Fortunately, the process of updating an
estate plan is usually simple, straightforward and can be completed efficiently.