Estate Planning After Divorce
The emotional and financial stress caused by the end of a marriage often means that estate planning is not on many people’s minds, but it should be. Estate plans need to be reviewed, revised and replaced after any major life event, especially divorce. And that review needs to include more than just a new will and power of attorney. Estate planning after divorce needs to address your entire estate plan, including your financial accounts and your legal documents.
Most married couples have estate plans which name each other their personal representative, power of attorney and beneficiary. Following a divorce, it’s unlikely that the former spouses want each other to retain control over their assets or health care decisions if they become incapacitated or receive their assets at their passing, so their estate plans require revision to meet the former spouse’s new circumstances.
Estate planning is even more critical after a divorce if you do not have any existing estate planning documents. If you don’t already have at least a will and power of attorney, a major life event like a divorce is an excellent reason to start your planning. Without an estate plan, you and your estate will become subject to the state’s guardianship and intestacy laws, which might not reflect your wishes.
Estate planning after divorce begins with finding a new estate planning lawyer. The attorney who assisted you and your former spouse with the estate plan created while you were married cannot ethically assist either spouse individually. In many states, the attorney has an obligation to notify their client, your former spouse, of any changes you make to your estate plan. As a result, and as part of the start of your new life after a divorce, you need to locate your own attorney who does not have any duties towards your former spouse.
Separation and Divorce
Many people mistakenly believe that you cannot change your estate plan during divorce proceedings. Both separation and divorce require action to update your estate planning. The need to revise your estate planning starts as relationship ends, not when the marriage is formally ended. Separated spouses do not have to notify other spouse of changes to their estate planning. The only exception is any beneficiary change to a retirement account requires the spouse’s permission if made prior to divorce being final. (Spouses also cannot dissipate (give away) assets during a divorce proceeding that would be subject to equitable distribution.)
If you die after signing a new will or trust, but before your divorce is final, your spouse would still have the right to “elect against” your estate plan and claim a substantial part of your estate, since you are still legally married. State law does not terminate spouse’s inheritance rights until the marriage is formally over.
In addition to revising your estate plan, during and after your divorce, you need to take steps to secure your personal information, both physical and digital, from access, theft or destruction by your former spouse.
Impact of Divorce Decree
Most people believe, incorrectly, that a divorce decree automatically invalidates all of the estate planning documents and beneficiary designations of both spouses. In fact, the impact of a divorce degree varies dramatically based upon state law and is somewhat limited. In almost all states, a divorce decree will invalidate the naming of a now former spouse as the beneficiary under you will. However, state law frequently does not automatically remove a former spouse as your personal representative. And state law usually does not remove a former spouse as a power of attorney, health care agent or as the named beneficiary of a bank account or life insurance policy. As a result, the best course of action is to change your estate plan instead of relying on state law.
It’s equally important to understand what a divorce decree will not change. The most important example is that a divorce decree (unless it’s in a very special and rare form) does not invalidate the naming of an former spouse as the beneficiary of your retirement account. Federal law requires the retirement plan’s administrator to pay the account balance to the listed beneficiary in the plan’s records, even if it’s a former spouse. As a result, you need to change the beneficiary of your retirement accounts (consistently with terms of divorce decree), once your divorce is final.
What Needs to be Reviewed, Updated and Replaced?
In short, everything. Your entire estate plan (legal and financial) needs to be reviewed, updated and / or replaced after a divorce, including:
- Revocable Trust
- Health Care Power of Attorney
- Financial Power of Attorney
- Advanced Directive
- Vehicle and other asset titles
- Life insurance beneficiaries
- Retirement Account beneficiaries
- Annuity beneficiaries
- Payable on Death account beneficiaries
- Transfer on Death account beneficiaries
- Online account usernames, passwords and contact emails
You may also need to speak to your parents and / or other family members to encourage them to review their own estate plans to confirm that any inheritance intended for you or your children does not end up being received by, or placed under the control of, your former spouse.
Planning for Incapacity
Your estate plan needs to include a surrogate decision maker for financial and medical issues if you become incapacitated. Generally, spouses will name each other as their financial power of attorney and health care agent for that purpose. In most states, a divorce decree will not automatically invalidate such designations. If you don’t want your former spouse to control your assets and determine the course of your medical treatment if you become incapacitated, it’s important to sign new powers of attorney and an advanced directive. The new health care directive should also expressly state that new agent has the authority to determine who can visit. If any prior powers of attorney exist, you also need to give any person or institution with a copy of the prior version written notice that it’s been revoked along with a copy of new version.
Planning for Asset Distribution
Will and Living Trust
After your divorce, a new will or living trust is needed to distribute your assets the way you want at your passing. As noted above, it is neither necessary or advisable to wait until divorce is final to sign a new plan providing how you want your assets managed and distributed.
Divorce decrees and property settlement agreements provide which spouse gets which asset. But, the decree alone is not sufficient, the assets actually need to be retitled. For example, for real estate, a new deed needs to be recorded. For a car, boat or other vehicle, a new title needs to be issued. The best way to avoid disputes over who owns what is to carefully and fully retitled the formerly joint assets as outlined in the divorce decree.
- The new will / trust and life insurance beneficiaries need to be fully consistent with terms of property settlement agreement.
- If you changed your name as part of the divorce, you need to be sure the new deeds, titles and accounts all reflect your new name.
A critical part of estate planning after divorce is updating your beneficiary designations. This include life insurance, annuities and retirement accounts. In each case, you need to contact the involved institution, request the proper form, complete and return the form and confirm institution’s records get updated. As noted above, this is especially important for retirement accounts. Even if divorce decree addresses these issues, the beneficiaries need to be changed to avoid issues and problems later.
In addition to accounts with beneficiary designations, you also need to update the beneficiaries on your bank accounts with Payable on Death (PoD) designations and assets (like securities accounts) with transfer on death (ToD) designations.
Many people have an extensive online presence including email, social media, subscriptions, shopping, credit cards and other online accounts. In some cases, you may share an account with your now former spouse or to which they had access. As part of your post-divorce estate planning, you need to change the usernames and passwords for all online accounts and remove nay permissions given to your former spouse. In some circumstances you may need to close one account, like an email account, and open a replacement. As an extra precaution, you should advise the online service providers in writing that your former spouse is not authorized to access the account.
Planning for Minor Children
If you pass away before your children turn 18, your former spouse will most likely be awarded custody. In your post-divorce will, it’s best to name your choice as guardian of any minor children. While such designation is not binding on the court, it will inform the judge of your preference. This is especially important if you have concerns about your former spouse raising your children.
In addition to custody, your post-divorce estate plan needs to address how, and by whom, you want your assets used for the benefit of your children. For this purpose, your estate plan should include a trusted person as trustee, under either a will or revocable trust, to control your children’s inheritance. While you may be comfortable now with your former spouse having control over your children’s inheritance, circumstances change. A better option for any inheritance left for your children is to utilize a trustee who will manage it outside of your former spouse’s control.
Many divorced parents mistakenly end up naming their minor or young adult children as direct beneficiaries following a divorce. As suggested above, naming a trust as beneficiary avoids the problems caused by naming the children directly. If a minor is named a beneficiary, a court appointed person will be placed in charge of the funds, potentially even your former spouse. Some courts will name a county official or office to hold/manage your child’s inheritance. It can often be very difficult to get funds from this person/agency for children’s needs or see that they are spent the way you would prefer. Regardless of who is named to manage the funds, if funds are left directly to a minor, when he/she turns 18, they get full control of the funds, which unfortunately often leads to the purchase on an expensive sports car instead of college tuition.
Planning for Remarriage
Many people remarry following a divorce and want to be sure that their children get an inheritance after their passing, even if their new spouse survives them. A number of different options exist to achieve this goal, such as lifetime gifting, naming children as direct beneficiaries in a will or trust, using a separate trust that provides surviving spouse with income only, keeping your assets separate (including expenses) from your new spouse’s and using beneficiary designations directly to your adult children for accounts which do not pass under a will or trust.
You should also consider including a premarital agreement (or marital property agreement) in your planning for remarriage after a divorce. These types of documents outline what assets belong to what party and what happens to them upon a party’s death or the ending of the marriage. These types of agreements are needed, in part, because state inheritance laws do not handle modern marriages (for example, those in which the children are not the children of both spouses) well since they essentially assume a traditional (biological) relationship between the family members. A premarital agreement / marital property agreement, as part of a complete estate plan, can be used so that at least some of your assets go to your children at your passing and not to your new spouse and his / her family or next spouse.