Divorce and Estate Planning Issues

Divorce and Estate Planning Issues

             The emotional turmoil of divorce can be overwhelm­ing or liberating depending on the client’s perspective. While it is commendable and responsible for families to do estate planning, there are some issues to be considered following divorce.

            In most cases, the husband and wife seeking to dissolve their marriage are no longer interested in their ex-spouse being the beneficiary to their estate OR leaving their children in a position to be disinherited due to the fact that their ex-spouse may re-marry following the divorce. If their original plan was to leave everything to their spouse and then to their children, their spouse may still get ev­erything if they do not modify their estate plans following divorce.

 

Beneficiary Designations

             Following a divorce, the items below should be amended unless the client chooses to leave everything to his/her ex-spouse:

 

1. Beneficiary designations for the following financial instruments:

• Employer retirement plans

• Individual Retirement Accounts (IRA)

• Life insurance

• Annuities

• Health savings accounts

 2. Transfer on Death (TOD) investment accounts

 3. Payable on Death (POD) bank accounts

 4. Will

 5. Health care Proxies and Living Wills

 6. Powers of attorney

 7. Revocable trusts

 8. Advanced estate planning structures such as irrevo­cable trusts

 

Medical & General Powers of Attorney

 Generally speaking, if one has chosen to no longer be married to their spouse, they usually no longer want to leave their health care or financial decisions in the ex-spouse’s hands. It is therefore imperative that amongst the documents to be amended are the client’s Advanced Health Care Directive and Durable Power of Attorney.

 

Guardianship & Remarriage Issues

             In a perfect world, if something happened to one parent, the other parent would assume guardianship of the mi­nor child. However, that assumes that the non-custodial parent desires to raise the child and is fit to do so. If the ex-spouse is likely to assume guardianship, they will be responsible for providing a residence for the child, provide for care and support and education.

             If the client is concerned that monies left to a child may not be used as the client wishes if the ex-spouse has ac­cess, the client can designate in the Revocable Living Trust (RLT) that the client’s successor trustee provide 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 and tuition. A parent can pro­tect a child’s inheritance by having an RLT in place with a trustee to carry out the grantor’s wishes as specifically designated. The money would not be paid directly to the guardian, but would truly be for the benefit of the child. This also protects the grantor’s assets, which should be for the benefit of the children, from getting into the hands of the client’s ex-spouse’s new spouse should he or she remarry.

 The client should also consider naming successor guard­ians in the event the ex-spouse does not want to raise the kids or is otherwise unavailable.

 

Remarriage

            Perhaps a newly-divorced parent has a significant other in his or her life, and remarries. This situation could result in a parent unintentionally disinheriting existing children. Without legal documentation to indicate otherwise, a spouse is generally entitled to one-half of the deceased spouse’s estate. The second spouse may not be the result­ing caretaker of the former step-children, particularly if another guardian has been named, yet he or she has received half of the assets intended to provide for them.

            A divorced parent may typically desire to leave assets to care for BOTH the new spouse and the children. In such a situation, the parent should sit down with a financial advi­sor and an estate planning attorney to assess the options. An easy solution is the use of additional life insurance to assist the parent in his or her wishes to provide for both the minor children and the new spouse. Term insurance can be a low-cost solution to provide these benefits until the children reach adulthood, assuming the parent is insur­able.

            In most cases, changing these items is as simple as requesting, completing and filing the appropriate form. Since retirement & employer plans often represent the most significant portion of an individual’s net worth and liquid assets, it is particularly important to amend the ben­eficiary designations on these accounts.

            Because assets passed to a named beneficiary pass under operation of contract, this designation supersedes the person’s will and state intestacy statutes. If no changes are made, the ex-spouse who was originally designated as the beneficiary will be entitled to the benefit, despite the existence of a will or trust designating otherwise or a new spouse. Beneficiary designation will always trump a will or intestacy laws.

Complex Changes

         Advanced estate planning structures such as irrevocable life insurance trusts (ILIT’s), Qualified Personal Resi­dence Trusts (QPRT’s), and charitable trusts may 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. Should the husband or wife assume the power to change the irrevocable election, the tax advan­tages gained by the structure may be destroyed. It is im­perative that the client work closely with his/her attorney, as well as the trustee, to explore possible options.

 

            The client should also keep in mind that most states have an “elective share statute” which provides that the client’s spouse (whether estranged or not) will automatically be entitled to a certain percentage of the estate. However, through proper planning, there are a number of ways to avoid or limit the assets which are subject to the elective share, and to provide that the estranged spouse does not receive more of the estate than the client wants him or her to. This is another reason it is imperative to re-visit the client’s estate plan following divorce.

             These are just some of the  estate planning issues that the client faces following a Divorce.  If you, or anyone you know, has any questions regarding any of the above information, please feel free to contact my office at any time.