When it’s critical to revise your estate plan
There are few events that can completely upend a person’s life more than divorce. Of course, there’s the emotional toll on you and your family to contend with, but you also have to consider the divorce’s impact on your estate plan.
When you originally crafted your plan, you likely centered many of its strategies around your spouse. Thus, when divorce proceedings begin, it’s crucial to update your estate plan as soon as possible to avoid unintended outcomes.
Who’s next in line for your wealth?
Unless you wish to provide your former spouse with an inheritance, 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.
There are several reasons for this. 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, 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 current 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.
Who are your designated beneficiaries?
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, as well as property held in joint tenancy with right of survivorship.
In some states, a divorce automatically revokes spousal beneficiary designations under certain circumstances. But, again, relying on state law is risky. Third parties, who 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, 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.
Who has power of attorney?
Many married people execute powers of attorney or directives that authorize their spouses to make financial and/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 this kind of 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.
Act sooner rather than later
Going through divorce proceedings can be upsetting for your entire family. During this time you’ll want the peace of mind of knowing that the proper heirs are provided for in the event of your death. For this reason, consult your advisor as soon as possible after filing for divorce to review and update your estate plan.