Regardless of the outcome, divorce is an arduous process. Even when both individuals end up on amicable terms, the emotional and financial repercussions of divorce are often immense. Given the sensitive nature of the process, it makes sense that something as inconsequential as estate planning is the furthest thing from most people’s minds. However, estate plans are heavily affected by marriage (and subsequent divorce).
Should anything happen to you, minor discrepancies within estate plan updates allow your ex-spouse becomes eligible to inherit your entire estate (or half of your assets, if you do not have an estate plan to begin with). That being said, it is important to update your estate plan pre, during and post-divorce. By doing so, you can ensure that it accurately reflects current wishes, beneficiaries, and overrides older versions.
Estate Planning Basics
Estate plans come in different shapes and sizes. The most important component of an estate plan is the method by which you designate beneficiaries of your assets and property. For most people, the easiest way to do this is through a last will and testament. Contrary to its name, your “last will” need not be the last – it simply overrides all other existing wills previously signed.
Wills cannot typically be drafted and notarized on a whim. There is a process to legitimizing a will, and it includes requiring witnesses present during the will’s signing. Otherwise, you will need a separate document witnessed and signed to legitimize a previously signed will.
Wills carry many advantages over simply letting your estate be automatically distributed according to state laws. For one, you can designate beneficiaries. In the absence of an estate plan, state laws determine who does and does not inherit, as well as how much is inherited. Wills:
- Allow you to include individuals who are not considered kin
- Determine what goes to which beneficiary
- Give parents of minor children the power to name a guardian (which heavily affects the court’s decision of residence upon death)
Although, wills do not decide everything. There are certain assets and accounts that are automatically transferred to designated beneficiaries upon death, including (but not limiting to):
- Life insurance policies
- Retirement plans and accounts
- Properties that are tagged as transfer-on-death (TOD)
- Accounts that are payable-on-death (POD)
Trusts are a set of legal instructions created between grantor, trustee and beneficiary, used to hold and transfer property upon death or incapacity. While trusts offer greater wealth transfer options, they cannot name a guardian for children, and are costly to prepare and maintain.
Not all estate planning documents revolve around distributing assets and property upon death. Some documents safeguard wishes and instructions for both financial decisions and long term care while incapacitated.
It is common for married couples to leave a substantial amount of their estate to their spouse. Spouses also benefit from the tax exemption bonds of federal estate taxes (also known as gift tax) , as well as the income tax on larger estate transfers. Many estate plans are explicitly drafted with a person’s marital status in mind.
Pre, During and Post-Divorce Considerations
Before a divorce is finalized, it opens the potential of transferring assets and property to your spouse, which may fundamentally affect your estate planning strategy, requiring a major rewrite. It is also important to know that while some states prohibit ex-spouses’ from inheriting wills and trusts, 401k and life insurance inheritance is subject to probate. It is advised to update your plan, review trusts and wills during divorce, and take an inventory of assets with a designated beneficiary.
Before you make any sweeping changes, consult with an estate planning attorney to review any prenuptial or postnuptial agreements that you and your spouse may have signed. If you do wish to amend any estate plan updates, you must ensure changes abide with the rules outlined in previously made agreements. Once you have determined what you can and cannot amend, go over each part of the estate plan. Some things to consider include:
- Beneficiaries listed on bank accounts
- Beneficiaries listed on auto titles and real estate titles
- Beneficiaries listed on savings accounts
- Life insurance policies and retirement accounts
- Last will and testament, living trusts, and testamentary trusts
- Durable power of attorney (you may have named your ex-spouse as a proxy)
- Living wills
If you name your child as a beneficiary, note that your ex-spouse may be your child’s only guardian. And thus, is in control of their inheritance until reaching age of majority. One way to workaround this is to hold assets in the hands of an appointed trustee, until the minor in-trust is of age. Even with your ex-spouse being removed from your will, anything can happen during the divorce process itself. It is never wise to rely on state law for safeguarding assets.
Safeguarding Estate Plan Updates and Amendments
Amending a will during or after a divorce will usually require a full rewrite. Going over every title and mention of beneficiary designations can be both time-consuming and difficult, as well. To ensure your desired wishes and assets are transferred seamlessly upon death, consult with a legal professional to review your estate plan updates and amendments.