Posted On: March 17th 2017
Going through a divorce can be a traumatic experience, not to mention a time-consuming and expensive one. Although it is not surprising that separating couples often overlook the impact of divorce on their estate plans, neglecting to update your plan can lead to unintended consequences.
Unless you wish to provide your former spouse with an inheritance, you should, as soon as possible after you decide to divorce, amend your will and any trusts to eliminate him or her as a beneficiary. In addition, unless you are comfortable with your former spouse administering your estate or controlling your wealth, you should designate someone else as your executor or trustee.
Your estate planning documents should reflect your current wishes, 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. First of all, if you die before the divorce is final, even if you are legally separated, your spouse will still inherit in accordance with your will or revocable trust and his or her appointment as your executor or trustee will likely stand. The laws in these states typically treat your estate plan as if your former spouse predeceased you. If you have 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. However, 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. However, 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, it is best to 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 choosing.
Finally, keep in mind that, in many states, as long as you are legally married, your spouse will retain their elective share or community property rights to a portion of your estate. As a result, updating your plan soon after you decide to divorce can reduce the amount your spouse will receive if you die while you are still married; it is difficult to disinherit him or her completely before the divorce is final.
Amending your will or trust is not 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.
In some states, a divorce automatically revokes spousal beneficiary designations under certain circumstances. Again, relying on state law is risky. Third parties, who may be unaware of your divorce, are not liable for distributing assets to the person named on a valid beneficiary designation form. Therefore, to ensure that your wishes are carried out, it is best to contact your employers, financial institutions, insurance providers and brokerage firms and submit change of beneficiary forms.
Be aware that, if you would like to change the beneficiary of a qualified retirement plan to someone other than your spouse, you will need to obtain your spouse’s consent. This requirement no longer applies once your divorce is final.
Most married couples execute powers of attorney or directives that authorize their spouses to make financial or health care decisions on their behalf should they become incapacitated. If you have signed such documents, and you do not want your former spouse to exercise such authority, you must revoke them. Moreover, if you have provided copies to third parties, such as financial institutions or health care providers, notify them in writing of the revocation to ensure that they do not rely on them.
If you recently divorced, or if you are contemplating a divorce, consult with us as soon as possible to review your estate plan. In addition to eliminating your former spouse’s access to or control over your wealth, you may need to rethink your estate planning strategies as a newly single person.
If you get divorced, it is critical to review your estate plan. As a single person, the estate planning strategies you designed with your spouse may no longer be effective. Many of the strategies employed by married couples focus on leveraging their combined gift and estate tax exemptions and making the most of the unlimited marital deduction. However, after you and your spouse split up, you are left with one exemption and no marital deduction.
Consider this example. Jerry and Elaine are married, with two children, and have a total of $10 million in assets, $7 million in Jerry’s name and $3 million in Elaine’s name. They divorce and agree that each spouse will keep the property titled in his or her name.
When Jerry and Elaine were married, the use of the marital deduction, estate tax exemption, and/or portability allowed them to combine their estate tax exemptions (currently $5.49 million each, or $10.98 million together) to shield all of their wealth from federal gift and estate taxes. After the divorce, if Jerry dies and leaves his property to his kids, his estate will be subject to a $700,000 tax (at the current rate of 40%).
Jerry would be well advised to consider strategies that allow him to transfer his wealth at a lower estate tax cost, such as a family limited partnership or grantor retained annuity trust.