Estate Planning Steps You Should Take After Divorce
After nearly 10 years of helping people create and curate their personal estate plans and probate family estates, I want to share some advice about your estate plan after a divorce.
(Disclaimer: I am an attorney but I am not your attorney. The information provided here is merely educational, does not create an attorney-client relationship, and should not be considered legal advice. Always consult with your own attorney about your particular circumstances. )
I often receive the question: “how often should I update my estate plan?” Many people think it is a set number of years. However, I tend to believe that you should update your estate plan each time you encounter a major life event.
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Some of those major life events might be the birth of a child, marriage, retirement, death of a spouse, or DIVORCE.
Estate Planning After Divorce
Divorce or legal separation is a major reason to update your estate plan. This means that you should use your divorce as an excuse to meet with an estate planning attorney who can not only review your estate plan but also recommend any potential changes that you might need in your planning as a result of divorce.
Don’t believe me? Let’s consider some of the ways that your divorce could impact your estate plan. How does divorce affect your will, your trust, your powers of attorney, or even your beneficiary accounts?
Estate Planning with Your Spouse
If you do not have a will, your state of residence will make one for you. If you had a look at your states’ intestacy laws, you might find that you don’t really like the will the state makes for you!
In many states, happily married spouses receive very small portions of their deceased spouses’ estate. Sometimes this portion even excludes the marital home where the two of them might have spent the better part of their life.
For this reason, and many others, you should have a personalized and professional estate plan. Not the least of your estate planning documents is your will.
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Updating Your Last Will and Testament After Divorce
Among many other documents, your estate plan should include a will or last will and testament.
A will or last will and testament gives all of your assets –the assets left in your name alone—to your beneficiaries.
Your last will and testament no doubt includes your spouse and children (if you have them). You have the right in your will to leave all of your personal belongings and real estate to your spouse if you so choose even to the exclusion of your other children.
However, if you are like many couples, perhaps you created an estate plan early in your marriage and haven’t thought about it again in many years.
Perhaps you have even left it in a dark dusty drawer somewhere under the divorce decree.
Your Will and Divorce
It is not unusual for children to bring dad’s will to my office and find that his will was never updated after the divorce. His will –usually decades old—still leaves all of the family assets to a woman he divorced decades prior.
Now, you and I both know that dad does not intend to leave all of his assets to a long-estranged woman. However, his estate plan is king. If his will states that all of his assets are to pass to a divorced spouse, then the only way to refute that is with a newer will, a revocation, or a statutory exception.
Thank goodness that in most states, you will find a statutory exception.
Statutory Protections for Wills After a Divorce
In most states in the U.S. you will find a statute made by your state legislature that pretends that ex-spouses predeceased the deceased individual.
In other words, if dad’s will still includes the ex-wife, then we cut her out and skip to the next beneficiary in line.
Although this solution often keeps the estate out of the ex-spouses’ hands, it rarely meets the deceased individual’s wishes.
The alternate beneficiary might have been an in-law, children of the ex-spouse, or a joint business. The statutes only protect against ex-spouse inheritance.
So, even if you cut out the ex-spouse, your estate plan should still be updated. It is not unusual to see an estate split between the children of the decedent and the children of the ex-spouse if a person fails to update his or her estate plan after divorce.
And, remember, your will is not the only document in your estate plan, it’s possible that you might also have an accompanying trust that needs attention.
Without your intervention, your trust could still dictate that your ex-spouse receives all of your assets.
Divorce and Your Trust
Many trusts have specific provisions and details in the event of a divorce between the grantors. However, many have no provision regarding divorce at all.
Or, even if it does have some divorce provisions, do those provisions simply nullify the trust? Divide it? Leave it in place?
Most revocable trusts are freely revocable and modifiable during the lives of the grantors. However, little if any protection is in place in the event of divorce.
If you fail to update your trust, unlike your will, the state does not step in and offer a correction. Not all states offer estate protection for divorce when it comes to trusts. This means that even if you divorce your spouse, your trust may still leave all assets in the trust to the ex-spouse.
Therefore, updating your trust after divorce is incredibly important to make sure that you don’t accidentally leave all of your property, business, and retirement accounts to an ex-spouse to the exclusion of your children or loved ones.
Could My Ex-Spouse Just Make a Gift?
While we are on it, clients often ask me whether someone could just sign over their gift in the event that their estate plan isn’t in proper form at death.
Some extremely friendly ex-spouses want to rectify the estate planning debacle and simply sign over their gift to the children of the decedent.
This leads me to 2 concerns.
- Do you trust your ex-spouse to actually gift a large amount of money to your children or proper beneficiaries?
- Taxes. Of course the IRS has something to say as well!
First, in my experience many, but not all, ex-spouses are willing to sign over the gift that was made to them in error. However, many ex-spouses have a hard time turning down a big cash gift or chance to get what they thought they deserved all along.
Further, even if the ex-spouse would have signed it over, if the ex-spouse is subject to a guardianship or state care, they might not be able to legally sign it over anyway.
Second, Taxes and Assignments
Further, and more importantly, signing over a gift (assignment) might lead to significant tax consequences. Currently, each person in the United States has a lifetime exclusion amount of more than $11 Million.
This means that no one has to pay any death taxes or gift taxes until he or she gives away more than $11 Million. For most people, this is never a concern. But, if your ex-spouse is already near the $11 Million mark, then he or she would be required to pay approximately 1/3 off the top of the gift in taxes.
Further, even if your ex-spouse didn’t have to worry about the $11 Million limit, there are still other tax consequences.
Under current federal law, in the event that anyone gives away more than $16,000 to a single person in a single year (the annual exclusion amount), then he or she has to file against his or her lifetime exclusion amount.
In other words, even if the gift isn’t taxable, it still has reporting consequences. The ex-spouse would still have to deal with the IRS on an ex-spouse’s behalf. Who wants to do that?
After a divorce, most people want to create a clean break. They don’t want to have to worry about later dealing with the IRS or even your physicians.
Powers of Attorney after Divorce.
If you, like many others, only update your Powers of Attorney when you complete your will, then you might find that your ex-spouse is also still your attorney-in-fact.
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This means that your ex-spouse would have the right to make your health, financial, and end-of-life decisions.
Most people don’t like this idea!
While some states do have specific power of attorney protections eliminating ex-spouses from powers of attorney, not all do.
Therefore, your power of attorney may only properly name an ex-spouse if you never updated it after a divorce.
Again, some ex-spouses are happy to work with the family to rectify the situation, but others are not. I have seen some ex-spouses use this as an opportunity to further get even with their ex-family or seize control of assets they believed they were due in the divorce.
Your power of attorney along with your other estate planning documents should always be reviewed and updated after a divorce. But what about the documents that aren’t created by an attorney? What should you do with your TOD and POD accounts after a divorce?
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Divorce and Beneficiaries and Pay on Death Transfers
In addition to the documents that an estate planning attorney should review after a divorce, a good estate planner will also review your beneficiaries with you.
He or she should go through all of your life insurance, retirement accounts, beneficiary accounts, or other investments that name a beneficiary.
Under federal law, spouses who haven’t otherwise waived the right, are the primary recipients of all federally qualified retirement accounts after the death of the owner.
Therefore, when you set up a retirement account, your spouse becomes the primary beneficiary of that account. This remains true even if you divorce.
If your ex-spouse remains the primary beneficiary on our life insurance, bank account, retirement fund, or other account at your death, then that ex-spouse receives the underlying funds.
Your ex-wife will continue to receive the transfer on death account, your long-term investments, or even your transfer on death ownership interest in that small business.
At this point in time, few if any states have ANY protection against spouses receiving beneficiary accounts.
Those spouses walk away with the federal funds, the VA life insurance, the annuity, the account, or other TOD asset…no questions asked. No one can challenge the ex-spouse for the asset regardless of when the beneficiary designation was made.
Therefore, one of the most important estate planning updates to do after divorce is to update ALL beneficiaries and TOD accounts.
Estate Planning Updates after Divorce Checklist
After a divorce, which is daunting enough, don’t forget to also update your estate plan.
You must:
- Update your will
- Update your trust
- Name a new or alternate attorney-in-fact in your power of attorney
- Review and update all beneficiaries and transfer on death accounts.
Without making those updates, you leave your estate, which is likely already dwindling after a divorce, subject to the claims and ownership of the very ex-spouse you are trying to escape.
Not only does this create additional drama for your family, it may ultimately leave them with nothing.
If you fail to make the necessary updates to your estate plan, your children, family, or other loved ones may ultimately watch the entirety of your estate pass to an ex-spouse.
Updating Your Estate Plan
Major life events, including divorce, are always a good excuse to review your estate plan with a licensed and reputable attorney in your jurisdiction.
Absent an estate planning review after a divorce, your prior documents or failure to plan entirely could leave you and your family far from your intended objections.
If you are recently divorced or pursuing a divorce, get with an estate planning attorney as soon as possible to review your documents and wishes.