Perhaps no life event imposes a more significant – and urgent – need to update an estate plan than a divorce. A divorce generally causes a radical change in both personal finances and planning objectives; in nearly all cases, both the husband and wife involved in the divorce no longer want the ex-spouse to be a beneficiary of his or her estate plan. If children are involved, the need to protect and provide for them following a divorce is of paramount importance.
Many people incorrectly believe that a divorce automatically nullifies the estate plans that were in place prior to the divorce. Broadly speaking, it does not. Here are the top five questions you should ask about your estate plan following a divorce. Answering these questions now can help you and your loved ones avoid legal setbacks down the road.
1. How can I ensure that my property and life insurance proceeds will be passed on appropriately to my children?
Divorce can trigger a need for new estate planning instruments that the person did not require prior to divorce. For example, while happily married, a person with children may be comfortable with an estate plan that leaves all property outright to the surviving spouse, confident that he or she will use that property (and any life insurance proceeds) for the benefit of the children. Divorce predictably erodes that confidence, but the underlying need to provide for surviving minor children remains. Most states, for example, have had numerous cases involving individuals who failed to change the beneficiary designation on a life insurance policy following a divorce, and the policy proceeds ended up being awarded to the ex-spouse.
In such a situation, it is often advisable to revise the estate plan so that rather than leaving property and life insurance proceeds directly to the ex-spouse, a trust is established instead – to be administered by a carefully selected trustee – providing for distributions for the benefit of the children on a regular and/or "as needed" basis.
2. Who will obtain custody or guardianship of my children when I’m gone?
While many divorced parents are comfortable with the ex-spouse assuming custody of the children in the event of their death, in some cases (for example, if the ex-spouse is an unfit parent), this is not appropriate. A revised estate plan can include the designation of a guardian for the children which, while not absolutely binding on the courts, may nevertheless weigh heavily with the deciding judge.
3. If I’m remarrying, how will that affect my estate plan?
Following divorce, you may also need another estate planning document that many people do not consider to be part of a typical estate plan: the premarital agreement. The decision to remarry after a divorce can have a significant impact on a parent's ability to leave property to or for the benefit of surviving children. Many people are unaware that remarrying in the absence of a properly drafted premarital agreement may render the remarried parent unable to leave most or all of his or her estate to children from a prior marriage because the new spouse is legally entitled to receive a significant share of the property. You can learn more about how premarital agreements can help you protect your children’s inheritance in this article.
Your premarital agreement can also provide you protection in the event of a divorce.
4. Have my tax considerations changed now that I’m single?
In high net worth situations, a divorce can also create estate tax considerations that did not exist prior to the divorce. For example, under current federal law, an individual can currently pass up to $5.25 million at death without incurring any estate taxes. While a married couple can take advantage of both parties' estate tax exclusions (which effectively doubles the potential tax-free transfer to $10.5 million), a divorced person has only one $5.25 million exemption. As a result, a person with a net worth of, say, $8 million may benefit from estate tax planning after divorce that was not needed while married.
5. What other documents need to be reviewed and updated?
A full and healthy estate plan encompasses multiple documents that need attention after a divorce. The following documents should be reviewed, considered and updated:
Powers of attorneys
Life insurance policy beneficiary designations and irrevocable life insurance trusts
Health care powers of attorney and living wills
Bank and brokerage accounts with "pay on death" provisions
Beneficiary designations for individual retirement accounts, 401(k)s, other retirement plans, annuities and health savings accounts
Titles to property: After divorce, many people simply fail to re-title the assets that they are awarded outright in the divorce (e.g., real estate, vehicles, etc.) into his or her own name, leaving the property in joint title with the former spouse.
Understandably, after getting through a divorce, you may feel weary of working with attorneys and legal documents. However, it's one of the most important times to update an estate plan – or create one, if you had no estate plan previously. Fortunately, the process of updating an estate plan is usually simple, straightforward and can be completed efficiently.
Estate planning attorneys recommend that an individual's estate plan be reviewed periodically, especially to address changes in the law and the life of the client since the estate plan was last updated. If you have questions about updating your estate planning following a divorce, please contact a member of Bingham Greenebaum Doll LLP’s Estate Planning Practice Group.
6. Who gets ownership of our family business once the divorce is final?
Whether or not both spouses are active participants in the business, the business is part of the marital estate for the purpose of dividing property. Typically, each spouse will be entitled to one-half the value of the business and one spouse must buy-out the other spouse’s share of the business. This usually requires that the business be professionally evaluated. Often, the spouse who gives up the business interest will keep a larger share of the other assets, such as a home or retirement accounts. If the marital assets are not sufficient to make up for half the value of the business, the spouse keeping the business may obtain a business loan to make a lump-sum payment to the selling spouse. In the alternative, the selling spouse might agree to accept payments over time. Barring an agreement to the contrary, the same division of assets occurs when the business is owned over several generations. For example, if a wife owns a business jointly with her parents, the husband would be entitled to one-half of the wife’s share of the business upon divorce.
DISCLOSURE REQUIRED BY CIRCULAR 230. This Disclosure may be required by Circular 230 issued by the Department of Treasury and the Internal Revenue Service. If this article, including any attachments, contains any federal tax advice, such advice is not intended or written by the practitioner to be used, and it may not be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. Furthermore, any federal tax advice herein (including any attachment hereto) may not be used or referred to in promoting, marketing or recommending a transaction or arrangement to another party. Further information concerning this disclosure, and the reasons for such disclosure, may be obtained upon request from the author of this article. Thank you.