There are numerous documents to be reviewed and decisions to be made in the event of a divorce. Elevated stress levels during the separation process can make it easy to overlook important matters, including reviewing and updating your estate plan. Estate plans are intended to manage an individual’s financial and healthcare matters by allowing clients to choose who will make decisions for them when they no longer can. These proposals can be simple or sophisticated depending on an individual's preferences, circumstances and needs.
These are some common elements of estate planning:
- Powers of attorney
- Beneficiary designations
- Property ownership
- Life insurance policies
- Retirement accounts
- Estate taxes and business successions
If you already have an estate plan, it will need to be revamped when you divorce or soon thereafter. Your original arrangement was formed under circumstances that no longer exist. Revising your plan is essential as you lay a straightforward path for you and your loved ones when you no longer have that ability. (For more, see: How to Manage Your Finances Through a Divorce.)
If you do not yet have a plan, the time for organizing your wealth and welfare is now. Divorce is a sad period for many people, but it can also be an opportunity to make positive changes in your life. Make this a time of empowerment as you work to gain control of your assets and your wellbeing.
What About a Will?
As you go through changes during a divorce, reviewing your will should be a priority. A will is a legal document that is utilized in distributing your assets to your beneficiaries when you die. When wills are created by couples, the spouse is usually the executor of the will and the main beneficiary of the estate. When a separation is underway, it’s unlikely this document still matches the designee’s desires or intent.
In most states, the law automatically removes your spouse from benefits in your will when you divorce. The entire will is not revoked - it just treats your spouse as if they are deceased. In some states, the whole will is retracted as soon as the marriage ends. Either way, your former spouse no longer has rights in your estate as beneficiary, executor or administrator. There are a few states where the will still stands when you divorce and your spouse’s rights are intact until formal changes are made, so it’s important to know the specific laws in your state as you divorce.
The rules listed above only apply to your spouse. If there are terms in your will regarding your spouse’s children or other relatives, their provisions stay in place and are not altered as the marriage dissolves. The best and safest way to handle your will during divorce is to cancel it and generate a new one as soon as you can. Even though most states revoke your spouse’s rights when you divorce, this law is only employed once the divorce is final. If you are in the process of getting a divorce, your spouse still holds legal claim to part of your estate. (For more, see: Get Through Divorce With Your Finances Intact.)
What If No Will is in Place?
If you don’t have a will in place, now is the best time to start your outline. Dying intestate is the term used when someone dies without a will in place. When this happens, the state determines how your assets are dispersed. If you pass away before your divorce is settled, your spouse could inherit a large part of your fortune. Fortunately, most estate planning documents are relatively simple and fairly inexpensive to amend. The process of modifying your plan should begin as soon as divorce is pending.
Are Trusts Important During Divorce?
A new living trust is also needed when you divorce. Trusts can be complex even without the involvement of divorce. The type and intent of an existing trust will determine if the trust needs to be repealed and redone or whether it can just be revised. A trust is especially beneficial for divorcees with children. It creates opportunity for establishing plans for future allocations to children, and it can be very advantageous if you ever remarry.
If an irrevocable living trust is in place, it cannot be altered despite the divorce. In an irrevocable living trust, all assets are passed on and complete control is signed over to the trustee right away. Irrevocable trusts established during a marriage are usually designed for the benefit of the children. The dissolve of a marriage typically would not change this intent. If either spouse has access to the trust and there is possibility of abuse, the court may decide that the trust is closed to the parties and that only the beneficiaries may reap the benefits.
If the trust is revocable and the couple is still in command of the assets, then the trust can be modified with new terms or it can be dissolved. If the trust is disbanded, then the assets must be recorded in the couple’s divorce documents and related income taxes must be paid.
What About Powers of Attorney?
Powers of attorney are powerful legal documents that assign decision-making authority to a third party. If you are unable to make your own decisions due to illness or incapacity, a power of attorney can act on your behalf. If your spouse has been assigned as your power of attorney for health and financial matters, both documents need to be changed when the marriage dissolves. When changing your power of attorney, appoint someone you trust and can depend on to fulfill your intentions and make decisions in your best interests.
Empower Your Position
Divorce is a challenging event to undergo and the aftermath of this process can linger for years. Dealing with your estate plan at the same time of your divorce can seem overwhelming. While this may be true, planning for your current circumstances can also be an empowering experience that will make you stronger and more at peace with your new reality.