Divorce is a Life Event to Trigger Changes to Your Estate Plan
You know the importance of estate planning and have taken careful consideration to have your "ducks in a row." You drew up a will and trust with your spouse, purchased the right amount of life insurance for your family, designated the appropriate beneficiaries and even decided on guardianship of your children in the event of a death, so your estate plan is in place. However, the one thing you and your spouse did not plan for is happening - a divorce. Considering your estate planning during a divorce is critical. In our previous post, "Why Everyone Over 60 Should Update Their Estate Plan," we review the five major age groups that justify a review of your estate plan as well as six changes in your circumstances that trigger a review of your estate plan and divorce is definitely listed. In that post we discuss how if you get divorced, you probably won't want your assets to go to your ex-spouse or to rely upon him or her to step in if you were to become incapacitated. However, there are many more estate planning components to consider during a divorce.
Below are four key strategies to make sure your wishes are protected during and after the process of separation and divorce.
1) Familiarize Yourself with Existing Estate Planning Documents. Understand what Changes are Needed During a Divorce.
Make sure you're familiar with the array of existing estate planning documents including wills and trusts, health care proxy, power of attorney, insurance policies, and any special arrangements such as a special needs trust to set aside funds to care for a family member. During a divorce most of these should be updated or replaced, as you and your soon-to-be ex may have different ideas about beneficiaries and instructions once one or the other passes away.
2) Understand how Life Insurance Works.
You most likely have life insurance - either a policy through work or other policies that are on their own. There are many types of life insurance policies and understanding how they're being paid and what each life insurance policy guarantees is important to discover during a divorce. The spouse, employer, relative, or whoever owns the life insurance policy is responsible for paying premiums to keep the policy in force and can also change the beneficiary, or the person who is entitled to the death benefit. During your divorce, make sure you and your family are provided for in the event of your soon-to-be ex spouse’s premature death. Life insurance is an important component of any divorce settlement, to guarantee the continued flow of alimony, child support, or both, as determined by the divorce settlement. Talk to an estate planning attorney about having a trust as owner of the insurance policy. This method can be a good way to avoid gaps and pitfalls in insurance planning that might otherwise arise during or after a divorce.
3) Set up a Trust to Handle Alimony and Child Support, and to Direct Funds to Your Heirs.
Discuss with an estate planning attorney how setting up a trust during a divorce can be an effective way to handle alimony, child support and the distribution of funds to the intended heir. A revocable living trust will spell out instructions and requirements for paying alimony and child support. The trust’s creator – the grantor -- is required to fund the trust, which will make payments according to the trust’s provisions. The added benefit of a trust means that funds can go to beneficiaries on the grantor’s death without being tied up in the probate process. These instruments also have tax advantages for divorcing couples as part of the federal tax reforms that went into effect in 2018. Talk to your tax advisor for details about how this law affects you and your divorce settlement.
4) Make An Estate Planner Part of Your Team as you Navigate the Divorce Process.
You'll want to hire your own estate planning attorney instead of continuing with the attorney who drew up a plan for you and your spouse. Under most state laws, when couples are jointly represented, everything you tell the lawyer, even privately, is not confidential from your spouse. Your estate planner can review the divorce settlement and look for any gaps. Are you protected from state and federal estate taxes? What’s the impact of divorce on retirement account beneficiaries? Are you and your heirs adequately provided for in the event of your ex’s death? What about your wishes for the children if you pass away while they are still young? Divorce attorneys have a different set of concerns and may overlook these key considerations.
Estate Planning During a Divorce
There are many considerations to estate planning during a divorce. This article covers four key considerations but is not comprehensive. If you or someone you know has questions about estate planning during a divorce, or has recently been divorced and is curious how to take inventory of estate planning documents, call 440-930-2826 to schedule a free consultation. We enjoy putting to use our knowledge and expertise to provide you with the best advice on how to protect the ones you love.