Divorce poses several complex financial problems to everyone who goes through the process. While the concept of divorce may seem straightforward at the outset, many people are unprepared for the complex financial issues that must be resolved in a divorce and the long-lasting implications divorce is likely to have on both spouses.
Most people going through their divorces are focused on more immediate financial concerns such as property division, child support, and alimony, but it is essential to look to the future. If you have any estate plan in place that you created while you were married, it’s vital to revisit your plan and adjust it to reflect your new situation. Failure to do so could result in very unpleasant consequences for your surviving loved ones. If you were to die unexpectedly, your estate plan as it stands currently would apply to your estate, and this may allow your ex to claim a sizable portion of your property.
What Is the Purpose of an Estate Plan?
Every state has unique laws that come into play after an individual dies. First, the deceased’s assets and debts must be resolved by distributing them to their beneficiaries. Typically, the deceased’s creditors have the right to seek compensation for outstanding debts from the contents of the deceased’s estate. Then the remaining assets within the estate are distributed to the deceased’s beneficiaries. If an individual dies without any legally enforceable estate plan in place, their property becomes “intestate,” and their state’s intestate succession laws determine what happens to their property.
An estate plan is the best method for customizing how the contents of your estate are distributed to your loved ones after your death. You can determine which of your assets go to which beneficiaries and designate a personal representative to respect your wishes. In many cases, the primary beneficiary of a deceased person is their spouse. If they divorce, it’s imperative to revisit the estate plan to account for this; otherwise, the ex-spouse would have a valid legal claim to various elements of the estate.
Revocable and Irrevocable Trusts
Trusts are common elements of modern estate plans in the US. Creating a trust as an element of your estate plan can potentially allow your loved ones to avoid probate proceedings after your death. With a trust, the contents of the trust are left in the care of a trustee designated by the trust’s creator. This trustee is responsible for distributing the contents of the trust to the trust creator’s beneficiaries. There are two types of trusts you can create: revocable living trusts, which can be modified after creation but pose tax liabilities to your beneficiaries, and irrevocable living trusts, which cannot be changed after creation but shield your beneficiaries from estate taxes because the contents of the trust no longer count as your property.
While the benefits of an irrevocable trust can be attractive to some people, it is vital to be careful in your decision if you are relatively young. For example, designating your spouse as the primary beneficiary of an irrevocable trust can be a disastrous choice if the two of you eventually divorce; you would have a challenging time withdrawing or changing the irrevocable trust and may not be able to at all. But, again, an estate planning attorney can help you determine what type of trust would be best for your estate plan.
Beneficiary Designations in Estate Planning
One key concern for anyone creating or modifying an estate plan is their beneficiary designations. Of course, they must choose which of their beneficiaries inherits their property, and it’s possible to go into extreme detail with these designations. However, if the estate owner controls certain assets, they may have had to designate beneficiaries for those specific accounts. For example, if the deceased secured a life insurance policy through their employer while married, they likely listed their spouse as their primary beneficiary.
Whenever an individual creates their estate plan, they may have previously created beneficiary designations for the accounts and assets they already owned. Therefore, if you have any reason to revise your estate plan or create a new plan, it’s essential to carefully review any beneficiary designations you already have to ensure they align with the contents of your estate plan. For example, if you listed your spouse as the primary beneficiary of your pension, but you list your child as the primary beneficiary of this asset in your estate plan, this could create a dispute during estate administration after your death.
How to Revise Your Estate Plan After Divorce
The divorce process requires precise determinations regarding various financial issues. You must resolve every one of these matters during your divorce proceedings. It’s necessary to complete your divorce before revisiting your estate plan, and it’s best to work with an experienced attorney when it comes to revising your estate plan to reflect the terms of your divorce. Depending on the unique details of your divorce, the amount of property, assets, and debts you control has likely changed significantly after the finalization of your divorce. You must carefully review your new property holdings and adjust your estate plan accordingly.
Make sure to remove your ex-spouse as a beneficiary in your estate plan as well as individual accounts you control. An estate planning attorney can help you review all the assets and accounts that have beneficiary designations and guide you through the process of changing these designations. Once this is complete, it’s best to draw up a new estate plan using the adjusted beneficiary designations.
If your divorce involved any long-term financial agreements between you and your ex-spouse, such as a child support order or an alimony agreement, these agreements typically end with the death of either spouse. You can designate property to be left to your children in the event of your death, and if you paid alimony to your ex, this payment would end when you die. Your ex cannot claim any contents of your estate instead of alimony they can no longer receive, as long as you no longer have them listed as a beneficiary on any of your assets.
Ultimately, divorce raises many questions and can complicate estate planning in several ways. If you have concerns about adjusting your estate plan after your divorce, the first step is navigating your divorce case successfully. Contact an experienced divorce attorney to secure the best possible divorce settlement before exploring potential changes to your estate plan.