Getting a divorce is an emotional roller coaster. But more so, it also creates several challenging financial issues which, if not taken care of early, may create long-term problems. While focusing on the emotional aspect, many people are unprepared (or underprepared) for the complicated financial concerns that must be settled during a divorce, as well as the enduring effects divorce is likely to have on both individuals, as well as their dependents. Estate planning after divorce is vital to protect your interests and consolidate your financial situation for the years to come.
The Importance of Estate Planning After Divorce
It is important to consider the future, even while most people going through divorce are focused on the more immediate financial issues like division of property, child support, and alimony. For women who build their personal and financial lives with their spouse, a future after divorce may seem stressful. But with careful financial planning, they can move forward in life confident and financially prepared.
It’s critical to review your estate plan and modify it post-divorce to consider your current circumstances. If you don’t, your beneficiaries may have to deal with some extremely trying consequences. Your estate plan comprises your will, perhaps a revocable trust, healthcare and financial powers of attorney, and your living will, and are designed to carry out your wishes in the case of your incapacity, illness, or death. In the absence of a cogent estate plan, your ex-spouse could be entitled to claim a large percentage of your assets.
Each state has its own laws that take effect once someone passes away. In the absence of a good, fully-executed estate plan, the estate will need to go through probate–the legal process for the administration of the will by the Court. This process is both lengthy and expensive to the estate. By having your estate plan current and executed, you will save your heirs a lot of time and stress, and they will receive their share of your assets sooner.
The first step for the named executor is to pay any expenses of the estate, such as debts, income, or other taxes, and final expenses of the decedent, such as hospital bills and funeral expenses. Then, the estate assets can be distributed to the beneficiaries. Generally, the assets of the decedent’s estate are available to be used as payment for unpaid debts by the decedent’s creditors. The beneficiaries of the deceased then receive the estate’s remaining assets, according to the person’s will and/or trust. A person dies “intestate“ when they pass away without a valid will in place, and the state’s intestate succession laws govern what happens to the assets.
The best way to control how your estate is allocated to your loved ones after your passing is through an estate plan. You can specify which assets are distributed to which beneficiaries (like minor children) and choose a personal representative (executor) who will carry out your instructions. In many situations, a deceased person’s spouse serves as the primary beneficiary. After a divorce, your estate plan must be revised to update this; otherwise, your ex-spouse would have a legal claim to assets from the estate.
Choosing a Beneficiary for Estate Planning
Beneficiary designations are a major consideration for anyone creating or updating their estate plan. In addition to selecting beneficiaries for your will or trust, you will also need to name beneficiaries for bank accounts, retirement accounts such as 401(k)s and IRAs, life insurance policies, annuities, and other financial instruments that require a beneficiary. As part of your divorce settlement it is possible that your former spouse is required to carry life insurance with you as the named beneficiary to cover child support and spousal maintenance payments to you should he pass away before completing them. Since you may have already established beneficiary designations for these types of accounts (savings bank accounts or retirement accounts), it’s crucial to review and update them to avoid an unintended result that doesn’t align with your wishes in your estate plan.
How to Update Your Estate Plan Following a Divorce
Making important decisions about a number of financial matters is necessary during the divorce process which will determine the assets that become part of your estate as a single person. Although you can (and perhaps should) implement a temporary estate plan during your divorce, most individuals finalize their divorce agreement before revisiting their estate plan,. When it comes to updating your estate plan to consider the circumstances of your divorce, it is advisable to engage an experienced attorney that practices estate planning. The amount of property, assets, and debt obligations has probably changed dramatically as part of your divorce, depending on the particulars of your case. Your estate plan needs to be carefully reviewed considering your new separate assets.
Be certain to change the beneficiaries in your retirement plans or accounts and any private investment accounts to exclude your ex-spouse. You can analyze all the assets and accounts that have beneficiary designations with the assistance of an estate planning attorney, who can also walk you through the procedure of modifying these designations. It is best to create comprehensive estate planning documents incorporating the modified beneficiary designations, as well as updating your healthcare directives.
The founder of Bridge Divorce Strategies is a Certified Divorce Financial Analyst® Professional and she will help you navigate through the intricacies of the divorce process to ensure that you make informed decisions to safeguard your financial future.
Any long-term financial arrangements between you and your ex-spouse, like a child support order or an alimony agreement, need to be considered as you are updating your estate plan. If you are the recipient, these arrangements terminate with your passing. However, the passing of your former spouse does not relieve his estate of these obligations. Often, life insurance on the payor is used to guarantee the balance of these payments in the event that his estate is not large enough to cover them.
When Should You Start Creating Your Estate Plan?
It may be prudent to start updating your estate plan even before you are divorced since either you or your spouse could potentially pass away during the divorce process. A good example is your financial power of attorney. If you were to become incapacitated while still legally married to your spouse, this power of attorney determines who will manage your financial affairs on your behalf. If your spouse is listed as your power of attorney but you no longer want them to oversee your finances, you must withdraw the power of attorney and notify all relevant financial institutions of the change. If you don’t do this, your spouse could potentially use this power to redirect your assets to himself. However, always consult with your family law attorney regarding what changes you can legally make during a divorce.
Update any healthcare directives you may have, especially your healthcare power of attorney. This form, also known as a patient advocate designation or health care proxy, enables you to designate a third party to make medical decisions on your behalf if you aren’t able to make them yourself. It would normally make sense for this person to be a spouse. But in a divorcing situation, you may prefer to choose a different family member or a friend to fulfill this role for you.
Updating any trusts or wills to reflect your divorce status is vital. Many divorced people have no desire to leave any assets to an ex-spouse. Under Arizona law, a divorced person’s will remains valid if it has not been updated post-divorce, but the ex-spouse is disqualified as a potential beneficiary of the estate.
Keep Your Beneficiary Designations Up to Date
Don’t forget to update the beneficiaries on other accounts, such as life insurance policies, retirement accounts, bank accounts, annuities, and other financial accounts that have a beneficiary designation in addition to revising estate planning documents like your will, trust, and powers of attorney. To ensure that child support or spousal maintenance continues if your ex-spouse passes away, requiring them to carry a life insurance policy with you named as the irrevocable beneficiary helps to protect you financially. This should be made part of your divorce agreement.
While divorce is a difficult process to navigate, having the right professionals on your team–your family law attorney, your financial expert, your estate planning attorney, and perhaps a mental health professional–can make a world of difference in your outcome. Before considering any adjustments to your estate plan, always speak with an expert family law attorney to get the right advice.
At Bridge Divorce Strategies, we provide caring support and expert financial advice to women going through divorce. From identifying your financial standing and needs to creating a plan for tomorrow and supporting your lifelong wealth management, we will be with you at every step of the way.
To know more about how we can help, contact us via phone or email, or book an introductory call with our founder, Julie Kern, CPA, CFP®, CDFA®.