Going through a divorce can be a traumatic experience — not to mention a time-consuming and expensive one. So it’s no surprise that separating couples often overlook the impact of divorce on their estate plans. But neglecting to update your plan can lead to unintended consequences.
Update Your Will and Trusts
Unless you wish to provide your former spouse with an inheritance, you should — as soon as possible after you decide to divorce — amend your will and any trusts to eliminate him or her as a beneficiary. In addition, unless you’re comfortable with your former spouse administering your estate or controlling your wealth, you should designate someone else as executor or trustee.
This is true even if you live in one of the many states where divorce automatically nullifies any gifts or bequests to an ex-spouse and automatically revokes an appointment of a former spouse as executor or trustee. First, if you die before the divorce is final — even if you’re legally separated — your spouse will still inherit in accordance with your will or revocable trust and his or her appointment as executor or trustee likely will stand.
Second, typically, the laws in these states treat your estate plan as if your former spouse had predeceased you. If you’ve named contingent or residual beneficiaries, any property your spouse would have received will go to them. If not, the property will pass according to the laws of intestate succession. But relying on these laws can be dangerous.
Suppose, for example, that your will leaves all of your assets to your spouse or, if your spouse predeceases you, to your children. If you and your spouse divorce, your children stand to inherit your estate. But what if your children are minors? In that case, the court would appoint a guardian to manage their inheritance and that guardian would most likely be your former spouse.
To avoid this result, it’s best to update your estate plan. In this case, for example, you might want to leave your assets in a trust for the benefit of your children, managed by a trustee of your choosing.
Finally, keep in mind that, in many states, as long as you’re legally married, your spouse will retain elective share or community property rights to a portion of your estate. So while updating your plan soon after you decide to divorce can reduce the amount your spouse will receive if you die while you’re still married, it’s difficult to disinherit him or her completely before the divorce is final.
Change Your Beneficiary Designations
Amending your will or trust isn’t enough if, like most people, you own assets that are distributed on death via a written beneficiary designation. These assets include life insurance policies, IRAs, other retirement plans including 401(k) plans, payable-on-death (POD) bank accounts and transfer-on-death (TOD) brokerage accounts.
In some states, a divorce automatically revokes spousal beneficiary designations under certain circumstances. But, again, relying on state law is risky. Third parties, which may not be aware of your divorce, aren’t liable for distributing assets to the person named on a valid beneficiary designation form. So, to ensure that your wishes are carried out, it’s best to contact your employers, financial institutions, insurance providers and brokerage firms and submit change of beneficiary forms.
Be aware that, if you’d like to change the beneficiary of a qualified retirement plan to someone other than your spouse if you’re still married, you’ll need to obtain your spouse’s consent. This requirement no longer applies once your divorce is final.
Revoke Your Powers of Attorney
Most married people execute powers of attorney or directives that authorize their spouses to make financial or health care decisions on their behalf should they become incapacitated.
If you’ve signed such documents, and you don’t want your former spouse to exercise such authority, be sure to revoke them. And if you’ve provided copies to third parties, such as financial institutions or health care providers, notify them in writing of the revocation to ensure that they don’t rely on them.
Review Your Plan
If you recently divorced, or if you’re contemplating a divorce, consult your attorney and financial/tax advisor as soon as possible to review your estate plan. In addition to eliminating your former spouse’s access to, or control over, your wealth, as a newly single person you may need to rethink your estate planning strategies.