June 21, 2012   Estate Planning

Estate Planning After Divorce


Divorce can be a painful and overwhelming process, as anyone who has gone through it knows. Once the big decision to go separate ways has been made, there are more decisions and seemingly endless paperwork—separating and re-titling assets, selling or refinancing the family home and/or relocating to a new one, custody issues if there are minor children, college expenses for older children. These tasks and more must be completed to be able to move on with your lives.
 
Often overlooked, but just as important, are changes that need to be made in your estate planning. Most people would agree that their ex-spouse is the last person they want to inherit their assets when they die—or to have that person make life and death decisions for them. But that is exactly what can happen if these documents are not updated. While some states do have provisions designed to keep an ex-spouse from inheriting from you, they vary greatly from state to state and they do not apply to all of your assets. The only way to be sure your assets will go to those you want to have them is to update your estate planning—and the sooner the better.
 
Beneficiary Designations
Assets that let you name a beneficiary (life insurance policies, employer retirement plans, IRAs, annuities, health savings accounts, investment accounts and bank accounts, etc.) are not controlled by a will or trust. Instead they will be paid directly to the person you have listed as your beneficiary, unless that person is deceased, is a minor, or is incapacitated when you die (in which case, the court will step in). You probably named your spouse as beneficiary when you were married, so you will need to change that. Usually all you need to do is request the appropriate form and list a new beneficiary. However, naming the right beneficiary is critical.
 
If You Have Children
If you name your children as beneficiaries and they are minors when you die, a court guardianship must be established for them until they become age 18—at which time they will receive the entire inheritance. (Forget college. Think expensive sports car and fun times.) The other parent (your ex-spouse) could be named by the court to manage the funds until that time.
 
Naming another individual (for example, your parent or sibling) as beneficiary with the understanding they will use the money to care for your children until they are older is also risky. You have no guarantee they will follow your instructions, they may be tempted to use the money for their own needs, and the money would be exposed to their creditors.
 
Naming a trust as the beneficiary instead and selecting your own trustee (which may, indeed, be your parent or sibling) is a much better choice. A trustee can be held liable if he/she misuses the trust assets. You can keep your ex-spouse from having access, and you can control when your children will inherit. Money that stays in the trust is protected from irresponsible spending, creditors, and even spouses.
 
Tax-Deferred Savings
Naming the right beneficiary is especially important for these accounts because of the tax consequences and the potential for long-term tax-deferred growth. After you die, required minimum distributions are generally based on the life expectance of your beneficiary; the younger the beneficiary, the longer the tax-deferred growth can continue. But instead of naming a young beneficiary as the beneficiary, you can set up a “stand-alone retirement trust” to receive the distributions for your beneficiary. Distributions will still based on his/her life expectancy, but this arrangement will prevent the beneficiary from cashing in and destroying your plans for long-term growth.
 
Your Will and/or Living Trust
If you do not update your existing will or trust, your ex-spouse may inherit your assets. If he/she has remarried or remarries in the future, your assets could end up with the new spouse and his/her children—completely disinheriting your own children or family! If you provide support to your parents or others, be sure to include them in your estate plan.
 
If you have minor children, you need to name a guardian for them in your will. (Even if you have a living trust, a simple will is required to name a guardian and to direct any forgotten assets into your trust.) Upon the death of one parent, usually the surviving parent will become the sole guardian. But if your ex-spouse has also died, had his/her parental rights terminated, or becomes an unfit parent, the court would have to appoint a guardian and would appreciate knowing your wishes.
 
Health Care Powers of Attorney and Living Wills
These are medical documents that let you name someone to make health care decisions for you if you are unable to make them yourself. Most married couples name each other. But now that you are divorced, you probably do not want your ex-spouse to make life and death decisions for you. You can name a parent, sibling, close friend or an adult child.
 
Financial Powers of Attorney
Again, most married couples give each other power of attorney so that one can manage the other’s financial affairs without interruption. These powers are often quite broad, giving this person the ability to buy and sell real estate, open and close financial accounts, change beneficiary designations, collect government benefits, etc. Instead of your ex-spouse, you can name a parent, sibling, close friend or adult child.
 
You Need Professional Guidance and Assistance
Granted, if you have recently gone through a divorce, you may feel you have had enough of attorneys for a while. But you probably need an experienced attorney more now to help you with updating your estate planning than you did when you were married. Don’t procrastinate on this. Make sure you protect yourself, your children and others who depend on you.
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