Protecting Inheritance if Divorce is on the Horizon

Estate planning may not be the first thing on someone’s mind during a divorce. However, if it’s not addressed, an ex-spouse could end up with part or all of their estate – especially if the person dies while the divorce is pending.

Most divorces take several years, with some dragging on for more than five years if the parties are contentious or there’s significant property at stake. Until a divorce is finalized, spouses are legally married, even if they have been separated for years.

What happens if a spouse dies before the divorce is finalized?

In most cases, the spouse usually retains the right to inherit the assets of the decedent spouse. Jointly owned accounts and property with right of survivorship automatically transfer to the named co-owner.

Assets with beneficiary designations pass to whoever is listed on the beneficiary forms. If it’s your soon-to-be ex, the family won’t be able to do anything. While court cases are possible, success is not guaranteed.

Can you change your will during a divorce?

Legal rules and court orders may restrict the changes that can be made to estate planning documents once divorce proceedings begin. Be sure that any changes made comply with any restraining orders set by state law or in the divorce documents, even if they are not finalized.

Check all beneficiary designations on life insurance policies, bank accounts and investment accounts. Depending on the jurisdiction, you may be able to make changes to these documents.

Any Power of Attorney documents should be modified. This includes a financial or durable POA, as well as a healthcare proxy or medical POA. Any Advance Directives should be reviewed and modified, as necessary. Without these documents being updated, a soon-to-be ex could be the one making critical medical decisions.

For older parents, protecting their children’s inheritances.

Similar concerns arise for older parents if a child is going through a divorce. Inheritances are generally considered separate property. However, if they are commingled with marital assets, placed into joint accounts, or used for jointly owned purchases, such as a home, they lose their protected status.

If an inheritance is in the future, parents may protect the inheritance by placing it in a trust with instructions for its use, especially if the goal is for the inheritance to be used for grandchildren’s benefit.

What happens when the divorce is finalized?

Once a divorce has been finalized and executed, the ex-spouse is treated as if they had predeceased each other. They no longer have legal standing to inherit separate assets. A will should be updated immediately, since the prior will remains in effect until a new one is executed.

Legal compliance and record keeping

Courts generally don’t want to see assets moved around during the divorce process, so be sure any changes are permitted by local law. Maintain meticulous records, which may be critical in the event of disputes.

People who don’t update their estate plans during the normal course of events are even less likely to update them during a divorce. However, this is an especially important time to protect assets for the next generation and prevent unintended inheritance to a soon-to-be ex-spouse.

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