Divorce and Estate Planning
The risk of having an ex-spouse making critical medical decisions if one becomes incapacitated or inheriting a lifetime of wealth if a spouse dies while the separation agreement is being prepared should motivate both parties to update their estate plans before a divorce is finalized.
Power of Attorney Documents
Even when a divorce begins as an amicable breakup, these relationships can deteriorate unexpectedly. Documents, including Power of Attorney, Medical Power of Attorney and HIPAA release forms, should be revised immediately to reflect the change in the relationship. If a divorce is contentious, one spouse could use the Power of Attorney to empty financial accounts. The POA will need to be revoked and a new one executed. If living, a sibling, trusted friend, or parent is commonly chosen as POA. The named individual should be asked if they are willing to take on the role and provided with the necessary information.
Changes to Wills
Spouses usually name each other as mutual executors, taking on the tasks of administering an estate for one another. During divorce proceedings, it would be wise to have a will updated, even if only a few items are changed. For instance, another person besides the spouse should be chosen as the executor. If there are minor children, review the choice of the nominated guardian.
Trusts and Beneficiary Designations
The terms of the divorce property settlement will likely impact the ownership of trusts, insurance policies, investments and bank accounts. Whether changes can be made before the divorce is finalized will depend on each situation.
Assets in a revocable trust may be subject to equitable division. If the couple has an irrevocable trust, the assets in the trust are not considered marital or community property. A non-beneficiary spouse may trace the source of the assets in the trust to push back against how assets in the trust are divided. This is where estate planning meets divorce law.
Distribution of Non-Retirement Assets
Spouses may transfer property between themselves with no tax consequences. However, property divided incident to divorce should occur within one year of the divorce being executed. The IRS will consider transfers made within six years of the divorce as being related to the end of the marriage, as there are cases when property can’t be easily transferred, or one spouse may have hidden assets from the other.
Division of Retirement Assets
Certain assets, including pensions and retirement funds, require a Qualified Domestic Relations Order (QDRO) to direct how assets are divided in a divorce. This court order issued by a state court allows a person who is not the owner of the retirement plan or pension to receive all or part of the account.
Estate Planning Provides an Additional Layer of Protection
An updated estate plan ensures that your wishes are fulfilled, and the family is taken care of if something should happen during the divorce. Ensuring that an ex-spouse doesn’t receive assets and protecting your estate from claims after death is essential.
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