Four Key Considerations During Divorce Estate Planning
Author: Miod & Company
Date: October 21, 2022
Category: Business Valuation, Family Law, Litigation
Average Time Reading: 4 minutes
You and your partner have made the difficult decision to divorce. The next step? Choose how to go about splitting all your belongings: your house, the kids, and your bank account. It’s common to want to be prepared for every step of your life with your significant other, but most married couples do not envision a divorce occurring later on. For example, what happens to your estate in the event of a divorce?
A divorce is a life event that will undoubtedly change your estate plan. The dissolution of your marriage will impact your estate planning goals and strategies, including life insurance, beneficiary designations, and asset protection issues associated with the situation.
There are many more estate planning components to consider during a divorce. In this article, we’ll talk about the four crucial tips that you should keep in mind when divorce estate planning is on the table.
Understand What Changes Are Required in Your Existing Estate Planning Documents
As a first step in the process, look over all of the documents you and your spouse formerly agreed upon and decide what needs to change from there. Everything that you and your spouse planned together, from your will, health care proxy, life insurance, and more—most of these will need to be revoked and/or updated.
One of the most common things that happen in a divorce is that one spouse gets custody of the children. This means that the non-custodial parent has to make changes to their divorce estate planning documents so that they reflect this new situation. These documents may also include details about who receives guardianship of your children after your death. Some people may be okay with their past partner taking the kids if they’re still on good terms. If not, you may want to replace their name with another’s, such as your parents’ or a friend you trust.
In addition, a health care proxy, or the person who is in charge of your health care decisions, will be another change to consider. While you can leave it as is, it’s understandable to change it to a parent, friend, or future spouse instead. If one spouse has health insurance coverage for another spouse and was paying for such coverage prior to their marriage but stopped paying after their marriage ended, then that person may have to provide proof that they no longer need such coverage so as not to lose it.
These are just a few examples of how the courts can impact an estate plan during divorce proceedings. If you do not take these situations into account when creating an estate plan, then you could end up losing out on an important part of your financial future
Make Modifications to Your Trust–or Create One
A trust is a legal entity that transfers assets to beneficiaries upon the death or retirement of an owner. You should think about opening a trust if you don’t have one already. Trusts can be advantageous in providing funds to the beneficiaries without the hassle of the probate process. Trust assets usually don’t undergo the probate process because a trust agreement stays private.
You can set up a trust to handle alimony and child support payments as well as any other future expenses you may incur during your divorce. You can direct funds to your heirs during this process, so they can take care of themselves without worrying about money.
If you already have a trust in place, you will want to look it over to ensure that all terms are agreeable as you go through your divorce. You have the option to designate someone to control the funds in your trust to make sure your children receive them.
Lastly, as part of the federal tax reforms that went into effect in 2018, setting up a trust can provide you with some tax benefits for divorcees. The IRS allows a tax deduction for income distributed to beneficiaries through irrevocable trust funds. Irrevocable trusts do not allow you to make changes after you sign them. These tax advantages are due to the fact that contributions to the trust are generally subject to gift tax requirements during your lifetime. The current gift tax exemption rate for individuals is up to $15,000, or $30,000 for married couples filing jointly.
Know the Ins and Outs of Your Life Insurance
Life insurance is a valuable tool for two reasons. First, it can help protect your family’s financial stability if something happens to you. Second, it can help pay for your spouse’s future expenses if they become a widow or widower. That said, there are certain things you should be aware of when it comes to buying life insurance—and one of them is how the policy will be paid for. It is also crucial that you know what the policy guarantees. If there is a chance that the policy will not be paid in full, be sure to make this known before signing any paperwork.
If you’re buying life insurance on your own and not as part of a joint policy, you’ll need to decide whether you want your premiums paid in monthly installments or as one lump sum. If you choose the latter, make sure that your spouse knows about this, so he or she has time to budget accordingly.
If you are purchasing a joint policy and want to split payments between spouses, make sure that each person understands their responsibilities and how it will be funded before purchasing the policy.
Sharing life insurance with your spouse is normal, but what happens to it when you go through a divorce?
Reviewing your life insurance policies is a great way to understand how your separation might affect them—be familiar with their guarantees, how they’re paid, who owns them, and how you can change the beneficiaries.
Most likely, whoever’s name the policy is under will have the power to change who it benefits; if the owner is trusted as well, it can help you and your family avoid financial problems after the divorce.
Change Your Acting Team!
From changing the future guardians of your children and your beneficiaries to your powers of attorney, you need to assign trustworthy people to your documents moving forward.
This goes for more than just your will. Your life insurance, retirement accounts, TOD (transfer on death) accounts, and others are also important to reassess.
A power of attorney (POA) is the giving of power for another person to act for you in times when you cannot be present, such as illness, death, etc. In marriage, your significant other is often the one appointed to the role.
In a divorce, you may want to change that.
However, these POAs don’t have all the acting power for you in the world: they can’t revoke or change your will, vote for you, or contract marriage. To understand what powers your attorney does have, talk it over with an advisor. Overall, it should be someone you can trust to act in your place.
Also, divorcees can have their own power over their beneficiaries just by signing it. For example, the state of California legally recognizes divorce as an automatic revokement of your will, unless you say otherwise.
The Next Step
Having someone on your side with expert knowledge can help you perform your revisions with ease and confidence. A public accountant or advisor can point out any gaps or overlooked documents you didn’t notice before.
Fortunately, Miod and Company is ready and willing to help you. We are on your side! Our Certified Public Accountants (CPAs) can navigate you through divorce estate planning that covers every possible problem. Schedule a free consultation to find out how we can help.
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