Divorce is stressful, and estate planning is easy to put off in the best of times. So, it may come as no surprise that most people do not consider updating their estate plan (or creating one for the first time) following a change in their marital status. While it may be common, failing to update your will or other estate planning document once your divorce is final can have significant consequences, including an ex-spouse inadvertently inheriting from you. Below, our attorneys share their insights into what you need to know to avoid common pitfalls and to help you protect your assets.
Power of Attorney & Advance Medical Directive
A power of attorney (POA) is a document where you name an agent to make legal and financial decisions on your behalf. Many powers of attorney are drafted so that they are effective immediately, meaning the agent can use it to access information and control assets.
Similarly, an advance medical directive (AMD) nominates an agent to access medical information and to make medical decisions on your behalf if you cannot make them for yourself.
Spouses commonly name each other as their primary agent. Even if certain powers are revoked by operation of law or the terms of the document when a divorce action is filed, issues can still arise.
For example, a financial institution (or a hospital) will not automatically know that your ex-spouse is no longer an authorized user or agent if they haven’t received an updated POA or AMD. Additionally, if there is a secondary agent listed, they will automatically succeed as the primary agent which could be potentially problematic, depending on what their relationship to you is (for example, what if you named your soon-to-be ex-brother-in-law as your backup agent?).
Even if the POA or AMD is revoked, and even if your backup agent is appropriate, implementing a POA or AMD can be difficult on a good day. If they are not the first named agent in the document, and if the primary agent is still alive and competent, it may be a nightmare proving they have the appropriate authority to act. If you have an existing POA or AMD where your spouse is named as the first agent, talk to your attorney about revoking the existing documents, notifying the appropriate institutions, and replacing them with a new document naming another trusted individual.
Last Will and Testament
While any provisions in a will that relate to a spouse are automatically revoked after a divorce, prior to a divorce being final, those provisions are still valid. Speak with one of our attorneys about updating your will to remove a spouse prior to a divorce. Keep in mind, it may also be important to review your will again after your divorce is final and the marital assets have been re-allocated between you and your ex-spouse.
If you do not have a will, now is the time to develop one; doing so has countless benefits, including safeguarding your minor children(s)’ future, protecting your assets, planning for disability, and minimizing tax liabilities.
Revocable Trusts
Many estate planning clients utilize revocable trusts (sometimes referred to as revocable living trusts or living trusts) instead of or in addition to a will. These trusts can either be individual (each spouse has one) or joint (both spouses have a combined trust). Unlike wills, the provisions relating to spouses in a trust are not automatically revoked after a divorce.
Individual trusts should be updated in the same manner as a will. Joint trusts require special consideration by both parties in consultation with their respective divorce and estate planning attorneys. Because these trusts often own title to your property – such as your house or bank accounts – revoking a joint trust and following through on the retitling of assets requires careful attention.
Jointly Titled Accounts
Spouses often own bank, brokerage, and other accounts jointly between them. Prior to divorce, unless otherwise provided for (e.g., by a prenuptial agreement), most property accrued during the marriage is marital property. What does this mean? Money and assets that you earned or purchased may not only belong to you, so it would not be wise to go on a spending spree or move your money without first taking the advice of your divorce attorney on the appropriate use of joint accounts. After divorce, your settlement agreement or court order will dictate how the accounts are split between the parties.
Beneficiary Designated Assets
In our experience, this is often the most significant pitfall divorce clients encounter with regards to their estate planning. Many assets, including life insurance, retirement accounts, and sometimes brokerage or bank accounts can have named beneficiaries (sometimes also called payable-on-death “POD” or transfer-on-death “TOD”) who will automatically inherit that asset on the owner’s passing. For example, if an ex-spouse is named as a beneficiary, they will often inherit that asset, regardless of whether you are divorced or intend for it to go to your children.
Being proactive is essential. Prior to divorce, you can update your beneficiary designated assets in consultation with your divorce and estate planning attorneys.[1] After divorce, confirm that these designations have been updated, and update the designations on any Employee Retirement Income Security Act (ERISA) governed plans.
Key Takeaways
Divorce is overwhelming, and during the divorce process, estate planning is often the last thing on your mind. But ignoring estate planning can lead to potentially disastrous outcomes. By attending to estate planning during your divorce, you can ensure that you are not accidentally financially tethered to your ex-spouse. So, before you leave your divorce attorney’s office, make sure you make a stop to see an estate attorney.
We realize that this information may be overwhelming – especially while you may be dealing with the difficult time before, during, and after a divorce. Our attorneys are experienced in these matters, and can help guide you through the divorce and estate planning process simultaneously, with the expertise and compassion you need. For more information, please contact the Davis, Agnor, Rapaport & Skalny attorney with whom you typically work, or contact an attorney in our Family Law or Estate Planning Practice Groups.
[1] Certain retirement plans governed by Employee Retirement Income Security Act (ERISA), like 401ks (but not IRAs), require spousal consent to name a non-spouse as the primary beneficiary.
