Finances: Where There’s a Will: Updating Your Estate Planning After a Divorce
Too many divorced people — especially parents — put off estate planning or skip it entirely. Many are simply uncomfortable talking about anything that relates to their death, financial or otherwise. After all, things are rough enough with a divorce on your hands. But if you’ve known anyone who died without a will, or failed to update their instructions after a change in family circumstances, such as a divorce or remarriage, then you have seen the heartache — and the headaches — that lack of planning can cause.
“A will is very important, especially in the event of a divorce,” says Jeffrey Leving, a Chicago-based attorney and founder of the Web site DadsRights.com. “You have to know you are protected and the kids are protected. An irrevocable trust is also a good idea — that means although the father can’t touch the money, which transfers to his children, it guarantees than any creditors can’t get at the money, either. In a divorce, creditors pop up all over the place, so it’s important to protect your assets and a will and an irrevocable trust are great ways to do that.”
Without a will, Leving adds, the state you reside in takes over, and the estate will proceed to probate, which on average lasts nine months. This would tie up the financial resources for the remaining family during this period. The time lag might place undo financial hardship on any children, and family members who depend on you for financial support.
If there are no children involved, the divorced individual might like to direct their assets to family members, friends or a charity, certainly not to the ex-spouse. If the divorced individual remarries and still hasn’t amended his or her will, further headaches can arise. Should they die, the new spouse is generally entitled to one-half of the deceased spouse’s estate — thus effectively disinheriting the children. The new spouse may not be the caregiver of the children either, and therefore the money won’t go to your kids, who need the financial support the most. So yes, the stakes are high.
Yet, a will is often one of the first things that people overlook, says Jody D’Agostini, a certified financial planner at AXA Advisors’ in Woodbridge, N.J. “The downside is that ignoring a will could be of great consequence should one die before the assets have been redirected,” says D’Agostini. “The will controls where one’s assets go upon death. With all the emotional turmoil of divorce, the divorcees often move on and forget to address this important issue. The result can be that your ex-spouse gets an unexpected windfall upon your early demise or your children’s financial future is being controlled by a court-appointed stranger.”
Typically, the spouse receives or inherits the property that a will can control, so the instructions on a will need to be addressed and amended. “Wills, health care proxies and powers of attorney should be looked over by a lawyer to be sure that all intentions are considered and new situations are addressed,” says D’Agostini. Of particular importance is guardianship of minors in the event of death and health care directives in the event of disability.
The good news is that getting estate planning help for a will or a trust isn’t that expensive or that complicated. “Most divorce lawyers can’t do wills but a good estate planning attorney can do it easily,” adds Leving. “It shouldn’t cost more than $1,000 to handle the entire will process, or to create a trust.”
ESTATE PLANNING DOCUMENTS TO CONSIDER AMENDING:
1. Beneficiary designations for Employer Retirement Plans, IRA’s, Annuities, Life Insurance and Health Savings Accounts
2. Will
3. Health Care Powers of Attorney and Living Wills
4. Powers of Attorney
5.Revocable Trusts
6.Irrevocable Trusts
7.Transfer on Death (TOD) investment accounts
8. Payable on Death (POD) bank accounts. O
Once you dig into the will process, you’re going to have to ask yourself some critical questions. At the top of that list is determining who you want to your assets to. “That can be tricky if minor children are involved,” says D’Agostini. “The court would then appoint a guardian to make decisions on behalf of the minor child in regards to the disposition of the assets. The guardian also oversees the management of these assets, and what they will and will not be used for. These may not fit with a divorced person’s needs.”
The answer? Assign a Power of Attorney (POA), which lets you appoint whomever you wish to handle your business and financial affairs in the event you should ever become physically or mentally incapacitated. Designating a Power of Attorney for your retirement account helps insure that distributions or transactions will continue according to your wishes even when you are unable to give direction to your plan administrator.
To avoid any confusion, you may want to list all the actions it covers, such as: providing direction for investments; requesting distributions; making contributions and changing beneficiary designations. You’ll want to be sure that your financial institution or plan administrator has a copy of your document, and that it satisfies their requirements. And, it goes without saying, be sure to choose someone you trust to execute your Power of Attorney.
“You must be careful if you leave the assets directly to an adult guardian,” says D’Agostini. “You need to have confidence that they will use the money as you desire. They would now be entirely in control of the assets and could use the money as they so choose without oversight. Also, the funds would be susceptible to any creditors that they might have.”
Also, if you have major revisions to make to your will, the best call may be to write a brand new one, rather than update the existing will. According to Michael Sheehan, partner and estate planning attorney at Preti Flaherty, a Portland, Maine, law firm, any new will that you do create should clearly state that it replaces any and all previous wills you may have drafted and signed. He also advocates physically destroying the old will once your new one is completed and legal.
You’re almost at the finish line — but not yet. According to Mary Prior, a New York City financial planner who runs a divorce counseling site, updating your will is critical to securing your loved one’s financial future, but there is still more to be done. “Of course, it is important to update your will after divorce but it is equally important to update beneficiary designations,” says Prior. “Many people believe that their will controls who will inherit all their assets but this is not accurate.”Assets held in retirement accounts, IRA and 401(k) accounts, for example, do not pass to beneficiaries by a will. So if your ex-wife is your retirement plan’s beneficiary, she’ll get your money. “The person you have named as beneficiary in the retirement account inherits the assets in these accounts,” says Prior. “Same thing with life insurance proceeds. They are paid tothe individual named as beneficiary within the policy. This is extremely important since much personal wealth is tied up in retirement accounts.”
Again, some good news. Beneficiary designation forms can be obtained from your broker, bank, or even online, adds Prior. If you have an IRA with Smith Barney, for example, you can go online or ask them to send a beneficiary change form and change it yourself. Once your will and retirement accounts are updated, stay on top of things, and keep revising your will periodically, about every two years, as your personal circumstances, finances, and tax legislation change.
Bear in mind that an-out-of-date document is a dangerous document and can cost you in terms of taxes and unnecessary duress on your family. The big picture? Like most elements of post-divorce planning, think like a boy scout and be prepared. While wills can be complicated, they’re also a necessity — just imagine how tricky it is to distribute your assets after a divorce without one. If you value your loved ones and wish to spare them future headaches, do the responsible thing and plan ahead.
