Preparing for Divorce and Estate Planning
- February 17, 2015
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Our estate planning blog knows preparing for divorce can be difficult, even for people who believe it’s for the best, due to the emotions and stress involved. During this time, many spouses aren’t thinking ahead to estate planning, but during and immediately after a divorce is one of the most important times for a person to have finances in order. Therefore, it’s important to be aware of estate planning issues that might arise once the divorce is final.
Preparing for Divorce – What is Marital Property?
One problem that many people face preparing for divorce is the difficulty of determining what property is marital property instead of separate. In most cases, separate property is that which belonged to one spouse before the marriage. The problem is, assets can be converted from separate property to marital property if they are commingled with marital assets. For example, a spouse could gain an interest in a property acquired before the marriage if marital funds were used to do renovations or even make monthly mortgage payments.
Preparing for Divorce – Changing Beneficiaries
Another issue is that many people think they don’t need to change beneficiaries on retirement accounts or life insurance policies. The divorce does not automatically void those prior designations; it only terminates a spouse’s right to inherit if there was no will. A person without children may not even need a life insurance policy following divorce, so that is something to consider when making changes. Any bequests in a will left to a named spouse will still go to that individual. If a person dies following separation or divorce, before changing beneficiaries or amending a will, the former spouse could wind up with everything. In addition, many people forget to close joint bank accounts following the divorce, leaving the former spouse an open window into their finances.
Divorce also doesn’t automatically revoke a power of attorney granted to a spouse in most states (with a few exceptions). One mistake some people make preparing for divorce is not to revoke those powers of attorney, leaving the former spouse with authority to make decisions after the marriage ends. It may be necessary to speak to a local attorney to revoke power of attorney designations.
Avoiding Problems When Preparing for Divorce
One way to avoid many of these issues preparing for divorce is to create an irrevocable family trust. A house owned by an irrevocable family trust belongs to the family trust, not either spouse, thus helping with risk mitigation. Creating the family trust before the marriage can help support a claim that a house or other asset is one spouse’s separate property. Creating an irrevocable family trust fund may also be a way of avoiding a potentially awkward situation by requesting a prenuptial agreement. The trust could be the listed beneficiary on any accounts or insurance policies and the sole legal heir listed in a will, meaning that the testator need only change the beneficiary of the trust, instead of contacting several institutions or amending multiple documents.
Finally, a revocable trust could be considered a marital asset and divided as part of the divorce proceeding. Assets in an irrevocable trust fund do not belong to either spouse and cannot be divided.
If you need help strategizing a plan specific to you and your family’s needs, email us at email@example.com or call (888) 538-5872 for a free 30 minute consultation.
TELL US what you think about preparing for divorce in the Comments Box below. What is the craziest divorce story you have heard or experienced? Why?