Let’s connect!
CPA Chat T&E Chat

Estate Planning and Divorce

Ada Clapp, Partner, Citrin Cooperman Advisors LLC / Berdon Advisors LLC

09.08.20 | T&E Chat

If you’re going through a divorce, you probably feel overwhelmed. Not only is it a difficult time emotionally, but there are a lot of legal and financial decisions you have to make to terminate your marriage. Chances are you are not thinking about your estate planning—but you really should be. Here’s why:

Every person going through a divorce needs all of his or her estate planning documents reviewed, first when the divorce is commenced and again after the divorce is finalized. In addition, during negotiations, thought should be given to the estate or gift tax implications of proposed settlement obligations.

Wills and Trusts

To start, you should immediately review your will and revocable trust (collectively your “Will”). Under the laws of some states, bequests or fiduciary appointments (e.g., executor or trustee appointments) under a Will in favor of a former spouse are automatically revoked upon divorce. However, not all states provide for such revocation. Even if your state does, revocation will be inapplicable at the commencement of the divorce and won’t apply until the final decree is entered. Revocation also won’t apply with respect to a relative of your former spouse. If you want to revoke these bequests or fiduciary appointments (particularly during the pendency of your divorce), you will have to revise your Will.

Note that even if you amend your Will, until the divorce is final, your spouse may have the right under state law to elect to receive a specified share of your estate (an “Elective Share”). Your amended Will could limit the amount passing to your spouse during the pendency of your divorce to the Elective Share, thereby ensuring that you meet, but do not exceed, your obligation.

If you have minor children, you should consider how you wish to provide for them after your death. Typically, your minor children’s other parent (your ex-spouse) will act as their physical guardian until majority. However, your former spouse does not also have to manage property you leave to your minor children. You can create a trust for their benefit and name someone other than your former spouse as the trustee. Your former spouse would have no discretion to determine how the trust assets are invested or distributed—instead, your trustee would make these decisions.

If you are in the midst of a divorce, chances are you no longer want your estranged spouse to act as a trustee of any lifetime trusts you created. As part of the negotiations, consider asking your spouse to resign where he or she is acting as trustee and to renounce any successor trustee appointments where your spouse is named.

Powers of Attorney and Health Care Directives

If you have done estate planning as a couple, you likely named your spouse as your agent to conduct financial transactions on your behalf and to make medical (and possibly end of life) decisions for you when you are unable to do so for yourself. If the divorce is not amicable, you may no longer want your estranged spouse to act as your agent. Your power of attorney and health care directive are important documents to review and update right away.

Beneficiary Designations

An individual going through a divorce should review all beneficiary designations, including those made in connection with any life insurance policies, retirement plans, IRAs, or Totten trust accounts. When you can, you may want to change the named beneficiary. Note that some states prohibit you from changing certain beneficiary designations without your spouse’s written consent or a court order while divorce proceedings are pending. Federal laws may also prevent you from making a change, such as in the case of retirement plans governed by the federal Employee Retirement Income Security Act of 1974, which requires a spouse’s consent to change the beneficiary designation. You should therefore revisit your beneficiary designations after the divorce is finalized.

Jointly Owned Property

If you and your spouse own property (e.g., real estate or financial accounts) jointly, you should address how this property will be distributed and joint ownership dissolved (particularly joint ownership where the survivor takes full title).

Consider Estate and Gift Tax Consequences

Divorce attorneys do not always consider estate and gift tax implications when constructing settlements. For example, as part of your marital settlement or divorce degree, you may be obliged to maintain insurance on your life naming your former spouse as the beneficiary. If this obligation is not properly structured, the policy proceeds could be taxed in your estate for federal estate tax purposes. Your former spouse would receive the insurance proceeds income tax-free. This is probably not the result you anticipated when you agreed to the obligation. It is therefore important to view all divorce negotiations through the eyes of an estate planner.

Post-Divorce Review

Once the divorce is finalized, you should revisit your estate plan to see whether any additional updating is needed.

Berdon LLP can help you review your estate plan to ensure that your property passes as you intend and that the appropriate individuals have authority to make important decisions for you and your children. We can also work with your estate planning attorney to help update your estate planning documents. You can reach me at AClapp@BerdonLLP.com or contact your Berdon advisor.

Ada Clapp is a Berdon LLP Senior Principal with more than 25 years of experience, as a trusts and estates attorney, wealth strategist and family office general counsel, advising high net worth individuals, fiduciaries, and family offices on a wide variety of matters. She has extensive experience advising on sophisticated income, gift and estate tax planning, philanthropy, fiduciary advisory and trust administration, family governance and family office operations.