Estate Planning During a Divorce: Four Key Considerations

You have planned your life carefully. With your spouse you have drawn up a will and established trusts to organize your estate after your deaths. You have made decisions about the guardianship of your children should anything happen to you both before they come of age. Together, you have put insurance policies in place for health, life, and disability. And most likely you are each named beneficiaries on the other’s retirement plan.

The only thing you didn’t plan for was divorce.

What happens to your estate plan now? Here are some key strategies to make sure your wishes are protected during and after the process of separation and divorce.

Be familiar with existing documents and understand what needs to change now that you are getting divorced.

These documents include your will, health care proxy, power of attorney, insurance policies, and any trusts you and your spouse may have established together (such as a special needs trust to set aside funds to care for a family member). Most of these will need to be updated or replaced, as you and your soon-to-be ex may have different ideas about beneficiaries and instructions once one or the other passes away.

Understand how life insurance works.

If you and your spouse have life insurance, be clear on how it is paid for and what it guarantees. Whoever owns the policy is responsible for paying premiums and keeping the policy in force and also has the authority to change beneficiaries. You want to make sure you and your family are provided for in the event of your ex’s premature death. Life insurance is an important component of any divorce settlement, to guarantee the continued flow of alimony, child support, or both, as determined by the divorce settlement. Having a trust as owner of the insurance policy is a good way to avoid gaps and pitfalls in insurance planning that might otherwise arise during or after a divorce.

Consider setting up a trust to handle alimony and child support, and to direct funds to your heirs. 

A revocable living trust will spell out instructions and requirements for paying alimony and child support. The trust’s creator – the grantor -- is required to fund the trust, which will make payments according to the trust’s provisions. The added benefit of a trust means that funds can go to beneficiaries on the grantor’s death without being tied up in the probate process. These instruments also have tax advantages for divorcing couples as part of the federal tax reforms that went into effect in 2018. Talk to your tax advisor for details about how this law affects you and your divorce settlement.

Make sure an estate planner is part of your team as you navigate the divorce process.

This is perhaps the most important part of your plan. An estate planner can review the divorce settlement and look for any gaps. Are you protected from state and federal estate taxes? What’s the impact of divorce on retirement account beneficiaries? Are you and your heirs adequately provided for in the event of your ex’s death? What about your wishes for the children if you pass away while they are still young? Divorce attorneys have a different set of concerns and may overlook these key considerations. Lastly, be sure to hire your own estate planner rather than continue with the attorney who drew up a plan for you and your spouse. Under most state laws, when couples are jointly represented, everything you tell the lawyer, even privately, is not confidential from your spouse.

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