Divorce brings about significant life changes, and one often overlooked aspect is the need to update your estate plan. Your existing will, trusts, and beneficiary designations may no longer reflect your current wishes or circumstances. At Purposeful Wealth Advisors, we understand the importance of revising your estate plan post-divorce to protect your assets and provide for your loved ones according to your new life situation.
Why Updating Your Estate Plan is Crucial After Divorce
- Prevent Unintended Beneficiaries: Without updates, your ex-spouse might still be named as a beneficiary on various accounts or in your will.
- Protect New Relationships: If you’ve entered a new relationship, you may want to include this person in your estate plans.
- Reflect Changes in Assets: Divorce often involves division of assets, and your estate plan should reflect your current financial situation.
- Guardianship for Minor Children: You may need to reconsider guardianship arrangements for your children.
- Tax Implications: Divorce can affect your tax situation, which may influence your estate planning strategies.
Key Elements of Estate Planning to Review Post-Divorce
1. Will or Trust
After a divorce, creating or revising a will is essential, helping to ensure that your assets are distributed according to your wishes. A will is a legal document that outlines your wishes regarding the distribution of your assets and the care of any minor children after your death. It allows you to specify who will receive your property, appoint an executor to manage your estate, and name a guardian for your children if necessary.
All people should have a will. In some situations it makes sense to have a will and a trust. One downside of having a will without a trust is that it must go through the probate process when you pass away, which can be time-consuming, costly, and public. This process can delay the distribution of assets to your beneficiaries and may expose your estate to potential disputes or legal challenges.
However, many people might also consider the benefits of incorporating a trust into their estate plan. A trust in combination with a will offers more privacy, potentially faster asset distribution, and greater control over how and when your assets are passed on, which can be particularly important if children are involved.
For someone navigating post-divorce life, a will with a trust can provide an extra layer of security and flexibility, helping to ensuring that your estate is managed in a way that aligns with your new circumstances and priorities. This can be especially critical for those who wish to protect their assets from unintended beneficiaries, provide specific financial guidance for their children’s future, or who have a large and/or complicated estate.
2. Beneficiary Designations
Many assets pass outside of a will and trust through beneficiary designations. Review and update beneficiaries for:
- Life insurance policies
- Retirement accounts (401(k)s, IRAs)
- Transfer-on-death (TOD) accounts
- Payable-on-death (POD) bank accounts
3. Power of Attorney
Revoke any powers of attorney granted to your ex-spouse and designate new agents for:
- Financial decisions
- Healthcare decisions
4. Advance Healthcare Directive
Update your living will or healthcare directive to reflect your current wishes and remove your ex-spouse as a decision-maker.
5. Guardianship for Minor Children
If you have minor children, revisit guardianship designations in your will. Consider:
- Typically your ex-spouse will be the full-time guardian of your children if you pass away
- Alternate guardians can be chosen in case your ex-spouse is unable or unwilling to serve
6. Trusts for Children
Consider setting up or modifying trusts for your children to:
- Manage assets left to them
- Specify how and when they receive inheritances
- Name a trustee to oversee the trust
Special Considerations in Post-Divorce Estate Planning
Blended Families
If you’ve remarried or plan to, consider how to balance providing for your new spouse and children from previous relationships. Options might include:
- Qualified Terminable Interest Property (QTIP) trusts
- Life insurance policies to provide for different beneficiaries
Protecting Adult Children’s Inheritances
If you have adult children, consider how to protect their inheritances from potential future divorces or creditors. Strategies might include:
- Spendthrift trusts
- Lifetime asset protection trusts
Tax Planning
Divorce can impact your estate tax situation. Work with a financial advisor to:
- Reassess your estate tax liability
- Explore tax-efficient wealth transfer strategies
Prenuptial Agreements
If you plan to remarry, consider a prenuptial agreement to protect assets for your children or other beneficiaries.
Steps to Update Your Estate Plan
- Gather Documents: Collect all existing estate planning documents, including wills, trusts, and beneficiary designation forms.
- Consult Professionals: Work with an estate planning attorney and a financial advisor to review and update your plans.
- Draft New Documents: Create new wills, trusts, and powers of attorney as needed.
- Update Beneficiary Designations: Contact financial institutions and insurance companies to update beneficiary forms.
- Review and Communicate: Regularly review your estate plan and communicate your wishes to relevant parties, such as new executors or guardians.
Common Pitfalls to Avoid
- Procrastination: Don’t delay updating your estate plan after divorce.
- Overlooking Digital Assets: Include provisions for digital assets like social media accounts and cryptocurrency.
- Failing to Consider State Laws: Be aware that state laws can impact how divorce affects certain estate planning documents.
- Neglecting International Assets: If you have assets in other countries, consider their impact on your estate plan.
Work With Us
Navigating estate planning after a divorce can be complex, but it’s a crucial step in helping protect your assets and providing for your loved ones. By thoroughly reviewing and updating your estate plan, you can feel confident that your wishes will be carried out and your legacy protected.
At Purposeful Wealth Advisors, we specialize in helping clients navigate the financial complexities of life transitions, including divorce. Our team can work alongside your estate planning attorney to help you develop a comprehensive strategy that aligns with your new circumstances and goals. We invite you to contact us for a consultation to discuss how we can assist you in creating an estate plan that provides well-being and financial clarity for you and your loved ones in this new chapter of your life.
Disclosure:
Any opinions are those of Purposeful Wealth Advisors and not necessarily those Raymond James Financial Services, Inc., or of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional.
