One area that is often
overlooked in the divorce process is the need to update estate planning. Most
people would agree that their ex-spouse is the last person they want to inherit
their assets when they die—or to have that person make life and death decisions
for them. But that is exactly what can happen – and often does – when these
documents are not updated.
Beneficiary
Designations
Assets that have beneficiary designations (e.g., life
insurance policies, employer retirement plans, IRAs, annuities, health savings
accounts, investment accounts and some bank accounts) are not controlled by a
will or trust. Instead they will be paid directly to the person listed as
beneficiary (unless that person is deceased, is a minor, or is incapacitated
when the insured dies). Because most married people name their spouse as
beneficiary, these should be changed right away.
However, naming the right
beneficiary is critical. This is especially true for tax-deferred plans because
of possible estate and income tax issues and the potential for long-term
tax-deferred growth. Be sure to seek expert assistance before naming a
beneficiary on these accounts.
Children and Other
Beneficiaries
If you name children as
beneficiaries and they are minors when you die, a court guardianship must be
established for them until they become age 18—at which time they will receive
the entire inheritance. Until then, the other parent (your ex-spouse) could be
named by the court to manage the funds. Naming another individual (for example,
your parent or sibling) as beneficiary with the understanding they will use the
money to care for your children until they are older is also risky. You have no
guarantee they will follow your instructions, they may be tempted to use the
money for their own needs, and the money would be exposed to their creditors.
Naming a trust as the beneficiary instead and selecting your
own trustee (which may still be your parent or sibling) is a much better
choice. A trustee can be held liable if he/she misuses the trust assets. An
ex-spouse can be prevented from having access to the money, and you can control
when your children will inherit. Money that stays in the trust is protected
from irresponsible spending, creditors, and even spouses. For all these
reasons, a trust is an excellent choice as beneficiary instead of an
individual, regardless of his/her age.
Your Will and/or
Living Trust
If you do not update your will or trust, your ex-spouse may
inherit your assets. And if he/she remarries, the new spouse and his/her
children could inherit your assets, leaving your children and family with
nothing. If you provide support to your parents or others, be sure to include
them in your estate plan.
If you have minor children, you
need to name a guardian for them in your will. (Even if you have a living
trust, a simple will is required to name a guardian and to direct any forgotten
assets into your trust.) Upon the death of one parent, usually the surviving
parent will become the sole guardian. But if your ex-spouse has also died, had
his/her parental rights terminated, or becomes an unfit parent, the court would
have to appoint a guardian and would appreciate knowing your choice.
Most married couples give each other the power to make
health care decisions, including those regarding life and death. Financial
powers are also usually given to each other so that one can manage the other’s
financial affairs without interruption. These are often quite broad, including
the ability to buy and sell real estate, open and close financial accounts,
change beneficiary designations, collect government benefits, etc. Instead of
your ex-spouse, you can name a parent, sibling, close friend or adult child to
have these powers and act for you when you cannot.
Guidance and Assistance
You probably need an experienced attorney more now to help
you with updating your estate plan than you did when you were married. Our Palo Alto Living Trust Lawyers are available to advise or point you in the right direction. Don’t
procrastinate on this. Make sure you protect yourself, your children and others
who depend on you.
