If you recently divorced, it is essential to review your estate plan and beneficiary designations. Typically, these documents contain appointments of an executor, trustee, guardian or health care agent to manage financial and medical affairs in case of incapacitation.
Divorce can have unintended consequences when it comes to estate planning appointments; your former spouse will be treated as the decedent instead of you, potentially leading to unexpected outcomes.
1. Life Insurance
Life insurance is an integral part of estate planning, particularly when you have children. Not only does it provide financial security to protect your family, but it can also promote a healthy lifestyle.
Divorce can have a significant impact on your estate plan, including beneficiary designations for life insurance policies. If your ex-spouse is listed as the beneficiary of such an policy, it’s essential that you change it so that all benefits accrue to your heirs.
Altering the beneficiary designation on a life insurance policy can be an easy process. Reach out to your employer, financial professional or insurance services company for more information regarding how you can adjust the designation after divorce.
2. Retirement Accounts
Retirement accounts can be one of the most valuable assets a couple may own, yet dividing them during divorce can be an intricate and expensive process.
For instance, some retirement plans require your spouse’s consent before designating a non-spouse beneficiary on your behalf, which could affect the amount of property transferred between you and them.
Another common misstep is failing to update your beneficiary designations with the financial institution when significant changes take place.
Therefore, when you pass away, the funds in your retirement accounts are distributed according to who is on file at that financial institution instead of what was designated in your will or trust. This can create a lot of problems for those close to you, especially if one or more of them pass away suddenly.
3. Bank Accounts
Divorce can be a challenging time in anyone’s life, so it’s no surprise that many spouses neglect to update their estate plan after the divorce is finalized. However, once your settlement has been finalized, it’s essential to review your plan and assess what needs to be altered according to your new situation.
One important item not to overlook is beneficiary designations on life insurance, retirement accounts and bank accounts. Unless you’ve changed the names, your ex-spouse will inherit these assets upon your death if they pass away before you do.
Your family could suffer serious consequences if you neglect to alter a life insurance policy’s beneficiary designation. A recent Missouri case illustrates how failing to do so may result in an unexpected transfer of assets from the deceased individual’s estate to their ex-spouse.
4. Revocable Trusts
If you have a revocable trust, it may be essential to update its documents and beneficiary designations following divorce. Otherwise, your ex-spouse could inherit any assets in your trust.
Additionally, it’s essential to update your beneficiary designations in order to guarantee the proper people receive benefits from your revocable trust. For instance, if your former spouse served as your designated health care proxy, then that person must be removed from the authority to make healthcare decisions on your behalf.
Finally, it is essential to update your beneficiary designations for inherited or gifted property. For instance, if you receive a large inheritance from your parents, setting up an independent revocable trust that manages the inherited assets instead of including them directly on your beneficiary designation form can be more beneficial.
5. Powers of Attorney
Powers of Attorney (POAs) are a common estate planning tool that enable an individual to appoint someone else as their agent or attorney-in-fact for financial and healthcare decisions if they cannot make such choices themselves. If someone needs extra assistance with these decisions, POAs can be particularly beneficial.
If an individual loses mental capacity, a Power of Attorney can help avoid the need for court appointment of either a guardian or conservator. It also helps save unnecessary legal fees and time spent in the court system.
When making a Power of Attorney, be sure to select someone with the character, integrity, honesty and capacity to manage your financial and legal affairs. Grant only those powers you deem necessary, and make sure the instrument does not stipulate that your agent can alter financial beneficiaries – this could create legal and financial chaos for the principal.