Careful estate planning is inextricably linked to family relationships, and marriage comes first among those. That’s why it’s essential to be thinking about your estate plan if you’re involved in a divorce, ideally before, during, and after the legal proceedings.
As grueling, stressful, and expensive as a divorce can be, it’s a big mistake to ignore the financial planning that has to accompany it. Your investment, retirement, and estate-planning expert should be part of your team, right along with your divorce attorney. That’s not just for your own good, but for the long-term benefit of any children or other family members affected.
One obvious task that you don’t dare neglect is to make sure all your financial arrangements comply with the court’s orders enshrined in your divorce decree. Getting this wrong can be costly and painful, so it’s well worth investing in professional help to make sure it’s handled properly.
Here are some important matters to attend to. Some of these can be done during the divorce process; others have to wait until it’s finished.
As soon as possible, you should remove your soon-to-be-ex-spouse’s name from such crucial documents as your health care power of attorney. The last thing you need in an emergency is to discover that someone you thought was out of your life can still make decisions for you!
Power of attorney designations can affect far more than just medical matters. You might also have granted your spouse the right to make decisions about your bank accounts, investments or insurance policies, too. Be sure you clean these all up!
Equally important, but not as simple, is changing beneficiary designations on life insurance policies and pension plans, including 401(k) and IRA accounts. The tricky part is that you may not be able to change beneficiaries while a divorce is in progress. That’s a legal provision meant to protect both parties; often, remaining a beneficiary of a spouse’s accounts is an important lifeline for the spouse who earns less, or who may have deferred a career to work as a homemaker.
Because the stakes are so high, it’s vital to get competent advice on this subject, both from an investment counselor and from your lawyer, before you agree to relinquish any rights as a beneficiary. Likewise, if you are the owner of these instruments, expect them to be a major point of negotiation—if not contention—while the divorce plays out.
Even after the divorce is final, you may not be able to cut your ex out of any life insurance settlements. The law in general, and your divorce decree in particular, may require you to maintain a policy for your ex’s benefit, especially if you are obligated to pay alimony or child support. If you do intend to leave your ex as a beneficiary, whether of insurance or investment accounts, it’s a good idea to execute a new beneficiary statement once the divorce is final. That will make it clear that this was your intent, and not simply an oversight.
Your will, of course, will definitely need to be updated. Especially if your spouse is listed as executor. Another important provision of a will is who will become guardian of any minor children if you die. It may well be that their other parent is the best choice, divorce or no divorce. But in the worst cases, if there is evidence of serious misconduct, addiction, or financial irresponsibility—a parent’s unfitness for custody is something a court will ultimately have to decide—it may be necessary to name an alternative guardian.
Now comes the matter of what your will leaves to the ex-spouse. The law doesn’t make it easy to disinherit an ex, on the grounds that both parties together contributed to the growth of a family’s assets. State laws can automatically revoke provisions in a will that benefit a former spouse or even the spouse’s relatives, but you should never rely on that. It’s an all-too-common mistake to assume that this means you don’t need to rewrite your will. That passive approach may create a tangle of unintended consequences. Better, by far, to tear up the old will (literally!) and write a new one. That way, there will be no ambiguity or confusion about what you want to happen after your death.
A little different from the will, which of course means nothing until your death, is how property is divided between living ex-spouses. Unlike so-called “community property” states, North Carolina law provides for “equitable distribution” of marital assets. “Equitable” means fair, based on the means and the needs of both parties, not necessarily an equal split.
A divorcing party must request an equitable division as part of the suit for divorce. The court will then identify which property is considered “marital” and subject to distribution. What each party owned before the marriage, or got by inheritance or gift during the marriage, is considered separate property. That’s not subject to a split. Be aware, though, that formerly separate property can become “marital” if it’s not kept distinct. So money from one spouse’s bank account, if rolled over into a joint account, loses its “separate” status. Likewise, if a new mortgage puts both spouses’ names on the deed of trust, a house that originally belonged to just one spouse will become marital property and subject to a court-ordered division.
A very important part of the process is assigning value to marital assets. That can be simple, as with investment accounts; or it can require appraisals, as with real estate.
As to what’s “equitable,” although North Carolina law assumes a 50-50 split is the default, the reality is that few divorces result in an even division. The court will consider factors including each spouse’s earning potential, prior obligations such as child support, age and health, and other needs. If you helped support a spouse who was working toward a degree or during a period of unemployment, don’t neglect to make your attorney aware of your contribution to the other’s career. That can be important in how assets are divided. Don’t expect, however, for a judge to award additional assets because of any bad behavior by the other party. That may be relevant in some aspects of a divorce, but it’s not considered when property is being divided.
If you made a prenuptial agreement with your spouse, of course that will come into play with a divorce. Whatever changes you make in your estate plan, they must conform with what you’d agreed to in the pre-nup. On the same subject: if you get married again, you should strongly consider a prenuptial agreement with your new spouse. It may help avoid many of the pitfalls you might have encountered when the previous marriage ended.
Along with the will, you’ll have to review any revocable trusts. Does a trust leave money to the ex or members of the ex’s family? You may want to revise that. Very important is who is left in charge of assets the trust designates for your children’s benefit. If a divorce is amicable, it may make sense to leave the ex-spouse with control over the children’s assets and income. But in many cases, it’s best to designate a different trustee.
A good divorce lawyer understands many of these issues, but likely lacks expertise in the fine points of estate planning and trusts. That’s why you should put a competent estate-planning specialist in touch with your attorney when divorce proceedings begin—and again after they are concluded.
In consultation with your lawyer, the experts at Old North State Trust can advise you about how to structure property divisions for your benefit and your children’s, as well as avoiding any unforeseen legal entanglements.
As Marketing Director, Alyce works to develop, budget, and implement marketing plans, which include advertising, coordination of conferences, special events, and development and maintenance of marketing materials. She also oversees the company’s website, in-house articles, and fostering community initiatives within the organization. Alyce received a BS degree in Interior Design from East Carolina University with a concentration in Business Administration and obtained her teaching certification from UNCW. Old North State Trust professionals have many years of experience and for over a decade have assisted clients in identifying and reaching their financial goals. For more information, visit www.oldnorthstatetrust.com or call 910-399-5470.