You’ve worked hard to provide for your children, and you’ve achieved so much more than you thought possible. Making sure your kids (and grandkids!) will continue to be well taken care of after your death is understandably very important to you. That’s why you’ve made sure to put in place directives for your assets that are well thought-out and comprehensive.
But not everything works out the way we plan for it, including marriages. Divorce is a disruptive force, not only in the immediate, but also of your long-term plans. Big life changes mean that you’ll need to revisit your estate planning documents to make sure that your wishes are updated and clear.
In this article, we discuss estate planning and risks divorce poses to your plan. We take you through the importance of updating key documents like your will and insurance policies, how irrevocable trusts can protect your assets, and the steps necessary to see to it that your children’s inheritance is secure.
By seeking professional guidance and following a few practical tips, you can confidently preserve your legacy to provide a stable financial future for your family, no matter what bumps in the road you face along the way.
Divorce & Estate Planning Overview
What changes do I need to make to my estate plan if there is a divorce in the family?
• Update your healthcare proxy and power of attorney.
• Update beneficiaries on financial accounts, insurance policies, and retirement plans.
• Thoroughly review your prenuptial or postnuptial agreements.
• Update your will and any established trusts.
• Communicate openly with your family about your estate plans.
What are some financial challenges of becoming suddenly single?
A legal arrangement where assets are placed into an entity and managed by a trustee who follows the terms you outline.
The child or other named individuals benefit from the trust but do not own the assets directly.
Not having direct ownership of the trust assets helps shield them from creditors, lawsuits, and potential claims in divorce proceedings.
How and when funds can be accessed may be limited, often restricted to health, education, maintenance, and support.
The Challenge of Divorce and Inherited Assets
Inherited assets can be treated as marital property during divorce proceedings. Inheritances, which parents set aside for their children, might be divided between spouses, reducing the amount available for the intended beneficiaries. Such a division affects the financial security of your children and undermines the legacy you worked hard to build.
Estate planning laws vary by state, influencing how inherited assets are treated in the event of a divorce. It’s important to work with a knowledgeable financial planner and estate attorney to develop a strategy tailored to your unique situation.
Protect Your Legacy with An Irrevocable Trust
An irrevocable trust is a powerful financial tool for securing inheritances. It offers the reassurance that your legacy is well preserved. This type of trust can provide a robust layer of protection for your assets, particularly from potential threats like divorce or creditors.
When placing your assets in an irrevocable trust, your child or intended recipient, becomes a beneficiary rather than an owner. This distinction means the assets are not directly under your child’s control. Instead, an independent trustee appointed to manage the trust will execute your wishes and see to it that the assets are distributed and used as you intended.
In some states, assets within an irrevocable trust are shielded from claims that could arise during a divorce, offering significant protection from creditors, including ex-spouses. It’s important to note that these protections vary by state.
A key component to an irrevocable trust are ascertainable standards which limit how and when your child can access the trust’s funds. Typically, they restrict usage of funds to essential needs like healthcare, education, and basic living expenses. By setting these parameters, you have some assurance that the funds won’t be mishandled, and you can add an extra layer of protection for your beneficiaries in the event of a divorce.
Divorce and Estate Planning Tips
Here are a few items to prioritize as you work your way through the divorce process. The sooner you can cross these off your list, the less stress you’ll have during a difficult time knowing that your assets are safe even in the event of your incapacitation.
Update your health care proxy and power of attorney.
Many spouses grant each other the authority to make health and financial decisions if you are unable to do so. Maintain control over your personal affairs by updating these documents so that your current wishes are carried by folks you trust.
Update beneficiaries.
Change the beneficiaries on your financial accounts, insurance policies, and retirement plans so that unintended individuals, such as an ex-spouse, don’t receive assets that you intended for your children or other loved ones. This update, while critical, is as simple as filling out a new beneficiary form.
Review your prenuptial/postnuptial agreement.
A thorough review of your prenuptial or postnuptial agreement is necessary since these agreements often contain specific clauses that dictate asset distribution, which may need to be renegotiated or updated to reflect your new circumstances. Work with a knowledgeable advisor to make sure these agreements are aligned with your current estate planning goals.
Update your will.
Updating your will is a fundamental step in adjusting your estate plan post-divorce. This document outlines how you want your assets distributed and who will manage your estate. An outdated will could lead to conflicts or unintended distributions.
Update your trust.
If you have established a trust, it’s important to review and update it after a divorce. Updating your trust can help protect your assets, ensure they are managed according to your wishes, and provide financial security for your beneficiaries.
Communicate with your children.
It’s smart to keep an open line of communication with your children regarding your estate plans, especially after a divorce. Transparent discussions can help manage expectations, reduce potential conflicts, and guarantee your children understand your intentions.
Final Thoughts
Going through a divorce is tough, but making sure your estate plan is up-to-date is an important step in protecting your legacy and your child’s inheritance. Updating essential documents like your health care proxy, power of attorney, beneficiaries, and will make all the difference in how your assets are managed and distributed. By being prepared, you can ensure that your hard work and dedication continue to benefit those you care about most.
In order to create an effective plan tailored to your needs, we recommend consulting with an estate planning attorney to navigate the specific laws in your state and seeking advice from trusted financial advisors for additional support and clarity in managing your financial future.
At SK Wealth, our financial planners are all about helping you make informed choices regarding your estate planning and your long-term financial health. Refined over the last 25 years, our financial planning process, known as The Integrated Financial Advantage™, provides personalized recommendations to empower you to live with intention, tomorrow and today.
