10 Estate Planning FAQs for Divorcees

The intricacies of divorce extend beyond emotional and financial realms; they can significantly impact estate and tax planning, influencing crucial factors such as marital deductions, portability, tax brackets, and filings, thereby necessitating a comprehensive reassessment of existing strategies to mitigate tax implications. To better guide those going through the process, here are answers to ten questions people commonly ask when it comes to estate and tax planning before and after a divorce.

1. Is the marital deduction available for estate tax purposes after divorce?

The marital deduction allows married individuals to transfer assets to their spouse upon death without incurring an estate tax on those assets. The marital deduction for estate tax purposes generally is not available after divorce. As a result, assets owned by either spouse may be subject to estate tax, potentially increasing the overall tax liability. However, other estate planning tax strategies may help minimize estate tax liability, such as lifetime gifting or establishing irrevocable trusts.

2. Is portability of the estate tax exemption available after divorce?

Portability allows a surviving spouse to use any unused portion of their deceased spouse’s federal estate tax exemption. If one spouse dies and has not used their full estate tax exemption, the unused portion can be transferred to the surviving spouse, effectively increasing their own exemption amount. However, if a person is divorced at the time of their former spouse’s death, portability is not available.

3. Why are estate planning documents important in a divorce?

Estate planning documents are legal tools that allow individuals to specify how they want their assets managed and distributed during their lifetime and after their death. Examples include a revocable trust, last will and testament or pour-over will, health care power of attorney, financial power of attorney, HIPAA authorization form, and a living will. These documents ensure an individual’s wishes are respected and may help avoid disputes among family members.

Estate planning documents are of heightened importance for divorced individuals due to the significant changes in personal and financial circumstances. These changes require updating and reviewing estate planning documents to ensure one’s assets are distributed according to their new preferences, their loved ones are provided for, and their medical and financial decisions are appropriately managed by individuals currently in their lives. Given the complexities and possible legal challenges that can arise post-divorce, having updated estate planning documents helps individuals maintain control over their assets, protect their loved ones, plan for guardianship of minor children, and ensure wishes are upheld in the event of death or incapacity. Therefore, ensuring you have up to date estate planning documents is especially important after divorce to navigate these changes effectively and provide clarity and security for the future.

4. How do state revocation statutes impact beneficiary rights after divorce?

Revocation-upon-divorce statutes automatically remove an ex-spouse as a beneficiary on particular estate documents or certain accounts, such as life insurance policies and Individual Retirement Accounts (IRAs). However, revocation-upon-divorce statutes may not apply to all assets and may have limitations or exceptions dependent upon the state in which you reside. Understanding the variance in state-level enactment of these statutes underscores the need for divorcées to proactively update estate documents to remove ex-spouses as beneficiaries, ensuring the desired distribution of assets.

5. Should an estate plan be updated before or after remarriage?

Waiting to update an estate plan until a subsequent marriage occurs is typically not recommended, even if a person plans to remarry. Waiting until remarriage can leave the estate vulnerable to unintentional consequences, such as unintended distributions or disputes. Proactively updating the estate plan before remarriage ensures that it aligns with current wishes and protects assets and loved ones in the event of a person’s passing.

6. Should a new executor, trustee, or agent be appointed after a divorce?

It is vital to select a trustee, executor, or agent with good judgment and on whom you can rely. It is generally best to consider someone who respects your wishes and intent, is prepared to undertake the mental and physical responsibilities, and has sufficient time to devote to the role. Furthermore, consider designating backup individuals in case the primary choice is unable or unwilling to serve when needed.

7. What steps can I take to ensure the care of my minor children?

Addressing the issue of guardianship can help ensure proper care of minor children after divorce. Nominating a guardian in estate documents will designate individuals to care for minor children in the event of death or incapacity and will name someone to care for their emotional and physical wellbeing.

Additionally, recent divorcées want to address whether a surviving spouse will automatically get custody, if not covered by a custody agreement. While in some cases, the surviving spouse might gain custody by default, especially if there are no legal challenges or if custody arrangements were previously established, this is not always the case. In short, while ensuring the proper individuals are responsible for the care of minor children can often be overlooked, it is an essential component of the estate planning process.

8. Can a recent divorcée use joint ownership arrangements, such as tenancy by the entirety or community property, for real property?

Tenancy by the entirety (TBE) is a form of real property ownership afforded to married couples that offers specific protections from creditors. It is not a form of ownership generally offered to single individuals. Additionally, community property ownership, which applies to married couples in certain states, governs property acquired during marriage. Property owned as tenancy by the entirety or community property may be recharacterized in a divorce decree. Nevertheless, it is generally recommended to re-title property to establish clear ownership in an individual capacity post-divorce, and to help avoid any potential conflicts or confusion.

9. Can prenuptial or postnuptial agreements be used with my estate plan?

Prenuptial and postnuptial agreements can be used in conjunction with an estate plan as these contracts outline the division of assets or inheritance in the event of divorce or death. However, it is important to make sure these agreements do not contradict the details of the estate plan but work in conjunction to form a cohesive plan. If there are differences between the documents, or their terms contradict each other, conflict can arise.

10. What happens if a person passes after divorce but before updating an estate plan and the ex-spouse is the listed beneficiary?

If an individual passes away without updating the estate plan, state laws may automatically revoke provisions benefiting the former spouse; however, this is not guaranteed and may not cover all assets. For example, certain assets with beneficiary designations, like 401(k) plans, pensions, or other plans governed by ERISA, may still pass to the ex-spouse if designations have not been updated. As a result, it is crucial to review all beneficiary designations after a divorce.

Estate planning after divorce can create challenges that go beyond the divorce settlement itself. If you’ve read this far, you’re taking the first step by gaining additional knowledge about the subject matter and the process. Being proactive and working with an advisor can also help alleviate some of the financial worries after divorce and get the estate and tax plans back on the right track.