Divorce can be a long, difficult and exhausting process. Once you receive your final decree, it may be tempting to put it in the file and continue moving forward into your next chapter. For the sake of your financial future and your loved ones, it’s important to invest some time in reviewing your estate plan and making changes if needed. Generally, these changes can’t be taken care of until your divorce is final. Once you file for divorce, an order typically goes into effect preventing you from modifying an existing trust or changing beneficiaries on retirement plans and insurance policies without your spouse’s consent. Once the divorce is final, it’s important to make the time to update your estate plan.
What do we mean by estate plan? Generally there are two parts to your estate plan. The first is a suite of documents that your attorney prepares after consulting with you to define your plans and wishes for disposition of your assets and personal property after your death. These documents include your will, trusts and powers of attorney.
Will and Living Trust
Many estate plans include a living trust, and may also include other types of trusts depending on your situation. Living trusts will have you as trustee and will usually name a successor trustee. You must also name an executor for your will. Often spouses will name each other as successor trustees and executors. Following a divorce, you will want to reconsider your will and trust. Your assets will have changed, as each party takes custody of their own half of the marital assets. You may wish to change your beneficiaries as well as your successor trustee. The laws of your state may prohibit your former spouse from serving as executor of your estate, so you may need to choose a new executor if your spouse was named for that role.
Power of Attorney
Powers of attorney are documents that give a trusted person legal authority to act on your behalf. The power may be general or limited. There are also specific powers of attorney for health care, which allow someone you designate to make medical decisions for you if you’re incapacitated. In California as in many other states, divorce typically revokes the power of attorney if assigned to the former spouse. You will need to consider whom you now want to appoint to make health care decisions if you are incapacitated. Some medical systems such as Kaiser require their own forms to be used for medical power of attorney, so check with your medical providers and make sure your documents are up to date.
Retirement Accounts and Other Assets with Designated Beneficiaries
The second part of your estate plan, which is often overlooked, includes the assets that pass outside your will and trust. This generally includes any account with a beneficiary, such as an IRA or 401(k), and it includes annuities and insurance policies, which pass by contract to the beneficiary. The designation of a beneficiary takes precedence over the instructions in your will and trust, unless your trust is the primary beneficiary.
When your divorce is final, you need to review all your insurance policies, annuities, IRA’s and Roth IRA’s, 401(k)’s and 403(b)’s as well as any other type of employer-sponsored retirement plan including pensions. All of these will generally have named beneficiaries, and you should review and make changes as appropriate. The assets will already have been divided, so if your former spouse is still named as beneficiary, they will in effect get both shares of the assets in the event of your death. If that’s what you want to have happen, you can certainly choose to leave it that way, but it’s important to review these designations and make sure they are aligned with your current needs and wishes.
Naming your Estate as Beneficiary
It’s generally not a good idea to name your estate as beneficiary of your IRA’s, as the account then has to be depleted within five years of your death. Providing named beneficiaries allows your heirs to extend tax deferral by stretching out distributions over their lifetimes.
Speaking of needs and wishes, after your divorce it’s a good idea to meet with a financial planner to discuss your goals and develop strategies to pursue them. Your life has just changed, possibly taking an unexpected turn. Invest some time considering what you would like to accomplish in the future, what new possibilities you may want to explore.
If you have any questions or concerns, or would just like more information, please don’t hesitate to call us at 408-551-6100 or toll free 800-927-8314 and ask to speak with one of our financial advisors or send us an email through the contact section of our website here.
Retirement Capital Strategies
A Registered Investment Advisor
1190 Saratoga Ave, Ste. 140
San Jose, CA 95129
Tel (408) 551-6100
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized legal advice. We suggest that you discuss your situation with a qualified legal advisor.
Source: This article was written by Margaret (Peggy) Stephan, CFP® – LPL Financial Advisor at Retirement Capital Strategies.