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ESTATE PLANNING AFTER DIVORCE – I.E. WHEN DEATH DOES DO US PART

4October
2015

Although most clients would probably say that a former spouse [or soon to be ex] is the last person they would want to inherit their assets, or to make life and death decisions for them, nevertheless, estate planning is still an area that is largely overlooked by people undergoing a dissolution of marriage.

Arizona Statutes

Here in Arizona we do get a little help. We have a statute, §14-2804 that addresses some interests of former spouses upon termination of marriage. While the statute covers many areas, there are still situations that are not provided. For example, the statute does not cover qualified plans under federal law such as a 401(k). Instead, the beneficiary who is designated with the plan administrator controls until changed.

Moreover, the statute addresses neither what happens if someone dies during what could be a lengthy divorce proceeding nor when the parties are legally separated instead of divorced.  Additionally, in some situations an ex-spouse may be court ordered to continue to maintain the beneficiary of life insurance, in which case it may be necessary to reaffirm the designated beneficiary.

Beneficiary Designations

 Assets that have beneficiary designations (e.g., life insurance policies, IRAs, annuities, investment accounts and some bank accounts) are not controlled by a will or trust. Instead they will be paid directly to the person listed as beneficiary (unless that person is deceased, is a minor, or is incapacitated when the insured dies).

The statute does purport to remove a former spouse as beneficiary of, for example, an IRA. However, a failure to change the beneficiary designation could create a gray area.

One such example is if the custodian believes that it was intended that the spouse remain as a beneficiary. Or a bank fails to verify marital status. The custodian may be in a different state with different laws. Because most married people name their spouse as beneficiary, the account designations should be changed right away [or updated and affirmed].

However, naming the right beneficiary is critical. This is especially true for tax-deferred plans because of possible estate and income tax issues and the potential for long-term tax-deferred growth. Be sure to seek expert assistance before naming a beneficiary on these accounts.

If you have minor children, the former spouse may also be the last person you wish to have complete control over the children’s money and assets. If children are beneficiaries and they are minors when you die, ideally you would want to establish a trusts for the children with an independent trustee. Otherwise a court guardianship usually must be established until the children reach age 18—at which time they will receive the entire inheritance. Until then, the other parent (your ex-spouse) could be named by the court to manage the funds.

Naming a trust as the beneficiary instead and selecting your own trustee (such as your parent or sibling) could be the best manner to insure that the funds are used only for the children. A trustee can be held liable if he/she misuses the trust assets. An ex-spouse can be prevented from having access to the money, and you can control when your children will inherit. Rather than receiving a lump sum at age 18 you can ladder when and for what purpose they receive funds. Money that stays in the trust is protected from irresponsible spending, creditors, and even spouses. For all these reasons, a trust is an excellent choice as beneficiary instead of an outright disposition to an individual, regardless of his/her age.

Your Will and/or Living Trust

If you do not update your will or trust, your will could still be valid, but your ex-spouse disinherited, as well as disqualified from any fiduciary position. However this would result only upon a decree of dissolution, not during the proceedings or upon a decree of legal separation.

If you have minor children, you need to name a guardian for them in your will. (Even if you have a living trust, a simple will is required to name a guardian and to direct any forgotten assets into your trust.) Upon the death of one parent, usually the surviving parent will become the sole guardian. But if your ex-spouse has also died, had his/her parental rights terminated, or becomes an unfit parent, the court would have to appoint a guardian and would appreciate knowing your choice. You may also wish to provide input, for example, so that children can continue to visit grandparents or other family members.

Powers of Attorney

Most married couples give each other the power to make health care decisions, including those regarding life and death. Financial powers are also usually given to each other so that one can manage the other’s financial affairs without interruption. These are often quite broad, including the ability to buy and sell real estate, open and close financial accounts, change beneficiary designations, collect government benefits, etc.

The powers given to a former spouse would automatically be revoked, but the document could remain valid if you have provided an alternate. Instead of your ex-spouse, you can name a parent, sibling, close friend or adult child to have these powers and act for you when you cannot.

You Need Professional Guidance and Assistance

If you have been through the divorce process you probably need an experienced attorney more now to help you with updating your estate plan than you did when you were married. Don’t procrastinate on this. Make sure you protect yourself, your children and others who depend on you by reviewing and updating your estate planning documents.

 

 

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