At least once a year, I invite clients in to conduct portfolio and beneficiary reviews on all important documents. It’s a rare year where I don’t find at least one policy or investment where an ex-spouse is still named as the beneficiary of the policy proceeds. Since IRAs, retirement plans, life insurance, and annuities are assets that pass by contract, whoever’s name is written on that form is legally entitled to receive the proceeds from that plan or policy that was purchased during the now defunct marriage.
And those are the lucky ones. Sometimes this situation only comes into awareness after the death of the account owner. By then, it’s impossible to change and a former spouse might receive a benefit while a new spouse goes without.
Keith Simpson is an esteemed family law attorney located in Manhattan Beach, CA. He also handles estate law and wanted to talk with me about a few critical estate planning issues that often come up during the course of divorce proceedings. He advises:
Many people tell me that they want to revise their Living Trust after their divorce is finalized, but there are many problems with this approach. People who are starting the divorce process in California should consider drafting a new Will and/or Revocable Living Trust when they begin.
First, in the event you pass away while your divorce is pending, the result is that your divorce case will be dismissed, which means the terms of your current Will or Revocable Living Trust are in control. For most people, this means that everything you own is left to your spouse! Yes, the spouse you were seeking to divorce prior to passing.
People are overwhelmed when contemplating a divorce. They often feel that with so much going on, so many decisions to make, they’ll think about changing their will or trust when the divorce is final and things have calmed down a bit. What people don’t realize is that a health crisis, or even death, sometimes occurs during the course of a divorce action. The most recent case in the news concerning divorce and health care power of attorney is Khloe Kardashian and Lamar Odom. One way to avoid the consequences of this is to have a new living will and revocable trust drafted prior to filing for divorce. As Keith points out:
This will allow you to have your share of the marital assets distributed to your beneficiaries if you pass away. Also, it relieves you of having to worry about your soon-to-be-ex-spouse receiving a windfall of 50% of the marital assets in the event of your untimely demise.
Before making these changes with your attorney, it is wise to bring in a financial planner early in the process. The financial planner is somebody that’s going to review each asset you own in order to present a correct picture to the attorney. This will not only ensure correct support calculations and property division, but can preempt any unintended consequences from an estate planning perspective.
Keith points out another important consideration:
You may also want to have a new Durable Healthcare Power of Attorney formed. This document specifies who you want to make healthcare decisions in the event you are alive, yet disabled. This typically arises in a situation where a person is comatose and unable to act on their own behalf. If you have your spouse named as the person in charge, then this may be your unlucky day because you are also divorcing your spouse in our hypothetical. What if you and your spouse are estranged? Do you really want your spouse deciding whether to pull the plug?
During the course of divorce, very few people remember to change their durable health care power of attorney. You should take care of this item right away.
Do you feel like you have a complete understanding of your entire financial picture? Do you understand which wills, trusts, and other legally binding documents are in place in your marriage? If your answer to either question is “no,” you might want to make an appointment with a financial planner.
It is important that you discuss estate planning issues with your divorce attorney at the outset of your case.