Estate Planning and Divorce
When going through a divorce, the last thing you probably want to do is hire an estate planning attorney. However, estate planning becomes a vital part of your life before and after your divorce. Why? Well, when you are married, some of your estate planning can be deferred to your spouse if you die first. For example, in California, which is a community property state, most of your assets can pass to your spouse with a summary probate administration. However, when you get divorced, the buck stops with you, and it is important you make sure your loved ones are taken care of so they can avoid the long drawn-out probate process.
Changing Beneficiary Designations After Divorce
One of the first things you should do after your divorce is change your beneficiary designation on all accounts. Most likely, before you were divorced, you may have had some accounts in your own name, but had your spouse as the pay-on-death beneficiary. Most people do not want their ex-spouse as his or her future beneficiary after divorce, so you should contact your banks and update the pay-on-death beneficiary. Pay-on-death (POD) accounts are different than joint accounts. You may have had a bank account in your joint names while you were married, and other accounts that were in your name alone. Most likely, the joint accounts were split during divorce, but the accounts in your individual name may be unchanged. The problem? Those individual accounts may still have your ex-spouse as the POD beneficiary. We’ve represented several child beneficiaries from divorced parents that discover after one parent dies that they are not the beneficiary, and instead the ex-spouse (who may have started a new family) is still the beneficiary. The child beneficiary may be able to alter the beneficiary designation, but must do so through court intervention, and before the ex-spouse closes the account with the bank. The better solution is to remove your ex-spouse as the POD beneficiary immediately after divorce.
Updating beneficiary designations is especially important for most IRAs, 401ks and any other qualified plans. If you do not change the beneficiary of a qualified plan after divorce, ERISA (Employment Retirement Income Security Act) states that the beneficiary named on the plan will receive the assets. This is true even if you have a qualified domestic relations order (QDRO) from the family court stating that your ex-spouse has no interest in your retirement account. Federal law (e.g. ERISA) trumps state law (QDRO from family court) in this situation! It’s horrible situation, but it’s the law so you need to update your beneficiary designations as soon as possible after divorce.
Choosing Beneficiaries After Divorce
So now that we have made it abundantly clear that you need to change your beneficiaries after divorce, let’s discuss who should be the beneficiary. Naturally, if you have children, you may think you would name them as beneficiary. However, if you have minor children, this is likely a bad idea. Why? Since your children are unable to receive money while minors, all assets that name your minor children as a beneficiary will be transferred to a guardianship. Why is a guardianship bad? First, the guardian of your child’s estate will likely be your ex-spouse. Second, your ex-spouse will be entitled to compensation to act as guardian of your child’s estate. Third, the court costs (filing fees, accountings, appraisals, bond, etc.) are very expensive and will reduce the amount your children will eventually receive.
For these reasons, simply naming your children as beneficiaries is not a good idea. As discussed below, you should name the Trustee of your Trust as the beneficiary of your pay on death accounts.
Estate Planning Solution for Divorced Spouse
The natural guardian for your children if you die is your ex-spouse. However, with proper estate planning, you can ensure that your assets end up in the hands of the people you trust to have your children’s best interest in mind, and not your ex-spouse. By creating a Trust during your lifetime, you can ensure that the proper people are put into place (the “Trustee”) to manage the assets for your children if you die. For example you could name another family member to be Trustee of your assets until your children reach a certain age. Assuming you have named your Trust as the beneficiary or owner of these accounts, these assets will not be transferred to a guardianship, but instead be held in your Trust. Not only will these assets not be transferred to your ex-spouse, there will be no court intervention involved, so your children will avoid the significant cost of transferring the assets to your children through a guardianship.
There are several ways to customize your specific Trust depending on your assets and the needs of your children. Those options are beyond the scope of this article.
Choosing a Guardian for Your Children
If you die, the likely and natural guardian for your child will be your ex-spouse. However, there are certain situations where you could name another person in your Will to act as guardian, and the court could appoint that person instead of your ex-spouse. For example, if there is a history of spousal or child abuse, or if your ex-spouse is in prison, or if there are other circumstances where the natural priority of your ex-spouse will not be in the best interest of your children, the court could name someone other than your spouse. Your Will can play a vital role in assisting the court with determining the proper Guardian.
Automatic Temporary Restraining Order (ATRO) Upon Filing for Divorce
Most of this article has addressed estate planning after your divorce is finalized. This is because the moment you or spouse files for divorce, California law prevents you from making certain transfers of property or amending certain estate planning documents. This restraint on transfer is called an Automatic Temporary Restraining Order (ATRO). If possible, you should consider potential estate planning options before filing for divorce. Those estate planning options are beyond the scope of this article. However, even if you could not plan ahead, there are certain estate planning options available to you after filing for divorce, but before your divorce is final. Please contact us for options specific to your situation.
If you do nothing, and you die before your divorce is finalized, you will be treated as married for purposes of succession of your assets. This usually means your soon-to-be ex-spouse will receive some, if not all, of your assets.
If you are interested in estate planning before, during or after your divorce, contact our offices at Modern Wealth Law, APLC to discuss options available to you.
John Wong advises on all aspects of estate planning, probate, asset protection and trust administration. He believes that estate planning is about planning for life; while having protections in place should the unexpected occur.
