Speaker: Maritess Bott
Maritess:
Sure, no problem, that’s a great question. There is a huge impact on estate planning when you’re going through a divorce. There are three things I want to talk about. First of all, thank you for listening to our blog today.
There are three things I want to talk about. One is, during the divorce and even post-divorce, making sure your beneficiaries are correct—as well as the titling of your assets. Number two is, often you have life insurance requirements in the divorce decree, and I want to talk about that. Number three is, if you do have young children, naming guardians to make sure that the right people are going to take care of the kids, heaven forbid the two of you are not around or both parents are not around.
Number one. We talk about during the divorce, a lot of things can happen, right? In the beginning, you’re just getting all started. Some divorces, as many of you know, can last a long time. If it’s two years, three years, five years—during that time it’s really important to know how are we going to make sure that the money is going to go to the right people. I would always suggest, at least during the divorce and even after the divorce, making sure the titling of those assets is correct.
When you have things owned in joint tenancy—on the first person’s death, the surviving joint tenant will receive those assets even if the divorce decree said you’re splitting that asset. If it’s joint tenancy with right of survivorship, then you’ve got this possibility that 100% will go to the surviving ex-spouse, as opposed to 50/50. Joint tenancy—huge, huge—it’s important that you split that joint tenancy to tenants in common if that’s what the divorce decree says, so that each of you has your half.
If you have beneficiary designations—making sure that you actually have the right people. A lot of times you have your spouse—the current spouse—and you’re still going through that divorce. If you die before the divorce is final or even after the divorce is final, and you still have that spouse’s name on that 401(k), life insurance, IRA—that surviving spouse does get that money. In Illinois, it’s always based on what the designated beneficiary says, regardless of whether there’s a divorce pending or the divorce is even final.
I had a woman call me one time saying that she had just finished her divorce and her ex-husband moved to Washington State. Sadly, about six months into that, he passed away. She’s calling me saying, “Hey, I think I’m still a beneficiary on his 401(k) and his life insurance—do I have the right to get that?”
The total of the insurance and 401(k) money was about $400,000, which is a lot of money. I helped her out, we found the ex-husband’s family, hired an attorney in Washington State, and I represented her in Illinois. It turns out that we have opposing laws in each of the states. In Washington, they actually say if you’re divorced and there’s no more marriage, it can’t go to the surviving spouse. But in Illinois, which is where the contracts were for these two assets, it says, whoever is on that designated beneficiary gets the money.
Our client—the ex-wife—had leverage in that sense. The family of the deceased ex-husband was trying to fight for 100%. At the end of the day, they ended up settling. But technically, they were divorced. That designated beneficiary should have been changed before he passed away. None of us have that crystal ball. We don’t know when we’re going to pass away, so it’s really, really important to figure out who the designated beneficiary should be, even during the divorce process.
That joint tenancy thing—making sure that you either change it to tenants in common, which is 50/50, rather than tenants by the entirety or joint tenancy with right of survivorship. That’s really key. That’s number one.
Number two. Often in the divorce decree, you’ll have a requirement of having life insurance in place because maybe there are young children, minor children involved, or even a maintenance program—or alimony, as they used to call it—going to the ex-spouse.
I always like having provisions for life insurance in the estate plan, in the trust. That means putting it in there, saying, yes, I have requirements in the divorce decree to have this insurance policy in place. However, once my requirements are done with respect to honoring that divorce decree, then this life insurance policy should go to my beneficiaries under my living trust.
What does that mean? Often, you’ll just put in your ex-spouse as the beneficiary of this policy. Maybe you had a half-million-dollar required life insurance policy, and the beneficiary had to be your ex-spouse—but only for a certain period of time. Maybe only when the youngest child turns 22. That’s the only time that half-million-dollar policy should be in place.
You go about life, you still have this policy, your youngest child turns 22, and you don’t even need this policy anymore to be going to your ex-spouse. Because your requirement under the decree has been completed. But you forget to change that beneficiary from the ex-spouse to your trust, and now it’s going to go to your ex-spouse—half a million dollars that should really go to your kids or your beneficiaries.
I have put in the trust saying, whatever my requirements are in the divorce decree, this insurance policy will honor those requirements. My point is, putting down your living trust as the beneficiary of the life insurance policy—not specific people like your ex-spouse. That way, your requirement will be based on whatever those requirements are, and that money will go to your family members if you’re done with those requirements.
Hopefully you understood that—that’s quite a big explanation, but really important to honor your requirements, and also make sure that your family gets your assets.
Number three. Another thing that people worry about is guardians—naming guardians for your minor children. Now you’re both divorced and typically, it is your ex-spouse that’s going to be your first guardian in case you die unexpectedly, which is fine. Most of the time, families are fine with the other spouse being the guardian.
But there are times when the other spouse maybe is not the right fit. There might already be extenuating circumstances that say, “No, my ex-husband should not be the guardian,” because maybe there’s some drug and alcohol abuse, or maybe there’s another family involved, and you don’t want your children raised in that environment—whatever it might be.
Really important to consider that. Can you stop your ex-spouse from being a guardian? Not necessarily. However, there are ways to kind of prevent that. You can name the person you’d rather have as a guardian, and they can work it out in court to see who is the right fit, if you can share some information that shows the ex-spouse is not a good fit for being the guardian.
Again, it’s a fine line, but definitely let’s talk about that and see who is the best person to take care of your minor children in the event of an unexpected or early death.
Those are the three things. There’s a lot more, but it’s certainly important to consider doing an estate plan or redoing your estate plan when you’re going through a divorce. After the divorce, review it again to make sure everything is exactly the way it should be, because you don’t want the funds to go unexpectedly to an ex-spouse and that ex-spouse’s family. You certainly want to take care of your children who are minors—that is important as well.
That is it. Thank you so much for watching today. We hope you’ll be able to watch us next time. Thank you.
