The divorce is finally over, the decisions have been made, and now life proceeds anew. But it’s never really that easy, is it? For the newly-divorced individual, the legal work may be done, but there’s often a long list of financial clean-up that lies ahead. There are the “big rock” items, such as home refinancing, re-titling of homes and cars, retirement asset division – all the stuff that’s mentioned in the divorce documents themselves. And there are smaller, but also important, items such as removing the ex-spouse from credit cards, bank accounts, gym memberships, and so forth. But there is also an underlying category of items of equal, or perhaps greater, significance that often are forgotten – until it’s too late. These items control where assets will go when someone passes away. Given the emotional turmoil accompanying most divorces, many individuals and families alike will agree that the former spouse is the last person to whom they want to bequeath assets. Yet all too often, this is what happens as divorced persons move ahead with their new lives, avoiding the pain of their recent divorce with that common enemy of resolution – procrastination.

First, let’s list the important items to consider amending:

1. Beneficiary designations for the following financial instruments:
    • Employer retirement plans
    • Individual Retirement Accounts (IRA)
    • Life insurance
    • Annuities
    • Health savings accounts
2. Transfer on Death (TOD) investment accounts
3. Payable on Death (POD) bank accounts
4. Will
5. Health care powers of attorney and living wills
6. Powers of attorney
7. Revocable trusts
8. Advanced estate planning structures such as irrevocable trusts

Since the spouse is usually the individual selected to receive or inherit property controlled by these documents and instructions, many, if not all, of these items will need to be amended. 

The items above are listed in the general order of difficulty to amend. A beneficiary designation can be very simple to change. Typically these changes simply involve obtaining the proper form, completing it, and putting it on file so that the request is documented. The same is true for Transfer on Death (TOD) and Payable on Death (POD) accounts that an individual may hold at an investment firm or a banking institution, respectively. Having noted that these arrangements are the easiest to amend, they are also the easiest to forget, since the assets controlled by these accounts may not have changed as a result of the divorce.

This danger applies particularly to retirement accounts – employer plans (such as 401(k)’s and 403(b)’s) and Individual Retirement Accounts (IRA’s). Retirement arrangements and employer plans often represent a significant portion, if not the majority, of an individual’s net worth and liquid assets. Since assets passed to a named beneficiary pass under operation of contract, this designation supercedes the person’s will and state intestacy statutes. According to estate planning attorney C. Randolph Coleman of The Coleman Law Firm, “There usually are a half dozen cases during a typical year where someone will call and ask whether there is anything they can do to prevent the ex-spouse of a recently deceased parent, child, or sibling, from taking the life insurance or retirement plan where the ex-spouse was still the designated beneficiary on the decedent’s plans/policies. The short answer is, there is nothing you can do. The beneficiary designation will trump the will or intestacy every time.”

Wills, health care documents, and powers of attorney all require more time and expense to amend, as one should likely seek legal counsel for assistance with these items. Despite the additional cost, these documents should be high on a priority list for a divorcee, particularly those who are parents of minors, as the will governs who will care for his or her children in the event of death, and as the health care documents dictate how one is cared for in the event of incapacity.

Revocable trusts, often known as living trusts, are more complex in their drafting and may require further consideration, as one may need to amend beneficiaries and/or trustee powers to eliminate the former spouse. Finally, advanced estate planning structures such as irrevocable life insurance trusts (ILIT’s), Qualified Personal Residence Trusts (QPRT’s), and charitable trusts may be very difficult, if not impossible, to amend, since the original intent of creating these structures was to make an irrevocable election, usually structured to benefit both husband and wife together. Should the husband or wife assume the power to change the irrevocable election, the tax advantages gained by the structure may be undone. It is imperative to work closely with one’s attorney, as well as the trustees, to explore possible options.

Aside from clearing up the issue of outdated documents, a newly divorced individual has another problem to solve: who to leave assets to, now that the former spouse is most often not the desired heir. If a divorcee has adult children, this issue might be easily solved, as the parent often desires to leave assets to grown children. In the case of minor children, however, the choices can be confusing and problematic.

The parent typically expresses the desire to leave assets directly to the minor child. Unfortunately, should the parent pass away while the child is still a minor, this choice will result in the court appointing a guardian to oversee and dispose of the assets, costing unplanned time and money. Another problem with this choice is the fact that the guardian, with extensive court oversight, will have to determine how the assets will be managed, and what will or will not be purchased with those funds. These decisions may or may not be in alignment with the choices the parent might have made. Many times a divorced parent, looking for the path of least resistance, will simply say, “Won’t the courts choose (their choice of guardian) to manage the asset?” assuming inherently that the court would make the same choice he or she would make. The short answer is, not necessarily. Just because a person seems to be the best choice to the parent does not mean the courts will see things the same way. If a parent has a wish for a particular person to manage an asset, the parent needs to specify it in legal documents.

A single or divorced parent might then say – if I cannot leave the assets to my child, I’ll just leave them directly to the adult I want to have manage them for my children – my parents, sibling, aunt/uncle, or family friend. This decision could also prove to be problematic. Leaving assets to an adult guardian causes that person to be entirely in control of those assets – with unrestricted rights to the assets – as well as potentially putting those assets up for grabs by that person’s creditors in the event of financial difficulty. If Jane Doe leaves a $100,000 life insurance benefit to her brother, Jim, that money now belongs to Jim – and potentially, his spouse, children, and creditors. Jane may feel certain that Jim will use the assets for the care of her children, but there is no legal arrangement that requires him to do so. If Jane puts this arrangement in place and then does not die until her children are adults, the situation may be even worse. Unless she amends her estate plan, she will have unintentionally disinherited her children.

Some parents might throw up their hands and decide to leave their financial fate to the laws of intestacy, thinking that their children will end up with the assets, or their benefit, in the end. While this might be true in theory, the average probate proceeding lasts nine months. The children will receive some care in the meantime, but the caretaker will not have the benefit of the majority of the financial resources during that time. This shortfall may cause the child’s life and activities to be drastically altered, further compounding the loss of the parent.

Perhaps a newly-divorced parent has a significant other in his or her life, and remarries. Here again, the parent may unintentionally disinherit a child – without legal documentation to indicate otherwise, a spouse is generally entitled to one-half of the deceased spouse’s estate. The second spouse may not be the resulting caretaker of the former step-children, yet he or she has received half of the assets intended to provide for them.

A divorced parent may desire to leave assets to care for both the new spouse and the children. In such a situation, it may be very important for the parent to sit down with a financial advisor or an estate planning attorney to assess the options. An easy solution is the use of additional life insurance to assist the parent in his or her wishes to provide for both the minor children and the new spouse. Term insurance can be a low-cost solution to provide these benefits until the children reach adulthood, assuming the parent is insurable.

This quagmire of follow-on hypothetical situations may seem overwhelming. So, what’s the most streamlined approach to take in this situation? First, use the list of follow-on items to amend, and focus initially on the easy items to complete, in particular those overriding beneficiary designations. Second, consider seeking assistance from a qualified estate planning attorney or financial advisor specializing in estate planning. A divorced individual can use these resources to get the detailed advice needed, and follow-on assistance to get the job done.

Again, from estate planning attorney, C. Randolph Coleman, “I probably see about 6 or 8 people a year who typically come in for estate planning 4 to 5 years after a divorce to ‘finally get around’ to updating their estate planning. Usually, during the course of our discussions, I will suggest to them to go back to their employer and check on the beneficiary designations for their life insurance and retirement plans. Invariably, about half of them will call back and tell me how much they appreciated the counsel to check, because their ex-spouse remained their beneficiary.”