Estate Planning During and After Divorce: What You Should Know
By: Ingrid Johnson
If you are going through a divorce, there is probably a lot on your mind. One thing you may not be thinking about is your estate plan. If you name your spouse in your estate planning documents, you may want to consider making some changes. This article explains some key estate planning items to consider during and after your divorce.
Estate planning items to consider during divorce negotiations
During your divorce or settlement agreement negotiations, there are a few things you should consider:
Gift Tax Returns
If you or your spouse made any large gifts in the past year, you should decide if you will be splitting those gifts on your upcoming gift tax return. (For a quick overview of when you may need to file a gift tax return, check out my article here.) Gift splitting may be advantageous for tax reasons but to split gifts, you must have been married for all qualifying gifts during the year and neither one of you can remarry during that same calendar year. You should talk to an estate planning attorney if you made any gifts of $16,000 or more (this is the annual exclusion amount in 2022).
TrustsIf you or your spouse have any trusts, these documents should be reviewed by your estate planning attorney. Trusts can be complicated and remembering who has decision-making authority over the trust and what they can distribute or withhold from beneficiaries may be an important consideration when negotiating your divorce settlement.
- For example, if both spouses are co-trustees and must both sign off on decisions before acting, you may want to negotiate the removal of one spouse as trustee. Furthermore, if you will be relying on your soon-to-be ex-spouse’s income from a trust to receive spousal support payments, you should determine who makes decisions regarding those distributions and ensure those cannot be cut off unexpectantly.
- You should also watch out for powers of appointment. These allow the holder of the power of appointment to distribute assets differently than is set out in the trust agreement. Make sure you understand who has these powers and who they can distribute assets to upon exercising these powers.
Updating your estate plan due to divorce
Iowa does have statutory code sections that will prevent the worst-case scenario if you do not update your estate plan after your divorce. However, as discussed below, you may want to proactively change your estate plan instead of relying on these statutory rules.
- If you name your spouse or a relative of your spouse as a beneficiary for retirement accounts, stock option plans, transfer on death accounts, payable on death accounts, annuities, or life insurance, that beneficiary designation will be voided upon divorce. A couple of important things to note:
- The beneficiary designation naming your spouse, or their relatives is only voided upon the issuance of the final divorce decree. If you were to die before the divorce is final, the beneficiary designation naming your spouse would still be effective.
- ‘Relatives of your spouse’ include people who are related to your spouse by blood, adoption, or marriage, and who cease to be related to you upon divorce. For example, your pay-on-death designation naming your spouse’s brother would be void but your pay-on-death designation naming your children would not.
- Any provision naming your spouse or your spouse’s relatives in your Will, including beneficiary provisions or fiduciary nominations, will be revoked upon divorce unless the Will provides otherwise.
- Note, again, these provisions are only revoked when the final divorce decree is issued.
- A financial power of attorney appointing your spouse as your agent is revoked when an action is filed for dissolution or legal separation unless the power of attorney provides otherwise. (Check out my article on powers of attorney here for more information on this document.)
- Powers of attorney are slightly different than other estate planning documents in that they only revoke the appointment of your spouse. If you name your spouse’s relatives, that relative would not automatically be stripped of their appointment upon divorce. Also, the power is revoked when a divorce action is filed and not upon the issuance of a final divorce decree.
- A medical power of attorney appointing your spouse as agent is revoked when your marriage is dissolved. This presumably means that it is not revoked until a final divorce decree is entered. Again, only the nomination appointing your spouse will be revoked. Any provision appointing a relative of your spouse could still be effective.
As you can see, relying on Iowa’s statutory rules is not always ideal and could even cause litigation over your estate later. Instead, it is best to be clear about what you want to happen in your estate planning documents by updating them when you get divorced.
The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship.