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Don’t Leave Your Retirement Plan to Your Ex - Estate Planning After DivorceSubmitted by Flourish Wealth Management on September 8th, 2017
By: Kathleen Longo, CFP®, CAP®, CDFA
It is said that change is the only constant. While that proverb can be confusing to people experiencing relative stability in their lives, it is the constant change and lack of certainty that can bring people in the middle of a major life transition to their knees. Transition and change are two very different things, and while one will never stop occurring (change), the other (transition) can feel in the moment like there may never be a light at the end of the tunnel.
One major life transition that impacts approximately half of all families, divorce, is one of the most challenging and stressful life events that a person can experience. The impact is emotional, psychological, physical and financial. The experience of having nearly every single aspect of your life changed is powerful and can take a toll on your will power and decision making skills. Divorce is also extremely challenging because, by its very nature, it is not something most of us typically plan for.
Divorce is mentally and emotionally demanding. Unfortunately, it is also wrought with practicalities that need to be addressed to ensure there is a solid foundation to stand on when the dust settles. Going through a divorce effectively negates a great deal of the planning and wealth building that you accomplished during your marriage. Due to the financial implications of a divorce, it is important to make tempered and informed decisions about your finances to ensure that you are on track to eventually retire whether that time is three or thirty years from now.
Give it Time
While it is important to stay on top of your finances and planning throughout the divorce process, very few things need to happen overnight. As is the case with any transition, taking some time to let your emotions settle before you start reframing your financial future will be beneficial in the long run. It is important to approach these decisions with a clear head.
When the time comes to start making decisions about planning after divorce, it can be empowering to consider these choices as part of a reinvestment in yourself. However, you should not wait too long to make the necessary changes to your estate plan. Once you're ready to start the process, you may find it liberating to shed aspects of your married life and transition to planning for the next stage of your life.
Make a List
A married couple will often accumulate multiple banking, investment, insurance and other financial accounts over the course of a long marriage. Typically, each spouse has named the other as a beneficiary on these accounts. Over time and after the trauma of a divorce, it can be hard to remember where all the accounts are.
Use your divorce decree to help make a physical list of the accounts you have been awarded in your settlement. It is a great inventory of your assets. Be sure to include any insurance policies, too—these are often forgotten but important when considering how to provide protection for children or other dependents after you pass away. Quite often, divorced spouses leave their exes named as beneficiaries on in-force life insurance policies and investment accounts, creating surprises and undue hardship for the intended beneficiaries when the proceeds go to a former spouse. It will be important to choose a new beneficiary to ensure that, should something happen to you, your assets are going where you want them to.
You should also review any legal agreements that you signed with an ex-spouse during your marriage. This can include documents related to health care and end-of-life decisions such as powers of attorney or living wills. Although rules about whether the documents remain valid after divorce vary by state, the best process is to revoke old powers of attorney and living wills and replace them with updated agreements, naming new individuals to act on your behalf for these critical decisions. You should also make sure to share the updated documents with the people you have named so they have the information on file and are fully aware of your future plans.
Set Your Own Priorities
A divorce can represent a fresh start for you. It's an opportunity to set and plan for your own priorities, once you are no longer sharing responsibilities and decision-making with someone else. In areas where you may have had to compromise before, you can now manage your personal relationships and your financial legacy in a way that matches your values and your goals. For example, this is an opportunity to select a meaningful charity that you want to include in legacy planning that might not have been a shared priority during the marriage. Ask yourself, what would you want to do differently with your financial assets? Also, consider the flip side of that question—what plans or priorities do you want to maintain? For example, do you want to continue to provide financial support to children or grandchildren for higher education? Sometimes it's easier for two people to accomplish these financial goals than one person, so you may have to adjust your estate plan to reflect your new financial situation to establish realistic plans.
Be Prepared for Change
Your life may take different, unexpected directions after divorce. Remarriage is a likely possibility, based on national averages. When families start to blend, priorities can also change which requires another look and possible adjustments to your estate plan.
For example, getting married again could change how assets are distributed to your children from your earlier marriage. It is important to take control of the process by creating a strong estate plan to ensure your assets follow the path you intend. Adding stepchildren to the mix can also complicate the transfer of assets if you don’t have a clear plan in place (and documented).
After updating your documents, a regular review of your estate plan should continue to happen every 3-5 years. You may not need to make changes that often, but as you add new relationships you may discover the need to update this plan more often.
It's a pleasure to share life's happy moments with our clients. However, we know not all events are cause for joy. Often, people seek our advice when they're going through challenging and difficult transitions. No one plans for their marriage to end in divorce. Sadly, divorce does happen, even among couples who have been together for many years. Divorce is a difficult process and it’s important to create the appropriate documents to establish your legacy as you see fit, make your estate planning decisions with clear thoughts and helpful guidance, and avoid a situation where your Ex unintentionally receives your retirement assets.