Divorce and Your Estate Plan

Dissolution of a marriage raises a number of complicated issues. There is more involved than obtaining a property settlement and divorce decree. The impact of a pending divorce on your estate plan should be considered as a part of the divorce process. The following issues relating to your estate plan should all be reviewed if you are separated from or divorcing your spouse.


Wills

You should discuss with your estate planner the possibility and benefit of executing a new will in contemplation of the divorce. Although Texas provides statutory rights to a surviving spouse, notwithstanding the terms of the decedent’s will, a new will can still provide for the maximum allowable benefits to go to your children or other heirs instead of to the other spouse. This may also be a time when it is particularly important to provide for a trust for your children’s inheritance.

Likewise, this is an important time to re-think the persons whom you have named as the executor of your estate and the trustee of any trusts you may have provided for in your will and change your will accordingly.  

Once divorced, Texas law provides that the divorce results in the ex-spouse being treated as a predeceased heir of the maker of the will. However, “updating” your will by means of relying on the inflexibility of statutory law is not generally the best solution. Therefore, if you did not execute a new will in contemplation of a divorce, then it is certainly advisable to do so once the divorce is final.

If a divorce or legal separation has occurred and results in financial obligations placed upon you, your will should reflect the terms of the agreement that must be carried out. Your new will should also be careful to provide that any bequests to an ex-spouse are in satisfaction of your legal obligations and are not meant to be in addition to those obligations. For example, assume the divorce decree provides that a payment of $100,000 be made to an ex-spouse in ten years. Your will says, “If my ex-spouse is alive in ten years, I convey to her $100,000.” As a result, the ex-spouse may receive a double benefit of both the bequest and divorce settlement rights.

 

Retirement Plans

You may also need to explore the possibility and benefit of executing new beneficiary designations for your retirement plans in contemplation of the divorce. Federal law generally provides that the retirement benefits of a qualified retirement plan must pass to the surviving spouse even if separated or if a divorce is pending, unless the spouse waives those rights. However, federal law does not require a spouse to be the designated beneficiary of an IRA.

Once divorced, Texas law provides that a designation made prior to divorce of the other spouse as a beneficiary under an individual retirement account, employee stock option plan, stock option, or other form of savings, bonus, profit-sharing, or other employer plan or financial plan of an employee or a participant in force at the time of divorce, the designating provision in the plan in favor of the former spouse is not effective, and the proceeds of the policy are payable to the named alternate beneficiary, unless:

  1. the decree designates the other former spouse as the beneficiary;
  2. the designating former spouse re-designates the other former spouse as the beneficiary after rendition of the decree; or
  3. the other former spouse is designated to receive the proceeds or benefits in trust for, on behalf of, or for the benefit of a child or dependent of either former spouse.

 

Life Insurance

You should discuss with your estate planner the possibility and benefit of executing new beneficiary designations for your life insurance in contemplation of the divorce. Although Texas law provides that a designation of an ex-spouse as beneficiary becomes void upon divorce, if your spouse is the named beneficiary and you are merely separated or if a divorce is pending at the time of your death, the beneficiary-spouse will receive the life insurance benefits.

Similar to retirement plans, Texas law provides that a designation made prior to divorce of the insured’s spouse as a beneficiary of a life insurance policy is not effective, and the proceeds of the policy are payable to the named alternate beneficiary, unless the decree designates the insured’s former spouse as the beneficiary; the insured re-designates the former spouse as the beneficiary after rendition of the decree; or the former spouse is designated to receive the proceeds in trust for, on behalf of, or for the benefit of a child or a dependent of either former spouse.

 If a divorce has occurred and results in your obligation to name a certain person as the beneficiary of a life insurance policy, you should execute a new beneficiary designation form to reflect the terms of the agreement to be carried out.

 

Other Beneficiary Designations

Don’t forget to review your annuities, bank accounts, brokerage accounts, and any other assets that may have a beneficiary designation. However, in certain circumstances Texas law requires notice be given to the other spouse or may require both spouses to sign the beneficiary change form.

 

Powers of Attorney

Many couples have executed powers of attorney naming each other to provide for the handling of medical and property issues in the event of incapacity. In many cases, estranged spouses do not focus on revising these important documents during or after divorce. In Texas, divorce terminates the powers granted to a former spouse under a durable power of attorney, but it does not do so until the divorce is granted. Having a soon-to-be ex-spouse in charge of medical and property decisions is usually not advisable. Therefore, you should consider changing your powers of attorney on the first hint of divorce. Alternatively, your documents can provide that if divorce or legal separation proceedings are initiated, the spouse’s right to serve as power holder immediately terminates and the next named successor is automatically appointed.

 

Your Parents’ Estate Plan

If you are separated from or divorcing your spouse, your parents may need to review their own estate plans as well. For example, your parents’ wills may provide gifts or other benefits for your spouse or may name your spouse as an executor or trustee. Your parents’ powers of attorney may also name your spouse as an agent to make medical and property decisions.  Though Texas laws may automatically “revise” your documents to read as though your ex-spouse predeceased you, they do not revise your parents’ documents.

A key element to planning for the potential divorce of a child or heir is flexible drafting. Every plan needs to address the possibility that a child or an heir will face a future divorce. The use of spendthrift trusts for the intended beneficiaries is oftentimes a good solution. Basically a spendthrift trust is any trust that restricts the ability of any trust beneficiary to assign or otherwise transfer his or her interest in the trust. It also restricts the right of a beneficiary’s creditors (which may include an ex-spouse) to demand payment of income or principal to satisfy the beneficiary’s obligations.