The Top Estate Planning Tasks after a Client’s Divorce
It’s never a good idea to broach the subject of estate planning when a client is facing a divorce. Many times they are overwhelmed and focused on the problems at hand. It’s a difficult time for anyone, and probably not the time to start talking about their succession planning of their estate.
Make sure to put reminders in the firm’s systems, however, to follow up on the topic when the rough patch is over. Here’s a checklist—designed specifically for pre- and post-divorce estate planning to ensure their clients are in the best possible situation after a divorce.
The First Steps
The initial separation has its set of estate planning tasks that are crucial for making the process as smooth as possible.
The first step is to create a formal separation agreement establishing client rights in the relationship as far as debts, property, alimony, and child support is concerned. This agreement should also be made binding on heirs—outlining minimum provisions in the will that favor children of the marriage. During the separation, if a death occurs, the remaining spouse must make sure that they are named as such on the death certificate. It’s also advisable that during separation, financial advisors help their clients check and change all named representatives and beneficiaries on any existing estate planning documents—identified trustees, executors, and any recipients of a power of attorney.
Estate Planning After Divorce Proceedings
The divorce may be over, but the dust hasn’t completely settled. It’s time to make sure:
The estranged spouse has removed from all representative and beneficiary positions.
Note that some states may no longer recognize a pre-divorce will unless ratified after the divorce is finalized.
Clients should consider the estate and gift tax benefits lost when a marriage ends. The marital deduction on their estate taxes will also be lost. This may cause their total individual assets to exceed $5.43 million—the amount allowed in 2015 before federal estate taxes are accrued—and clients may want to purchase wealth replacement insurance just to cover any potential estate taxes that may be due to when they die.
Monies paid by an estranged spouse for children’s education are considered a gift for tax purposes. If you have the estranged spouse pay educational expenses directly to the educational institution, you can avoid triggering the gift tax.
It is crucial that financial advisors don’t drop the ball for divorcing clients—their newly arising estate planning needs can define the later years in their life. Be sure to follow up and explore all options for your clients.