Key Estate Planning Issues Divorce Attorneys Often Miss

1. Updating Beneficiary Designations

Divorce attorneys play a crucial role in guiding clients through the dissolution of marriage, focusing on dividing assets, alimony, custody, and more. However, while handling the many legal and financial challenges in a divorce, attorneys may miss or overlook critical estate planning concerns that could significantly impact clients’ futures. Effective estate planning becomes especially important in the wake of divorce to avoid unintended outcomes and to ensure financial and legal protections are in place. Here are some of the most common estate planning issues that are often overlooked during a divorce.

Divorce lawyers typically focus on dividing marital assets, yet they may overlook updating beneficiary designations on key financial accounts and policies. Life insurance policies, retirement accounts, and pensions often have a named beneficiary who will inherit the asset upon the account holder’s death. If these are not updated post-divorce, the ex-spouse might remain the primary beneficiary.

Solution: Ensure that divorce clients review and, if desired, change beneficiary designations on all financial accounts, including life insurance, IRAs, 401(k)s, and pensions, immediately following the finalization of the divorce.

2. Revising Wills and Trusts

In many cases, divorce attorneys do not revisit clients’ wills or trust documents. If a client’s will still names their ex-spouse as an executor or primary beneficiary, this can lead to complex legal disputes and may not align with their post-divorce wishes. Furthermore, trusts designed with both spouses in mind may need to be revised to reflect changes in family structure and asset division.

Solution: Prompt clients to update their wills and trusts as soon as possible to reflect new wishes and designate appropriate guardians, trustees, and executors.

3. Addressing Powers of Attorney and Healthcare Directives

Powers of attorney and healthcare directives are critical legal documents, especially if clients experience health issues or need financial assistance. Often, these documents name the former spouse as an agent, potentially granting them decision-making power even after divorce. This arrangement could result in significant complications and conflicts if the client becomes incapacitated.

Solution: Encourage clients to update their financial power of attorney and healthcare directive forms, designating a trusted friend, family member, or financial advisor in place of their ex-spouse.

4. Protecting Assets for Children from Previous Marriages

Divorcing parents with children from previous marriages often overlook estate planning structures that ensure their assets pass to those children rather than the ex-spouse or children from a second marriage. Without planning, these assets might not be distributed as intended, leading to unintended or disputed inheritances.

Solution: Clients can use trusts to secure assets for children from previous marriages. For example, a qualified terminable interest property (QTIP) trust allows clients to provide for both a current spouse and children from a prior marriage.

5. Guardianship Concerns for Minor Children

Divorcing parents frequently forget to address guardianship for minor children in their estate plans, a topic often not directly covered in divorce proceedings. If one parent dies unexpectedly, the ex-spouse may automatically assume full guardianship, potentially disregarding the deceased parent’s wishes.

Solution: Divorce attorneys should collaborate with estate planners to designate specific guardians for children. This ensures the deceased parent’s wishes are known, offering the surviving family stability and preventing potential guardianship disputes.

6. Tax Implications of Dividing Retirement Assets

Qualified Domestic Relations Orders (QDROs) allow the division of retirement accounts during divorce without incurring penalties. However, few divorce attorneys provide in-depth guidance on the estate planning implications or tax consequences associated with these divisions, leading to issues down the road.

Solution: Ensure that QDROs are accurately prepared and align with clients’ long-term estate planning goals. Clients should consult with both tax advisors and estate planners to manage potential tax burdens and strategically plan for retirement and estate transfers.

7. Planning for Post-Divorce Business Succession

Business ownership often complicates divorce proceedings, and while attorneys address business asset division, they may not consider long-term succession planning. Without a plan, the ex-spouse might end up with business control or shares, creating conflicts and threatening the business’s stability.

Solution: Clients should create a business succession plan to clarify ownership interests, management roles, and buyout options in the event of the death or incapacitation of a key business owner.

8. Handling Joint Debts and Mortgages

Divorce decrees typically determine responsibility for joint debts, but creditors may still consider both parties liable. If not addressed in estate planning, this liability can impact one spouse’s estate if the other fails to make payments, leaving an unintended financial burden for heirs.

Solution: Clients should consider revising their estate plans to protect their assets from liabilities tied to an ex-spouse and manage existing debts properly. In some cases, refinancing or selling joint properties may be the best solution to eliminate shared liabilities.

Conclusion

Divorce is a life-altering event, and a thorough approach to estate planning is essential for protecting a client’s financial interests and wishes. Encouraging clients to work with both divorce attorneys and estate planners ensures a comprehensive strategy that accounts for all critical financial, legal, and family issues. By addressing these often-overlooked estate planning matters, clients can protect themselves, their children, and their assets well into the future.