Divorce Can Cause Change to Your Estate Plan, Assets, Retirement

Divorce Can Cause Change to Your Estate Plan, Assets, Retirement

by Richard S. Bernstein on Feb 23, 2018

Estate Planning

By: Arthur L. Bernstein, & Barry D. Siegel, Esq.

In the midst of the trauma of divorce, few couples are thinking first (or at all) about their estate planning. But it is very important that your planning is reviewed by your team of advisors, possibly including your attorney, your financial advisor, your insurance professional, and your CPA. All aspects of your financial situation will be impacted – far beyond alimony payments or the division of assets.

Life Insurance Policies

It’s easy to forget about insurance policies that you’ve owned for decades, so a policy review is important. The first consideration is whether you want your divorcing spouse to be the beneficiary of your life insurance proceeds. Perhaps the beneficiaries should be changed to your children, for example.

However, changing the beneficiary is not always an option. Divorcing spouses are considered to still have an “insurable interest” in one another. In fact, if you are paying alimony and/or child support, the court may order you to keep life insurance policies in effect to protect those payments in the event of your death. The court could even order you to purchase life insurance for that purpose if you don’t already own a policy.

Ownership of the policy may also be of concern to the judge because the policy owner controls the beneficiary designations and cash value of the policy. It’s possible that the policy may need to be transferred to an Irrevocable Life Insurance Trust or a trust established to purchase a new policy.

Retirement Plan Accounts

Normally the transfer of an IRA account to another person would be a taxable event. However, it’s not taxable if pursuant to a divorce decree. The spouse who receives the account would become the new owner of the IRA, subject to the normal tax rules going forward. As the new owner of the IRA, he or she could change or name new beneficiaries.

Your Home

There are beneficial rules regarding capital gains tax that apply to your personal residence. A married couple can exclude up to $500,000 profit in a home sale from capital gains tax if the home was owned and used as a primary residence for at least 2 of the previous 5 years. If the property is sold after the divorce, there are several rules to determine who qualifies as the owner to calculate the exclusion requirements.

If the husband in a divorce case transfers his ownership interests in the home to his wife, and she later sells it, she will only be entitled to the single person’s exclusion of $250,000 instead of the $500,000 exclusion available to married couples. It is often better (from a tax perspective) for the couple to sell the home prior to the divorce so they can use the full $500,000 exclusion, reduce taxes, and then split the proceeds.

Estate Planning Documents

Besides beneficiary designations on retirement plans and insurance policies, you’ll also need to remove the divorcing spouse as your executor, personal representative, trustee, health care agent, attorney under a power of attorney, and any other position of authority over your affairs; as well as any position as beneficiary of your estate.

While estate planning is often the last thing on someone’s mind during the difficult process of a divorce, it’s important to speak with the insurance advisors, CPA’s and Lawyers that make up your estate planning team.

Call us for a confidential consultation with one of our expert advisors who can guide you through this complex area of estate planning. 561.689.1000.

The founder of The Siegel Law Group, P.A., Barry is driven by a passion to make people’s lives better and simpler. He counsels both individuals and families on diverse issues, such as, Trust and Estate Planning and Asset Protection (using both domestic and foreign strategies), Elder Law Planning, Medicaid Planning, Veterans Benefits, Special Needs Planning, among others.

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Barry D. Siegel. Esq.

Barry is the founder of The Siegel Law Group. He is driven by a passion to make people’s lives better and simpler. He counsels both individuals and families on diverse issues, such as, Trust and Estate Planning and Asset Protection (using both domestic and foreign strategies), Elder Law Planning, Medicaid Planning, Veterans Benefits, Special Needs Planning, among others.