Divorce is never easy, but the divorce of a long-married
couple can be especially hard, particularly when it comes to retirement and
estate plans. Assets, including retirement accounts, can be hard to divide, and
the presence of children—and possibly grandchildren—can require the wholesale
revision of existing estate plans. If you’re divorcing or moving on to a
second marriage, it’s important to work toward the fair and accurate division
of assets, including retirement funds, so you don’t wind up facing a shortfall
later in life. You’ll also need to update estate plans to make sure your
wishes—no matter what your marital status—will be honored when you pass.
These four steps are
key:
1. Know
what’s yours. Marriage takes separate assets and intertwines them into
joint assets, making things hard to untangle in the event of divorce. Separate property includes any property
owned by either spouse prior to the marriage and any inheritances or gifts
received by either spouse, before or after the marriage. The status
of separate property can change, though, if it commingles with
marital assets—say, an inheritance is deposited in a joint bank account. Marital
property is typically any property that is acquired during the marriage,
regardless of which spouse owns or holds title to the property.
It’s important to remember that marital property isn’t
just houses and cars. It includes things like pension plans,
401(k)s, IRAs, stock options, annuities, life insurance, brokerage
accounts and closely held businesses. However, interpretations of separate and
marital property vary by state and pre-existing contracts—like prenuptial
agreements—can change things, so it’s important to speak with your
attorney.
2. Consider trusts. When
it comes to estate planning, a trust can make a lot of sense for divorced
individuals and those in their second marriage. Trusts can ensure that second
spouses are unable to disinherit children from a previous marriage, for
example. When setting up any trusts, especially any irrevocable trusts,
it’s even more important to have property agreements—prenuptial or post-nuptial
agreements—in place. These should clearly divide joint property into separate
property, and then identify that property going into the trust.
3. Update beneficiaries. Beneficiary
designation forms govern the distribution of assets from life insurance
and pension plans to annuities and 401(k)s, and they often override wills.
While some states have laws that automatically terminate a former spouse as a
beneficiary, you should never rely on those laws alone. To ensure your estate
plans are honored, make sure all your beneficiary forms are updated following
marriage, divorce, or re-marriage.
4. Keep good records. Go
through your retirement and estate planning documents at least every few years,
ideally with an attorney, to make sure designations are up to date and all
assets are accounted for. If you’re in your 40s or 50s, you’ve likely
accumulated multiple retirement accounts and insurance policies, and it’s easy
for an account to go overlooked, especially in the event of a divorce or new
relationship. Outdated information on wills, trusts and beneficiary forms can
cause estate planning pitfalls that are easily avoided with proper planning.
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