In this episode, I wanted to speak to a couple of things that you should keep in mind if you’re wanting to change your will or other estate planning documents during the course of your divorce process.
First of all, let me explain what I’m talking about when I reference your will and other estate planning documents. Most people are familiar with what a will is. Many people have one in place, but not everybody does. Sometimes the divorce is an impetus for people to finally put that will in place that they have been meaning to do for the last however many years. But assuming you have a will in place, the other kinds of estate planning documents that can be relevant and that people can think of changing during the divorce process would be any trust documents that you’ve put in place. Certainly also documents like a healthcare proxy, giving somebody the power to make health-related decisions for you if you’re incapacitated, or a document like a power of attorney.
The documents are going to differ state to state, so I can’t give you a comprehensive list of what documents might be relevant for you. They’re basically the general suite of documents that you would go to a trust and estates attorney to help you prepare in anticipation of either at some point being incapacitated and not able to make decisions for yourself or passing away and wanting to speak to what will happen to your assets on your death. So, a will, a trust, healthcare proxy, power of attorney, and other documents like that.
For obvious reasons, sometimes the planning that people have done for the end of their life and that they have reflected in documents like a will or a trust, power of attorney, healthcare proxy, etc., what they foresaw when they were married may be different now that they are going through a divorce process. So it’s natural to be rethinking some of your estate planning and wondering if you might not want to change it sooner rather than later. The big caution I want to give you is that the law often limits your ability to do that during a divorce process. So, before you make any changes to your will or to any trusts that you’ve created or to documents like a healthcare proxy or a power of attorney, you have to consult with your divorce attorney or you can ask your mediator if you’re in a mediation process about what is legally permissible and what is restricted during the course of the divorce.
I do want to clarify that when I say restricted during the divorce process, usually that just means you’re restricted from doing it unilaterally on your own. If you applied to a court to ask to make a change to a document, they can certainly allow it if they deem it appropriate. Also, if you and your spouse are in agreement that both of you can go ahead and change the terms of your wills or change your healthcare proxy or whatever the document may be, you probably need to have that agreement in a formal writing, whatever that means in your particular state. But if you’re in agreement, usually you can do almost whatever you want. Again, confirm those details with your own attorney who knows your particular case. I just want to clarify that when I say you’re prohibited from doing something or something is restricted usually it just means that it’s restricted if you’re trying to do it unilaterally without getting a court’s permission or your spouse’s consent.
The other kinds of not exactly estate planning documents, but relevant documents or assets that people think of in the same vein would be your beneficiary designations on your life insurance policies and on your retirement assets. Those aren’t a will. Those aren’t a trust or a healthcare proxy, but they are very important documents. The beneficiary designations become relevant if you were to die similar to the terms of your will or the terms of a trust or a healthcare proxy or documents like that. Similar to what I just said about a will and trust, and perhaps all the more so in the case of life insurance beneficiary designations and retirement asset beneficiary designations, the law is almost always going to prohibit you from changing those during the course of a divorce.
Again, if you can apply to a court and get a court’s permission to change them, okay. You’d be able to change them. And similarly, if you get your spouse’s written formal permission to change them, and by written, I don’t mean email or on a piece of paper that you both write, but whatever is required for a formal agreement between spouses in your state, if you and your spouse are on the same page about you changing a particular life insurance beneficiary designation or a 401(k) beneficiary designation, you should be fine to do that. Again, for sure, confirm in your particular case with your own attorney who knows the law in your particular state.
I also want to speak to why is the law so restrictive around this? Why would you be prohibited from making those changes during the course of a divorce? First of all, there’s a concern in a small subset of cases that people would be motivated to make changes to their different estate planning documents really more out of animosity toward their spouse than just being motivated out of good estate planning. So the law I think is, first of all, trying to limit the ability for someone who is really just feeling animosity toward their spouse and wants to do everything possible to harm them financially. The law around divorce is set up to limit your ability to do that.
Assuming that that’s not your motivation, I think the other concern of the law is that when you’re going through a divorce, your financial obligations, both spouses’ financial obligations, and financial entitlements are somewhat in flux. You’re not quite sure until the divorce is completely settled what your different support obligations might be, and you’re not quite sure yet what your different entitlements to certain marital assets might be. What the law does not want you to do is to go and change your life insurance, have it no longer go to your spouse, or change your 401(k) beneficiary, have it no longer go to your spouse, if that would be depriving your spouse of something he or she would be entitled to based on the way financial obligations and entitlements shake out in your divorce. If your spouse isn’t, for instance, ultimately determined to be entitled to half of your 401(k), the law doesn’t want to allow you to go ahead and sign that over to another person and basically circumvent the law in leaving at least half of it to your spouse.
They don’t want to allow you to do that while things are still being figured out. The law’s approach around these kinds of things is more like, “You know what? Hold your horses. Let’s table that. Once we figure out your different financial obligations and entitlements, then you can change your different estate planning documents to reflect that.” But before we’ve clarified what those things are, we don’t want you to go making any big changes and then creating a situation in which the surviving spouse is left far worse off than they would have been or should have been if you had just left things in place the way they were before the divorce process was initiated.
Finally, I wanted to introduce two concepts to you and just something for you to consider as you talk with your attorney or mediator about changing your will or different beneficiary designations. First of all, there’s a difference in general in estate planning between assigning someone the power to make decisions for you or decisions about your estate versus assigning someone the entitlement to receive or inherit an asset from you. One is more of decision-making authority. When I think of that, I think of things like a healthcare proxy or a power of attorney. Those don’t necessarily entitle you to receive an asset, but they do give you a power that’s very important, which is the power to make decisions for your spouse if they are incapacitated or the power to perhaps guide decision making around the administration of a deceased spouse’s estate, for instance, if you’re named the administrator or the executor of their estate.
The other area is more an entitlement to receive an asset. For instance, if you’re named the beneficiary of your spouse’s life insurance, that doesn’t give you any ability to make decisions about the life insurance policy, but it does entitle you to receive the proceeds of that asset if your spouse were to pass away. Similar to the 401(k) beneficiary designation doesn’t entitle you to make decisions about your spouse’s 401(k), but if they pass away, you’re entitled to receive the proceeds of that asset.
Again, I can’t say specifically in your case, but I would generalize and say that the law is going to be more concerned about you depriving your spouse of entitlement to receive an asset from you, like life insurance proceeds or a 401(k), than it is going to be concerned about you saying “I don’t really want my ex to be the person making healthcare decisions for me if I’m incapacitated” or “I don’t want my ex to have full blanket power of attorney to do whatever they want with any and all of my assets at any time.” Generally, you have more room to make changes to things like a healthcare proxy or power of attorney during the course of a divorce than you do to remove your spouse’s entitlement as a beneficiary to receive, for instance, your life insurance proceeds or to receive your retirement account on your death.
The second concept that I want to introduce is that there are gradations of making changes to the entitlements in your different estate planning documents. For instance, with life insurance proceeds, right now, you may have named your spouse as the outright beneficiary of 100% of your life insurance proceeds, and you may want to completely change that so that now your sibling is the 100% beneficiary of the life insurance proceeds. The proceeds basically are completely removed from your spouse, and they’d go to another person entirely. That’s one extreme. But more of a middle ground might be to introduce something like a trust vehicle where the proceeds are paid into a trust, and you can designate and specify the purpose of that trust as something that you and your spouse agree upon, for instance, that it’s to provide for the health and education and maintenance and support of your children. You could make your spouse a co-trustee of that trust. You could also make your, for instance, sibling the other co-trustee of that trust, so that they can together control the administration of the trust. The money is not going outright to your spouse, nor is it going outright to your sibling, but it’s going to a trust, and then there would be a document controlling the use of the proceeds, the principal within that trust, and you could allow your spouse some participation in that. Sometimes people will have their ex be the sole trustee of a particular trust that they set up, and that’s completely fine too. But if, for whatever reason, you really don’t want the proceeds to go outright to your spouse, and it’s just not acceptable to your spouse that they go outright to a family member of yours, a trust vehicle can be a good middle ground that gives some protection to the future use of those proceeds, but also allows your spouse to participate in a way that he or she would feel comfortable with.
My basic point here is that it doesn’t have to be all or nothing. Your only choices, for instance, around designating where your retirement asset proceeds will go to or where your life insurance proceeds will go to, it’s not a question of “Oh, well, does it have to go 100% to my ex-spouse or just 100% to another person?” No. First of all, it can go in percentages to different people if you want to do that, but it can also be paid into a trust, and then you can create a document governing that trust that spells out exactly how the proceeds would be used. So that’s a middle ground between having your spouse have unfettered discretion over exactly how to use 100% of the proceeds and having them completely boxed out of having any say over how, for instance, life insurance proceeds would be used on your death.
The final thing I want to say, which I alluded to before, was that if you are among the very high percentage of people who are going through the divorce process and kicking yourself for not having gotten your will or your different estate planning documents in place yet, don’t worry. You’re in good company. I don’t know what the percentage is offhand, but a very high percentage of people who are going through the divorce process have been meaning to get their estate planning documents in place for years, haven’t done so yet. So, if that’s the situation that you’re in, don’t worry about it. You can just use the divorce process as an impetus for talking with your spouse about what you would envision for estate planning now that you are going to be separated and understanding what your obligations are under your divorce settlement agreement and then constructing your estate planning documents in accordance with that.
This was our episode on changing your will and other estate planning documents during divorce. I hope it was helpful for you.