Going through a divorce takes a toll under any circumstances. During the process and after the divorce is final, there are often a great number of matters that need to be addressed. Changing titles to real property as well as bank and other financial accounts, dividing up personal property, and moving or relocating are just some of the changes that may need to be accomplished.
There is one very important step that should be taken as soon as possible during the process or immediately after a divorce, but it is one that is often overlooked. Updating your estate plan — or creating one, if you do not already have one — is the only way to ensure with certainty that your former spouse will not be able to assert a claim to your financial assets.
Failure to Revise an Estate Plan after Divorce Can Have Unintended Consequences
Issues in estate planning, retirement and divorce overlap. Under some circumstances, failing to update an estate plan and related documents following a divorce can result in an ex-spouse receiving unintended financial benefits.
In many estates, retirement savings in a 401(k) or Individual Retirement Account (IRA) make up a substantial portion of the estate assets. If a spouse is named as the beneficiary of a retirement account, as is often the case, and that designation is not changed following divorce, the former spouse may succeed in claiming the proceeds of the account. The same situation can occur if a spouse has been named as the beneficiary of a life insurance policy.
Michigan law provides some limited protection for estate assets from claims by former spouses. Section 700.2807 of the Estates and Protected Individuals Code (EPIC) provides that a divorce effectively revokes a disposition of property made to a former spouse in a will. However, the protection is very limited. It applies only to property given to an ex-spouse in a will. You can read more about whether an ex-spouse can inherit under a will in an article written by our estate planning attorneys at Barron, Rosenberg, Mayoras & Mayoras.
This statute does not affect direct beneficiary designations made in retirement accounts, life insurance policies, or other “pay on death” financial accounts. Depending on the wording of a divorce judgment, those beneficiary designations might not be affected by a divorce. Even when the judgment is properly worded, an ex-spouse can still receive the assets if the beneficiary is not changed after a divorce, because of the requirements of federal law.
However, Michigan case law does not allow the ex-spouse to retain those assets, if he or she waived the right to do so in the divorce judgment (or otherwise). But often a lawsuit is required to recover the assets and enforce the waiver. This of course puts beneficiaries in a difficult position of having to sue to reclaim funds. Not only does this result in legal fees, but if a court action isn’t filed quickly enough, the ex-spouse may spend the money before being ordered to return it. You can read about a Michigan case won by our probate litigation attorneys at BRMM that raised these very issues.
More Reasons to Update Your Estate Plan after Divorce
There are a number of life events that trigger the need to revise an estate plan, including marriage, birth of a child, and death of a family member. Divorce is one of the most important.
During a marriage, many couples have an estate plan that leaves everything to the spouse. When that couple divorces, there is an immediate need for both to prepare new estate plans providing for different property distributions. Relying on the statutory revocation is never a good idea — in fact, it is a significant mistake to think that the will or estate plan will automatically take care of itself.
Even if there is an automatic revocation of a gift to a spouse in a will, there can be uncertainty about what happens to that property. Depending on the circumstances and provisions of the will, the property may go to an alternate or residual beneficiary, if one is named. If there is no alternate or residual beneficiary, the property may pass to family members under state law as if there were no will. Updating the estate plan is the only certain, safe way to make sure your estate assets will be distributed exactly as you want them to be.
Beyond specific gifts, there are other parts of your estate plan that may need to be revised, because the spouse is often specifically designated in them. They include:
- Changing trustees and beneficiaries named in a trust
- Naming a new executor
- Updating all beneficiary designations, including retirement accounts, life insurance policies, bank accounts, and brokerage accounts
- Executing new powers of attorney for healthcare and financial matters
- Naming a guardian for minor children, in the event neither parent is able to care for them
There are estate planning options for retirement accounts and life insurance policy benefits, such as creating a trust with the proceeds, that cannot be accomplished simply by changing the beneficiary of the account or policy. Discussion about those kinds of options will be part of a comprehensive review of all your assets in determining the best structure for your estate.
Each situation is unique. There often are other compelling reasons to revise an estate plan when a divorce is anticipated or final.
Let our Experienced Michigan Estate Planning Attorneys Guide You
If you are anticipating a divorce or are divorced and have not updated your estate plan or do not have one, schedule a free consultation to talk with our experienced estate planning attorneys at Barron, Rosenberg, Mayoras & Mayoras. We will answer all your questions and work with you to protect your assets against claims of your former spouse. Revising your estate plan is the only way to ensure that your assets benefit your heirs and family exactly as you intend.
Our compassion, commitment, and credentials set us apart. Located in Troy, Michigan, we serve clients throughout the Tri County and Detroit area, as well as in other parts of Michigan. Call us at 248.641.7070 or complete our online form to set up your free consultation.