Dividing assets after a divorce is rarely an easy, straightforward process. This is especially true when clients split up late in life. During marriage, asset ownership often becomes intertwined – or commingled – resulting in shared ownership of most of the couple’s property. If the marriage ends, untangling that property can be a real challenge.
Estate planning professionals who are working with divorcing couples or clients who are moving on to a second marriage have an important part to play in ensuring the fair and accurate division of assets. They can also provide great value to clients by helping them update their estate plans to protect them from unintended consequences, assuring their wishes will be honored when they die.
Assets: Marital vs. Separate
Even with prenuptial agreements in place, marriage almost always results in commingled assets. When the marriage later ends, it can be challenging to divide those assets. What’s considered separate property? What’s considered joint? Definitions vary by state, but in general:
- Separate property includes any property owned by either spouse prior to the marriage and any inheritances or gifts received by either spouse, before or during the marriage.
- Marital property is typically any property that is acquired during the marriage, regardless of which spouse owns or holds title to the property.
Also worthy of note: If separately owned property increases in value during the marriage, that increase is also considered marital property. Because of the complexities involved when it comes to dividing assets, a marital property agreement (either prenuptial or postnuptial) can help clear up any confusion surrounding the ownership of assets.
Estate Planning Considerations
Once assets are divided, clients must set about reorganizing their estate plans. Following a divorce, especially if remarriage is a possibility, beneficiary designations must be changed, wills must be rewritten, and, in many cases, trusts should be established in order to protect clients’ wishes. Consider the following key steps when working with your divorced clients.
- Set up trusts. Trusts come in many forms and are established to accomplish many different things. A revocable living trust is often an appropriate solution and can serve as the foundation of a client’s estate plan. While not all trusts are created equally and not all trusts afford the same level of protection, without fail trusts provide greater protection for beneficiaries than outright distributions.
- Update beneficiary information. To ensure your clients’ estate plans are honored accurately, make sure all beneficiary forms are updated following marriage, divorce or re-marriage. Because life insurance proceeds and retirement accounts often represent significant portions of a client’s estate, the beneficiary designations should generally pay the proceeds to an appropriately designed trust, rather than to any individual.
- Keep good records. Meet regularly with your clients to go through documents, making sure designations are up to date and that all assets are accounted for. Outdated information on wills and trusts as well as beneficiary designation forms can cause estate planning pitfalls that are easily avoided with proper planning.
Divorces can be a challenging time for everyone involved, but with proper planning and insight, advisors can help keep clients’ retirement and estate plans on track.
What advice would you give late-in-life divorcing or remarrying clients? Share your experiences in the comments section.
