The road to divorce can be daunting. There is emotional turmoil. There is extra anxiety if children are involved. And the financial unknowns can be overwhelming. But some element of control can be maintained if there is foresight and planning.

Some of that planning means taking precautionary steps before a divorce action starts. Couples can open separate bank accounts. They can maintain separate credit cards. They can gather financial documents, catalog their tangible personal property and set up separate e-mail and post office addresses that allow them to correspond with their counsel and receive financial documents.

Divorcing couples often forget, however, to review and revise their estate planning documents. And the plans people create when they are married are usually not appropriate when they are parting ways, for obvious reasons. For instance, a plan might still require an individual’s entire estate to be passed to his or her (divorced) spouse upon death.

Those plans should not change with a divorce filing. They should be changed before. And it’s not just the will (or testamentary substitute) that should be reviewed. It’s all the beneficiary designations on a person’s retirement plans, life insurance and other assets, along with the form of title on all assets. All these should be reviewed before somebody goes down the divorce path.

Key Assumptions
As advisors assist their clients with a divorce, they should be aware of some key facts:
1. Most states say a person is entitled to a share in his or her deceased spouse’s estate—often referred to as the “elective share.” It typically amounts to about one-third of the decedent’s estate. Unless the spouse waives the right, he or she retains the right to the spouse’s share until a separation or settlement agreement is entered into or there is a divorce judgment.  

2. Once a divorce action is commenced, most states prohibit a spouse from shedding assets, including tax-deferred funds, stocks or assets in retirement accounts such as 401(k)s. Most states also forbid changes in life insurance beneficiaries, and some prohibit revisions in a will once a divorce action has begun.  

3. Many assets are owned jointly between spouses. When one spouse dies, these assets automatically pass to the survivor. For example, it is common for residences to be owned as a “tenancy by the entirety” (a term specific to spouses) or jointly with rights of survivorship. Financial accounts are often held jointly with rights of survivorship as well. While these arrangements may make sense if your marriage is intact, they may not if you’re divorcing. But until the assets are disposed of as part of the divorce process, the assets remain jointly owned.

4. In addition to a will, many people have a health-care proxy that names one spouse as the agent in situations where the other can’t make medical decisions for himself. A durable power of attorney is another common document that gives someone the authority to deal with finances in the event of his or her spouse’s medical problem or absence. Again, it is typical to name the healthy spouse as the “financial” agent.

5. Wills or testamentary substitutes leave assets to spouses or create trusts for the spouses’ benefit. People who die intestate (without a will) have their assets pass entirely to their spouses if there are no children. If there are children, the estate is split in half between the children and the spouse. This is certainly not the result one would want during a divorce.
6. Under federal law, you can bequeath an IRA to anyone, but spouses are entitled to inherit non-IRA retirement benefits such as 401(k)s and other pension plans unless they waive their rights in writing.

Case Study
Steven, an investment banker, decided that after 20 years of marriage, he and his wife Susan had grown apart, and while he cared for her, he did not want to grow old with her. They have two children—ages 16 and 18.

Steven filed for divorce, evoking a bitter response from his wife. Susan disparaged him to their friends and children. She increased her spending and decided that she was going to drag out the legal process so that Steven would have to continue to support her. She also believed that Steven was involved with another woman. She was determined to not leave the marriage easily.  

The environment grew so hostile that the children moved in with Steven because they couldn’t tolerate their mother’s rage.

The couple jointly owned a primary residence, a vacation home and various brokerage and financial accounts. Other than a small checking account, Steven had no account solely in his name. He also had several retirement assets that named Susan as the beneficiary, including a 401(k) and an IRA worth several million dollars. He had a life insurance policy with a $2 million death benefit payable to Susan.

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