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Updating Estate Plans Following Divorce

1 Dec 2022 10:11 AM | AAML NJ Administrator (Administrator)

By Alex Krasnomowitz, CPA, CVA, MBA | Smolin | AAML NJ Gold Sponsor

Divorce can be a stressful and time-consuming process. Following the end of divorce proceedings, family law attorneys may find that estate planning is the last thing on their clients’ minds. Still, it’s vitally important that clients update their estate plans to reflect their new situation.

As an attorney, you may not be the one working on those estate plans, but part of the divorce process is looking to secure long-term security for your client—and that includes solutions for financial success in the future. 

It is crucial that estate plans are considered when going through a divorce—but it can be a challenge to find the right person to help your client through the basics of estate planning. To set clients up for success in all areas of their divorce, you may have to refer your client to an estate planning attorney, either in your firm or outside your practice. 

By thinking proactively about solutions for your client, you’ll be helping to protect and control their assets while building valuable referral relationships. Below, we discuss a few key considerations for long-term financial planning that might be indicators your client could benefit from speaking with an estate planning attorney.

Using trusts to control assets

Since divorce usually extinguishes an ex-spouse’s rights under a will or other trusts, it is unlikely that a client's property will be directly inherited by an ex-spouse. However, it is still possible that an ex-spouse could have more control over their wealth than they would prefer, especially if they have minor children.

When a minor inherits property, that property is generally held by a custodian until the child reaches the age of majority—either 18 or 21, depending on the state. A surviving parent (including an ex-spouse) may act as the custodian in some cases, which could allow them to make decisions about how assets in trust are spent or invested until the child comes of age. 

Creating a trust (or several trusts) for the benefit of your client’s children is a good way to avoid this situation. Trusts allow the grantor to appoint a trustee with the authority to manage the trust’s assets and make distributions. Since the grantor is able to choose this trustee, your client will be able to ensure that assets within the trust will not be controlled by their ex-spouse.

Different types of trusts to consider

All of the following trusts may play a valuable role in the estate planning process for individuals who have recently divorced: 

Revocable living trusts

Revocable living trusts allow grantors to arrange for the transfer of specific assets to designated beneficiaries. These trusts are commonly used to complement a will, as they allow the assets they contain to avoid the probate process. 

Irrevocable life insurance trusts (ILIT)

Irrevocable life insurance trusts (ILIT) allow the grantor to remove the proceeds of their life insurance policies from their taxable estate by transferring ownership of the policies to the trust. An ILIT also allows the grantor's family to pay estate costs using the life insurance proceeds from the trust.

Credit shelter trusts

Credit shelter trusts can allow the grantor to maximize the benefits of the estate tax exemption and are particularly useful in cases where the grantor has children from a previous marriage but also wants to ensure a new spouse’s financial security. 

Qualified terminable interest property (QTIP) trusts

Qualified terminable interest property (QTIP) trusts may be helpful for clients that have divorced and then remarried. The surviving spouse will receive income from the QTIP trust until their death—after which the beneficiaries are entitled to the remainder.

Making the right estate plan revisions

All of the above strategies may allow your clients to exercise greater control over their estates following a divorce. If you have further questions about any of these strategies and how they may be able to help your clients, contact our experienced accountants at Smolin Lupin at any time. 

And remember—involving an estate planning attorney during the divorce process can be crucial to the long-term success of the divorce agreement. Divorce requires holistic solutions, and the right partner can help you achieve them with the best interest of you and your clients in mind.

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