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The emotional stress and damage of divorce can have even more lasting consequences if personal finances and assets are not updated to reflect your changed situation.
It’s particularly important to address what will happen after your death, when certain assets and benefits may unintentionally be passed to your former spouse or his or her family.
For example, a current New York court case involving the assets of a woman who died at age 43 has now reached that state’s appellate court. The woman’s family is battling her former in-laws who stand to inherit her home that her family has owned for generations, all because she did not update her will. New York divorce laws automatically prevent her ex-husband from inheriting the property, but her secondary beneficiaries remain her ex-in-laws; so they are fighting over the property now.
It may be emotionally difficult to address your financial assets in the midst of divorce, but if you are going through a divorce or have even been divorced several years, it will pay off in the long run for you and your family to review and update your financial documents.
Be sure you have updated your estate plans, check insurance and other beneficiary designations and beneficiary deeds. Also provide your loved ones with copies of the updated documents, or let them know where to find them. Divorcing couples should also consider individually seeking a new financial adviser to avoid any conflicts of interest.
Make certain your will clearly states your intentions, and that your powers of attorney, health-care proxy, and beneficiary designations on IRAs, insurance policies, bank accounts, brokerage accounts, and annuities name the people that you wish. Remember, no matter what a will says, these financial accounts and policies will pass to the individuals named on them, so having updated directives for each account is extremely important.
As we have detailed in our blog IRAs Need Updated Beneficiary Forms, changes in beneficiaries for annuities and IRAs must be submitted in writing and require a signed and dated document be sent to the financial institution handling the account or policy.
For some accounts, the original financial agreements stipulate the ex-spouse cannot be removed as a beneficiary, so the beneficiary may want to take steps to clarify the arrangements to ensure his or her name remains on the account.
When a divorce is final, the final divorce decree may be sent to the plan administrator directing how money in IRA accounts should be divided and transferred into separate accounts. Company-sponsored qualified retirement plans will need additional steps. In those cases, the court must issue a Qualified Domestic Relations Order (QDRO) properly apportioning retirement plan assets between the former spouses.
However you wish to change your beneficiary status or account information, it’s also a good idea to request a written confirmation notice from your insurance company, financial planner and/or banker confirming they have received and acted on your changes. Then, keep all the updated documents in a secure location that can be found in the event that you may become incapacitated or die.
Divorce may also affect a person’s current and future income tax obligation, and may affect future taxes owed on assets and retirement accounts. Receiving or paying alimony payments or child support may also have tax consequences.
Divorce is painful. Planning your next steps both personally and financially can help ease concerns as time passes.
Consider meeting with a McRuer CPAs expert who will help you identify and act upon the best financial strategy to help you now and in the years ahead. Contact us online or call 816.741.7882 for a consultation.
