Estate Planning in Divorce Mediation

Couples going through divorce mediation often wish to consider financial matters beyond immediate spousal or child support and property division. Two issues that commonly come up are college planning and estate planning. Not only can such issues impact divorce negotiations, but many divorcing couples are approaching them for the first time and will benefit from the support of a mediator during the process. Even if you already have an estate plan, you will generally need to revise it during divorce.

Last month we introduced two couples interested in addressing estate planning and/or college planning during divorce mediation. Sophie and Jim already have an estate plan, and their two children are both adults. Deena and Greg do not have a plan and their children are a bit younger. Today we will look at Jim and Sophie’s situation, and in our next installment, we will address Greg and Deena.

Estate Planning and Divorce

When attorneys make joint estate plans for married couples, they generally interview the spouses together to avoid any potential conflicts of interest. There is a presumption that married couples share essentially the same financial goals. Obviously, this changes during a divorce. If several years have passed since the initial joint estate plan, the current financial picture may also be quite different. Perhaps one of you has a greater understanding than the other of the state of your marital finances and assets. It is critical to level the playing field by ensuring that both of you share all financial information. Each of you should have a separate consulting attorney. Some family law attorneys are experienced and knowledgeable enough in trusts and estates law to handle such matters along with the divorce. Others may recommend a separate trusts and estates attorney, particularly if you have a complicated estate.

Jim and Sophie made their joint estate plan nearly 10 years ago, when their children were much younger. Emily is now 26 and Nick is 24. Both Jim and Sophie want to know what effect the divorce will have on their current estate plan and what they will need to change after the divorce. Sophie is especially concerned about the possibility that after the divorce, Jim—who has always been the more financially savvy spouse—will have substantially more assets than she will. She knows that she will be fine financially regardless, but what if Jim remarries? Will the children’s inheritances be protected?

Effects of the Judgment of Divorce

Simply filing for divorce does not affect an estate plan. For some people, this may be a concern. Divorce procedures can take more time for couples with complex financial holdings. If this is your situation, and you do not want to take the risk of leaving an ex as a designated beneficiary or fiduciary while a divorce is pending, you may want to take immediate steps.

Once you have a final judgment of divorce, some things change automatically, even if you do nothing. The divorce revokes any revocable disposition of property and any fiduciary appointment to a former spouse or a former spouse’s relatives, whether made by law or in a governing instrument (N.J.S.A. 3B:3-14). The term “governing instrument” covers a wide variety of items, including deeds, wills, trusts, insurance and annuity policies, retirement and bank accounts, pay on death (POD) or transfer on death (TOD) accounts, and powers of attorney (N.J.S.A. 3B:1-1).

It would be a mistake, however, to rely on the law to accomplish post-divorce changes in an estate plan. In Jim and Sophie’s case, they should each review and revise their plans to ensure that they clearly designate the beneficiaries and fiduciaries that they now want. They will need to address not only wills and trusts, but also any powers of attorney or health care directives they may have, as well as the beneficiary designations of non-probate assets, such as life insurance policies and retirement accounts. Their attorneys can guide them in the specific steps to take.

Addressing Estate Planning in Divorce Mediation

Spouses who address estate planning during divorce mediation can address related matters in their Marital Settlement Agreement (MSA). Sometimes one spouse wants to continue providing for the other in a will or trust. If the parties agree to this, any rights retained by either former spouse must be specifically set out in a written agreement between them (N.J.S.A. 3B:3-14).

As noted above, Sophie is more concerned for their children than for herself. Divorcing couples with adult children do not have to worry about child support orders. Like Sophie, however, they may well be concerned about their children’s financial futures. One option Sophie has is to request that Jim purchase a life insurance policy naming the children as beneficiaries. To ensure that Jim pays the premiums, the policy could be held by a third-party trustee. She could also suggest that Jim make current gifts to the children or fund trusts to protect their inheritances. Another possibility is an alimony trust. Jim could place assets—which might include things like real property or business equity in addition to funds—into the trust. The income from the trust would be designated as support for Sophie, who would also pay taxes on it. The assets could then pass to the children after Sophie’s death.

Mixing Creativity with Caution

These are just a few examples of the many creative options available. Estate planning can be complicated, but the beauty of mediation is that it allows for open and candid discussions of ideas and out-of-the box solutions. Before finalizing anything, however, the parties’ attorneys must review the potential agreements to ensure that they will be legal and effective. The parties will also want to consult with their individual tax professionals.

Although many mediators, particularly those who are also attorneys, will be familiar enough with at least the basics of estate planning to provide information, always keep in mind that it is not a mediator’s job to advise participants on any aspect of the law. They can, however, help you decide what kind of legal and financial professionals to consult with before completing your plans.

In our next post, we will look at Greg and Deena, a couple with no estate plan and minor children. If you are interested in addressing college planning or estate planning as part of your divorce mediation, take advantage of our free consultation and contact us today.