Divorce and Your Retirement
Don’t Let Divorce Mess Up Your Retirement Plans
Divorce is never easy, but the divorce of a long-married couple can be especially hard, particularly when it comes to retirement and estate plans.
Assets, including retirement accounts, can be hard to divide, and the presence of children, and possibly grandchildren, can require the wholesale revision of existing estate plans.
If you’re moving or divorcing on to a second marriage, it’s important to work toward the accurate and fair division of assets, including retirement funds, so you don’t wind up facing a shortfall later in life. When you pass, you’ll also need to update estate plans to make sure your wishes– no matter what your marital status– will be honored.
These four steps are key:
1. Know what’s yours. Marriage takes separate assets and intertwines them into joint assets, making things hard to untangle in the event of divorce. 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 gifts or inheritances received by either spouse, before or after the marriage. The status of separate property can change, though, if it commingles with marital assets– say, an inheritance is deposited in a joint bank account.
Marital property is typically any property that is acquired during the marriage, regardless of which spouse holds or owns title to the property.]
It’s important to remember that marital property isn’t just cars and houses. It includes things like pension plans, 401(k)s, IRAs, stock options, annuities, life insurance, brokerage accounts and closely held businesses. And, again, that’s regardless of which spouse holds ownership of those items.
Interpretations of marital and separate property vary by state and pre-existing contracts– like prenuptial agreements– can change things, so it’s important to speak with your attorney.
2. Consider trusts. A trust can make a lot of sense for divorced individuals and those in their second marriage when it comes to estate planning. Trusts can ensure that second spouses are unable to disinherit children from a previous marriage.
When setting up any trusts, especially any irrevocable trusts, it’s even more important to have property agreements– post-nuptial or prenuptial agreements– in place. These should clearly divide joint property into separate property, and then identify that property going into the trust.
3. Update beneficiaries. Beneficiary designation forms govern the distribution of assets from life insurance and pension plans to annuities and 401(k)s, and they often override wills. While some states have laws that automatically terminate a former spouse as a beneficiary, you should never rely on those laws alone. To ensure your estate plans are honored, make sure all your beneficiary forms are updated following re-marriage, marriage, or divorce.
4. Keep good records. Go through your retirement and estate planning documents at least every few years, ideally with an attorney, to make sure designations are up to date and all assets are accounted for. If you’re in your 40s or 50s, you’ve likely accumulated multiple retirement accounts and insurance policies, and it’s easy for an account to go overlooked, especially in the event of a divorce or new relationship. Outdated information on wills, trusts and beneficiary forms can cause estate planning pitfalls that are easily avoided with proper planning.
Divorce can be a challenging time for everyone involved, but with proper planning and insight, it doesn’t have to derail your retirement and estate plans. Talk to an estate planning attorney about these steps and more. To find one near you, click here.
What’s considered separate property? It’s important to remember that marital property isn’t just cars and houses. When it comes to estate planning, a trust can make a lot of sense for divorced individuals and those in their second marriage. To ensure your estate plans are honored, make sure all your beneficiary forms are updated following divorce, re-marriage, or marriage.
Divorce can be a challenging time for everyone involved, but with proper planning and insight, it doesn’t have to derail your retirement and estate plans.