With 1 in 3 first marriages and 1 in 2 second marriages ending in divorce you just cannot afford to overlook your estate planning. Divorce is not easy and it often forces you to invest significant amounts of time, money and stress. It’s not only a difficult time emotionally with a lot to do and many decisions to make, so it’s no surprise that many people fail to update their estate plan including the impact on business structures.
Before reading any further let’s dispel the myth that separation or divorce proceedings prevent your “soon to be ex” from having a share in your estate … or even taking it all! The harsh reality is that while the divorce is ongoing, your current spouse has rights and you have continuing obligations. Even though your focus may be elsewhere you really need to “keep your eye on the ball” and make sure that while meeting your legal obligations to your spouse, you exercise as much control over your assets as possible. The question that you need to ask yourself is: “If you die or become incapacitated prior to the divorce being finalised, how are you going to ensure that your assets end up where you want them to?”
Here are a few points to consider:
Update your medical power of attorney.
If you are in a car accident and end up in hospital, who will make the health care decisions for you? In most cases people appoint their spouse as the custodian of their health care plan which may not be what you want when you are in the midst of a divorce.
Update your financial power of attorney.
Again, most people execute financial powers of attorney in favour of their spouse which may potentially give your spouse access to all of your accounts and assets while you are alive. As a POA can authorise access to assets in your name alone it is important to revoke this, execute a new one and if you are particularly concerned, let people know about the change.
Superannuation and Life Insurance.
So if you die during a divorce who do you think is likely to receive your superannuation proceeds and life insurance – you guessed it, your spouse! So attending to life insurance beneficiaries and binding nominations for superannuation shouldn’t be left until you do your annual tax return, it should be addressed as a matter of priority. If you have a self-managed superfund the implications can be devastating as it is possible for assets to be stripped out and diverted away from what would be your new estate wishes given the marital breakdown.
Update your will.
Admittedly it may not bother you if your ex is the sale beneficiary of your estate however, you really need to consider a broader range of circumstances and options at which point you should ask: would you really want your current spouse in charge of your estate? What about amending your Will to include testamentary or super proceeds trusts! What if you or your spouse want to remarry, where will your assets ultimately end up then? Long story short, along with the divorce proceedings you should remove your spouse as executor. The issue of guardianship of minor children may also be of concern to you. Updating your Will provides you with an opportunity to make your wishes known.
Decide what to leave your current spouse (while they are still your spouse).
Should you disinherit your spouse? The answer is that you cannot disinherit your spouse completely otherwise you would be creating a right for them to contest the will and receive a certain percentage of your assets. Generally the person who wants to make a claim has to be closely related to the person who died. In Victoria, to challenge a Will you must fall into one of the following categories:
- A spouse or domestic partner of the deceased
- A child or step-child of the deceased or someone treated as a child by the Will-maker
- A registered caring partner of the deceased (if they can show that they were dependent or partly dependent on the Will-maker)
- A grandchild of the deceased (if they can show that they were dependent or partly dependent on the Will-maker)
- A spouse or partner of a child of the deceased (if that child had also passed away within one year of the deceased’s death)
- A member of the deceased’s household (or someone who had been a member of the deceased’s household in the past and would have likely been again in the near future)
- A former spouse or partner if property matters have not been formally settled
It is important to understand the Will challenge laws differ in each state of Australia so if you reside interstate or have significant assets interstate then things will look different.
Review your Binding Financial Agreement (prenup).
If you have a prenuptial agreement in place you can also look at this document to see what your spouse is entitled to in the event of your death as your new estate plan should be consistent with the terms of your prenuptial agreement.
Review your trust.
If your trust deed permits your spouse to step in and take control of your trust then this should be reviewed and updated as soon as possible. Additionally if you have a testamentary trust in your Will this should be reviewed unless you want your spouse managing and having access to money and assets that you are planning to leave for your children.
Make no mistake that although there are some concessions within the tax system for divorce, there has been many occasions of problems arising because tax was merely considered as an afterthought or wasn’t considered at all.
Revisit the plan after the divorce is finalised.
Estate planning during divorce may be a temporary measure, but your vigilance doesn’t end here because once the divorce is finalised, you must revisit your estate plan and see what needs to be updated in light of the divorce to avoid potential unintended consequences resulting in costly litigation. It is important to note that you cannot rely on your divorce lawyer to attend to these issues nor necessarily even raise them as the onus is on you to initiate an estate planning review.
In summary, it is important that you consider any estate planning updates to be just a normal cost of divorce rather than something separate to divorce. It’s not just an untimely death that is the issue here, imagine how you may feel waking up in hospital from a nasty car accident only to find that your soon to be ex has taken control of your assets under power of attorney! The reality is that if you are going through a nasty divorce or if you are re-partnering it would probably not be good news for your intended beneficiaries if your assets were directed to your ex rather than your new partner.