A divorce can be a highly contentious time, both legally and emotionally. In the rush to secure short-term benefits, spouses often take serious missteps with regard to their long-term estate planning. These oversights can cost them life insurance benefits, cause them to incur large estate tax penalties, require new insurance policies and even result in unintentionally disinheriting their own children. Here are four pitfalls in estate planning than can happen to a spouse during or after divorce if not careful.
1. Revocation of Life Insurance Upon Divorce
Under Michigan law, a life insurance policy that names a spouse as a beneficiary is automatically revoked upon divorce. Without being aware of this change, the surviving spouse may be surprised to learn that he or she is no longer named as a beneficiary and is unable to cover outstanding expenses. The policy can be amended after the divorce if desired or the issue can be addressed during the divorce itself. Federal insurance benefits, it should be noted, operate differently than those governed by Michigan law and these will often not be revoked upon divorce.
2. Extra Life Insurance Required to Cover Child Support
The property settlement agreement (PSA) may require the parent paying child support to maintain an additional life insurance policy of up to $500,000 with the ex-spouse named as the beneficiary in order to cover continued payment of child support until the children reach the age of majority. The insurance premiums will need to be taken into consideration when calculating monthly support obligations.
3. Estate Tax Exemption
The estate tax exemption of up to $5.45 million per individual is not entirely compatible with the blended assets that can result from remarriage. What this means is that the $5.45 million of the assets brought into a new marriage vests with their new spouse and the previous exemption is lost, possibly incurring significant tax obligations.
4. Disinherit Your Own Children
If a spouse remarries and forms a family with blended assets, then predeceases the new partner, the estate will pass to the new family and the result can be forever disinheriting the children from the first family. In some cases, the estate can pass to the children of a new family into which the surviving spouse remarries, allowing children the deceased never met to inherit the estate.
The estate issues surrounding divorce can be complex and changes to tax and inheritance law may catch one aware. Most important, when there are large estates involved, it is always best to seek the legal advice of professionals who are experienced in estate planning law.