Advising Late-in-Life Divorce

Estate planning steps your clients need to take

by Matthew T. McClintock, J.D.

Mr. McClintock, J.D., is the vice president of education for WealthCounsel. Matt leads the organization’s continuing education efforts, helping attorneys better understand estate planning techniques and strategies. Connect with him by e-mail: 

Dividing assets after a divorce is rarely an easy, straightforward process. This is especially true when clients split up late in life.

During marriage, asset ownership often becomes intertwined – or commingled – for spouses, resulting in shared ownership of most of the couples’ property. If the marriage ends, untangling that property can be a real challenge.

When a long-married couple gets divorced, their retirement and estate plans get thrown for a loop. Retirement accounts and other property can be hard to divide equitably, and account titles and beneficiary designation forms must be carefully reviewed and revised.

Estate plans must be completely redone and when the couple has children or grandchildren from prior relationships, cleaning up the estate plan is even more difficult – and much more important.

Advisors who work with divorcing couples or clients who are moving on to a second marriage have an important part to play in ensuring the fair and accurate division of assets. They can also provide great value to clients by helping them update their estate plans to protect them from unintended consequences, so their wishes will be honored when they die.

Assets: Marital vs. Separate

Even with prenuptial agreements in place, marriage almost always results in commingled assets.

As a couple creates joint bank accounts, purchases property together, or earns income during the marriage, joint property is often created and spouses sometimes gain rights to assets that may have previously been considered separate property.

When the marriage later ends, it can be challenging to divide those assets. 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 inheritances or gifts received by either spouse, before or during the marriage. The status of separate property can change, though, if it gets commingled with other marital assets. For instance, an inheritance might get commingled if a legacy is deposited into a joint bank account.
  • Marital property is typically any property that is acquired during the marriage, regardless of which spouse owns or holds title to the property. This often includes income earned by each spouse and profits made on retirement accounts when contributions are made to the account during the marriage.

It’s important to remember that marital property isn’t just houses and cars, either. 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 usually true regardless of which spouse holds ownership of those items.

What’s more, if separately owned property increases in value during the marriage, that increase is also considered marital property. For example, if a retirement account is started before the marriage but the spouse continues to make contributions once married, a portion of that account – as well as the interest or gain earned on those contributions – becomes marital property.

However, some states differentiate between active and passive appreciation – say, the investment growth within that retirement account – when deciding whether separate assets have become marital. If no contributions are made to the account during the marriage but its value continues to increase due to market performance or compounding interest, its designation as marital property will depend on state law.

Because of the complexities involved when it comes to dividing assets, a marital property agreement (either prenuptial or postnuptial) can help clear up any confusion surrounding the ownership of assets, including retirement funds.

Estate Planning Considerations

Once assets are divided, clients must set about reorganizing their estate plans. Following a divorce, especially if remarriage is a possibility, beneficiary designations must be changed, wills must be rewritten, and, in many cases, trusts should be established in order to protect clients’ wishes.

Advisors should consider the following key steps when working with divorced clients.

Set up trusts

Trusts come in many forms and are established to accomplish many different things. For most clients, a revocable living trust (RLT) serves as the foundation of their estate plan.

The RLT holds title to nearly all of a client’s property, allowing for the designation of a series of trustees to serve and manage that property for the client if the client becomes disabled or dies. When structured and managed correctly, an RLT allows the client’s heirs to avoid probate proceedings and administer and distribute the client’s property efficiently and with minimal difficulty after the client has died.

Regardless of the type of assets a client has, it’s far better to leave that property in trust for the benefit of a beneficiary – including a spouse – than it is to distribute the property outright to individuals. When individuals receive property outright, they become the sole owner of that property, and the property can be subject to claims by the individual’s creditors

An increasing number of attorneys and advisors have recently become familiar with a strategy called the stand-alone retirement trust (SRT). This special-purpose trust is designed to receive and manage IRAs and other qualified retirement accounts after a retirement plan participant dies.

Because of the complicated tax rules that govern tax-deferred retirement accounts, SRTs contain special provisions to make sure the retirement account balance is preserved as long as possible, protecting the balance from creditors of the beneficiaries and minimizing the impact of income tax on the amounts distributed from the retirement account to the beneficiaries.

For divorced clients who remarry later in life, an SRT becomes even more important. For example, retirement plan participants traditionally name their spouses as the primary beneficiary of their account. After the plan participant dies, the surviving spouse can roll over the account into his or her individual name.

The surviving spouse then owns the account and can designate new beneficiaries, even when that account originally belonged to the deceased spouse. But this can result in serious problems if the plan participant had children from a previous marriage. The surviving spouse can take over the retirement account, name new beneficiaries and essentially disinherit the kids.

When a client establishes an SRT, the client changes the beneficiary designation forms to distribute the retirement plan to the trust, not to the individual spouse. Although the surviving spouse can be a beneficiary of this trust, he or she cannot roll over the account and then name new remainder beneficiaries.

This way, the plan participant’s kids from a previous relationship will still see benefit from the account. The surviving spouse may be the primary beneficiary of the SRT, with the plan participant’s kids being the remainder beneficiaries, or the trust may divide the primary beneficiary interests into shares, allowing the children to receive part of the retirement plan benefit while the surviving spouse is still alive.

Regardless of the type of assets a client has, it’s far better to leave that property in trust for the benefit of a beneficiary – including a spouse – than it is to distribute the property outright to individuals. When individuals receive property outright, they become the sole owner of that property, and the property can be subject to claims by the individual’s creditors.

If the individual beneficiary is sued – in divorce, in business, in a car wreck – the amount that individual received outright can easily be lost in a judgment in favor of a creditor. By contrast, trusts can be established in a way that provides an incredible amount of asset protection for the beneficiary.

Rather than receive the property outright, the beneficiary can receive an interest in trust, allowing a trustee to make distributions to or for the benefit of the beneficiary. The beneficiary does not “own” the property; he or she only has a beneficial interest in the trust. As a result, the beneficiary is far less likely to have that interest taken away in the event he or she gets sued.

Not all trusts are created equally, and not all trusts afford the same level of protection. But without fail, trusts provide greater protection for beneficiaries than outright distributions.

Update beneficiary information

Beneficiary designation forms govern the distribution of assets from life insurance and pension plans to annuities and 401(k)s, and they generally override wills or trusts.

While some states have laws that automatically terminate a former spouse as a beneficiary, clients should never rely on those laws alone. To ensure that clients’ estate plans are honored accurately, advisors should make sure all beneficiary forms are updated following marriage, divorce or re-marriage.

Because life insurance proceeds and retirement accounts often represent significant portions of a client’s estate, the beneficiary designations should generally pay the proceeds to an appropriately-designed trust, rather than to any individual.

Keep good records

Clients and their advisors should meet regularly to go through documents, making sure designations are up to date and that all assets are accounted for. Many people have accumulated multiple retirement accounts and insurance policies by the time they reach their 40s and 50s, 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 designation forms can cause estate planning pitfalls that are easily avoided with proper planning. Divorces can be a challenging time for everyone involved, but with proper planning and insight, advisors can help keep clients’ retirement and estate plans on track.



 Want to know more about divorce and estate planning? Matthew T. McClintock and other experts will lead sessions on will and trust building, family planning and other topics at Symposium 2015, July 14-17 in San Diego. Learn more at