Iowa Fiduciary

Can My Ex-Spouse Inherit My Wealth?

We all know divorce can be emotionally and financially challenging. But many of us don’t know how to help protect ourselves – and our families –  after a lengthy divorce. The Fiduciaries at Johnson Wealth and Income Management are often presented with “what if” questions that span in this often-gray area. Here’s what you need to know about trying to protect your loved ones and your assets post-divorce.

For many Americans, their Estate Plan stipulates how their property should be distributed upon their death. Depending on how you plan, it may contain some surprises for those who are close to you. There are many unknowns when someone passes away, and a lot of questions arise when the worst occurs.

Inheriting wealth can be a burden and a blessing. Even if you have an inclination that a family member may remember you in their last will and testament, there are many facets to the process of inheritance that you may not have considered. The big question in today’s article asks… “Can my ex inherit my assets?”

Here are some things you may want to keep in mind to help make sure your assets go where – and with whom – you truly want.

Can Your Ex Inherit Your Inheritance?

Divorce and inheritance questions sometimes come up as a couple begins the process of dividing their assets. Would an inheritance be considered the separate property of one spouse or could it be classified as a marital asset? Determining how the asset is categorized and whether it is subject to division will depend on whether the funds were kept separate and if the assets have been converted.

Each state’s divorce laws will govern how to address inheritance, in community property states and equitable distribution states as well. Sharing a spouse’s inheritance after divorce in Iowa is generally a nonstarter, unless your divorce judgment specifically addresses that topic.

Can Your Ex Inherit Your Estate?

The answer to this question is often “no”. If you have a solid Estate Plan in place, your ex shouldn’t be able to get hold of your estate after you divorce and you pass. The only exception where an ex-spouse could perhaps be on the receiving end of your estate when you die is if you neglect to change your beneficiaries under your retirement and estate plan

Can Your Ex Inherit Other Assets?

Generally, unless there is a court order telling you that you have to make a payment to your ex, you are under no obligation to do so. But because pensions are governed by federal law, formally known as ERISA or the Employee Retirement Income Security Act of 1974, state rules don’t necessarily apply. So if you fail to update your beneficiary designations, your ex could still stand to inherit the money.

There are three main ways property can transfer at death. They each have different rules:

  1. Joint assets: Real estate, bank accounts and other investments such as mutual funds, stocks, etc., can be owned jointly with someone else. If property is held jointly with the right of survivorship, it passes automatically to the survivor and is not controlled by a Will/Estate Plan.
  2. Beneficiary designations: A wide variety of property can be owned, registered and titled with a designated death beneficiary, payee or transferee. Life insurance policies, annuities, 401(k) plans, IRAs and other contracts often allow you to make a primary and even a contingent beneficiary designation. At your death, these assets are paid or transferred directly to the designated beneficiary.
  3. Probate: If at your death you own property in your name alone, then the way ownership of that property is transferred to someone else is by a court process that declares and approves the transfer. This process is commonly known as “probate” or “probate administration.” There are multiple steps in the probate process (and several types of probate). However, the only reason probate is even necessary is because the person who died, whether with or without a Will, had property in his or her name alone. If there was no will, it would be pursuant to the state’s intestacy laws.

Please note: These rules can be superseded by a divorce decree. Therefore, review the divorce decree to see whether it has any relevant language. Laws governing division of marital property in divorce vary from state to state. Iowa law requires that a divorce division be equitable, which means that it must be fair but not necessarily equal. Some couples are able to agree on their own about how to divide property, while others use the help of attorneys or a mediator to negotiate a settlement. Couples who don’t manage to resolve property issues will end up going to court to ask for a decision from a judge.

Modifying Your Estate Plan 

Although the last thing that many want to do once the divorce action is complete is to engage in more paperwork, it’s actually a good idea for you to review your estate plan at this time with your financial advisor. Legally speaking, modifying plans has some unresolved questions that may need to be clarified in the future through some legislative changes. Historically, it was difficult to remove a trustee from a trust. However, the relatively new (& untested) Iowa Trust code does provide some “gray area” that may be used to change the trustee. There is also the possibility that a trust could be amended by insertion of a provision in a trust permitting a procedure to remove a trustee. At least one court in Iowa has permitted this change.

No matter how carefully you craft your estate plan—Wills, trusts, powers of attorney—life is full of changes. If someone dies before the divorce is final, then technically that person is still married at the time of their death, so their soon-to-be former spouse is still their spouse. Public policy prohibits completely disinheriting a spouse, so a spouse who isn’t named in the other’s will may still be entitled to receive a portion of the estate. If you are interested in making a modification to your trust, it is essential to gain the services of an experienced estate planner. With their knowledge and skill, you will be able to help achieve the modification you require without making small mistakes that might go unnoticed without the assistance of a Fiduciary.

Think It Through First

While it may be tempting to disinherit someone you have fallen out with in the family, it’s important not to take an approach that can cause irreparable harm to the relationship. Mean-spirited acts can invite all sorts of problems and make an estate plan more challenging. 

There is always the chance you may reconcile, even on your deathbed, at which point it will be too late to update your will and estate plan again. However, as the modern concept of what comprises a family continues to evolve, some people may decide to also include friends who feel like family in their wills. Those instances, known formally as unnatural bequests due to the fact that they do not include typical beneficiaries such as a spouse and children, should be shored up with specific language to make it known it was not an accident. An example would be leaving a friend a lump sum of  money for their active role in your life. 

Ultimately, to help ensure your wishes are carried out the way you want them to be, enlisting the right professional is key, whether that be a lawyer, accountant or a Fiduciary advisor.

How Johnson Wealth Income Management Can Help

Estate planning can be complex and it is important to have someone who thoroughly understands the process in your corner.  State laws generally make it so that once a married couple is divorced, ex-spouses lose all property rights. Oftentimes, there can be family conflict if it isn’t specified who gets/is in charge of what after the incapacitation or death of another family member. A financial professional can help determine if the inheritance fits with your overall goals, time horizon, and risk tolerance.

It’s absolutely essential to have your Estate Plan up to date in case the worst situation happens. Keeping your will up to date will help ensure the transfer of your assets to your loved ones in a swift manner. By not keeping it up to date, it leaves your family members in the dark and with more problems to figure out while already going through a difficult time. At Johnson Wealth Income Management, our group of advisors are experienced to handle life’s biggest challenges. To help ensure your assets are distributed to the people closest to you, you should start by creating an effective estate plan and will and testament. 

We can help you to manage your affairs during your lifetime and control the distribution of your wealth after death. An effective estate strategy can spell out your healthcare wishes and help ensure that they’re carried out – even if you are unable to communicate. It can even designate someone to manage your financial affairs should you be unable to do so.

For more information on our Will and Estate Management services, reach out to your trusted Iowa advisors at Johnson Wealth Income Management here today.

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