How could your divorce impact your estate plan in Texas?

You and your spouse hopefully each have a will that was created sometime during your marriage. If you have children you must have a will drawn up to protect yourself, your estate and your family should something unexpected happen to you. Once you get a divorce then you will likely have to change your beneficiaries to take into account that you and your spouse are no longer married. I highly doubt that you would want your ex-spouse to inherit all of your assets upon your passing away.

Also, if you earn a particularly high income and are fortunate enough to have a high enough net worth you will need to take a look at gift and estate tax issues at the time of your divorce. This is best done through the assistance of a tax professional and a financial advisor. For all of these reasons, you should anticipate and plan for changes coming to your estate planning in the weeks and months following the conclusion of your divorce. There is no better time than the present to begin to plan for the changes that come along with divorce from a financial perspective.

Are you able to do any financial planning/estate planning early on in your divorce?

In Texas, what you are more likely to do than to have a formal estate plan change early on in your divorce is to arrive at a settlement for temporary orders with your spouse. Temporary orders give you and your spouse marching orders for the remaining months of your divorce. Where you both will be living, who will get to see the kids and when the amount of temporary spousal support and child support be paid, and which of you will pay what household bills are common subjects dealt with in the temporary orders phase of a Texas divorce.

During this process, it is important to keep in mind that strange and unfortunate events sometimes do occur. An example of this would be your spouse passing away suddenly. What would you do if your spouse were to pass away after temporary orders were agreed to but before a final decree of divorce was entered by the court. How would you handle that? What would happen to you and your family from a financial perspective?

Suppose that you are the spouse who is in a position to be paid spousal maintenance and child support from your ex-spouse once your divorce is done and over with. In that event, you may want to negotiate for a provision in your final decree of divorce that your spouse will need to purchase a life insurance policy that names you as the beneficiary. Whatever amount you all decide upon to be insured by should be able to cover the spousal maintenance and child support payments that would be missed until your children turn 18.

I don’t see this happening with any regularity but I don’t see anything wrong with asking your spouse to update their will in favor of you or your children, either. The principle would be the same as holding a life insurance policy where you are the named beneficiary in the event that your ex-spouse passes away. However, you should be willing to meet some resistance regarding the will idea. Even if you are successful in negotiating for that update you would then need to go through the process of making sure the executor of the will executes your ex-spouse’s wishes promptly.

If you will be updating your estate plan what should your focus be in connection with a divorce?

This is an important step to take after your divorce has concluded no matter what you decide to do regarding your estate plan. If you have been married for an extended period it is likely that your ex-spouse is included within your will as your representative, beneficiary, a trustee on trust, or has a power of attorney either generally or medically over matters related to you. Although updating and getting a new will during your divorce may not be possible you should begin to plan what you want to do so that you can execute that plan as soon as your divorce concludes.

Suppose that you and your ex-spouse have a son who has just turned 18. When you and your spouse got a divorce, you agreed to pay for your son’s college education. That means college tuition, room and board and books are all going to be paid by you. If you pay the tuition directly to the university and then give money for everything else directly to your child, you may be interested to learn which payments are subject to a gift tax and which are not. Consult with a tax professional to find out more.

What happens to Social Security retirement benefits as a result of a divorce?

After you and your spouse get a divorce you can claim retirement benefits based on your earnings as long as you have been employed and have built up enough credits through paying social security taxes in your working years. In the alternative, you can claim benefits based on your spouse’s working history and earnings record. It doesn’t matter whether you worked or not if you want to claim benefits based on your spouse’s work record.

However, you must meet certain criteria to qualify for benefits under your ex-spouse’s work record. First, your ex-spouse must currently be entitled to receive retirement or disability benefits through social security. As far as your length of the marriage is concerned, you and your spouse must have been married for at least ten years before your divorce was finalized. Next, you cannot currently be married and must be 62 years old or older. Finally, you are not entitled to collect a benefit through social security based on your own earning’s record that exceeds or equals half of your spouse’s anticipated payout amount. If you meet all of these requirements then you can receive benefits through your ex-spouse.

One last point- if you are over the age of 62 and you have been divorced from your spouse for at least two years you are eligible to receive social security benefits based on your ex-spouse’s earnings. It does not matter if your ex-spouse has not elected to start receiving benefits as of yet.

What is the maximum amount of money that you can receive in Social Security benefits?

If you begin to receive benefits at your full retirement age your spousal benefit will be equal to 50% of your ex-spouse’s full retirement benefit. Your spousal benefit based on your ex-spouse’s full retirement benefit (monthly) of $2,000 would be $1,000. However, you need to be aware that if you are eligible to receive benefits based on your own earnings record then social security will pay that amount to you first. If your spouse’s benefit would pay you more money you would receive benefits based on your own earnings record and would get a second amount added to it that equals the higher benefit amount.

What happens to your Social Security benefits if you decide to remarry?

If your ex-spouse gets remarried but you do not then your benefits under Social Security will not be impacted at all. If you remarry you generally cannot collect benefits any longer based on your ex-spouse’s retirement or disability eligibility. You could, however, receive benefits based on your current spouse’s retirement or disability record.

What happens to your Social Security benefits if your ex-spouse dies?

If the unfortunate occurs and your ex-spouse passes away, you may be eligible to receive survivors' benefits under Social Security. Your ability to receive benefits would be based on your ex-spouse’s earnings record. You can also qualify for a death benefit if your ex-spouse was entitled to receive Social Security benefits. The marriage must have lasted at least ten years before your divorce was finalized, however. You must be at least sixty years old to receive a survivor’s benefit (or between 50 and 60 if you are disabled). You cannot be married, either. Finally, if you are entitled to receive a retirement benefit that is at least 100% of your deceased spouse’s benefit then you cannot receive a survivor’s benefit.

Why is managing risk an important part of a Texas divorce case?

If you face risk in the way of injury or loss of some sort it would make sense to buy insurance to compensate you if that risk turns into a reality. This is why people buy life and health insurance. If you get sick, injured, or pass away, these insurance policies would either compensate a beneficiary or could help you shift the burden of paying for expensive procedures and medication.

When we talk about risk management we are discussing an important topic for people like you who are either contemplating a divorce or are in the beginning stages of a divorce. When a divorce happens you will likely need to update the person who is the beneficiary under a life insurance policy. Your insurance coverage for health insurance may come to an end at the time of your divorce because your policy is through your spouse’s employer.

The impacts of divorce on your health insurance coverage

As I just noted, it is not uncommon for an entire family to have their health insurance provided by a single, employer-provided health insurance policy. If a divorce occurs, however, your coverage may end at some point. You can see out COBRA insurance in the period immediately following the divorce so that you do not have any gaps in your insurance coverage, however.

The impacts of divorce on your life insurance coverage

When you get divorced you will need to think twice about who to name as the beneficiary under your life insurance policy. You may want to name your children as the sole beneficiaries under that policy. If this is the direction that you want to go in, you should keep in mind that if your kids are under the age of 18 when you die that a probate court will require that a guardian be named to handle that money until your kids turn 18. Setting up a trust through your will would be a way to get around this, however.

In the alternative, you may consider naming your ex-spouse as the beneficiary under a life insurance policy. This may not be an idea that gets you excited, but it may be required under your divorce decree. Life insurance can be used as a mechanism to ensure that spousal maintenance payments that stop at your death do not put your ex-spouse in a financial bind. The same could be said for child support payments that cease upon your death.

Let’s look at an example to illustrate this point. Suppose that your spouse was receiving $500 per month in spousal maintenance from you after your divorce. If the court ordered you to carry life insurance on your life (with the insurance payable to your ex-spouse) for as long as spousal maintenance was required, you must do so.

Interested in learning more about finances and divorce? Head back to our blog tomorrow

We will be posting another blog that relates to financial issues and divorce in tomorrow’s blog post. In the meantime, if you have any questions about the material that we posted today please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed family law attorneys offer free-of-charge consultations six days a week here in our office. These consultations are a great opportunity to have an attorney address your specific needs and answer your questions directly. Thank you for choosing to spend part of your day with us and we hope that you will join us again tomorrow.

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