Estate planning and divorce are intricate processes, each filled with legal nuances and detailed accounting (to say nothing of the emotions involved). When the two overlap, the situation can quickly become unwieldy. A divorce will almost always complicate existing estate plans — it's just a matter of how much. Every aspect, from spousal rights to beneficiary designations, and even the potential custody of children, can be affected.
An individual seeking divorce will often look to their lawyer or accountant for initial guidance. What they should do, however, is turn to their lawyer and their accountant for support. Both professionals have distinct expertise, and relying on only one may leave vulnerabilities to which the other is unaware. As a lawyer, when speaking with a potential client, one of the first questions I ask is, "Do you have a good relationship with your accountant?"
In these situations, it's crucial to anticipate potential challenges and obstacles before they arise. Here are just a few strategies to consider when navigating estate planning amid a divorce:
1. Understand the client relationship. In the event of a divorce, accountants must maintain absolute clarity regarding their obligations and with whom they have a professional relationship. Did they file a joint return and thus represent the couple jointly, or do they exclusively represent one of the individuals? In these situations, adhering to all legal and ethical guidelines is paramount.
2. Speak openly with the divorce lawyers. It's important for accountants to have open and honest conversations with their clients' divorce attorneys. While the inclination may be to stay as removed as possible from the situation, doing so would be a disservice to the client and the relationship with one or both clients. This leaves room for either party to misconstrue or misrepresent tax filings.
Accountants are the experts in their clients' financial matters, and their active involvement can help ensure accuracy and transparency throughout the process. A dialogue between professionals will proactively mitigate confusion and complications down the line. Accountants should be neutral, but also available and helpful.
3. Revisit beneficiary designations. In many cases, a married couple's beneficiaries are each other. Should something happen to one of the two partners, the other would receive life insurance policy payouts, ownership of bank accounts, and other inheritances and assets.
In the event of a divorce, beneficiary details don't change automatically. It's critical that this information be updated at the right time. If not, one ex-spouse may inherit assets the other didn't intend for them.
It is important for accountants to have an open line of communication with divorce attorneys and estate planning attorneys to make sure that they understand the estate planning wishes of their clients' post-divorce, if changes are being made, and the tax implications they have.
4. Discuss custody details. Estate planning isn't just about bank account ownership and inheritance amounts. Particularly for young families, it can also involve child custody. During and after divorce, who gets custody in the event of a tragedy may change. And while custody battles are primarily the domain of lawyers, not accountants, the nuances of the situation can still be relevant — for example, ensuring that financial provisions, such as those found in a trust, are in place for the updated guardians.
5. Taxes. Accountants are acutely aware of the intricate nature of tax laws. Estate taxes, already governed by a multitude of rules and regulations, can become even more complex in the context of divorce. The transfer of financial assets between a previously married couple, for instance, may have different tax implications post-divorce. Spousal benefits, including those from Social Security, are also affected. In addition, alimony or spousal support arrangements can complicate matters further. In navigating these complexities, accountants play a vital role in ensuring financial clarity and compliance for their clients.
6. Consider state laws. While divorce laws may be strikingly similar from one state to the next, there are nuanced differences that can significantly impact estate planning strategies. From varying rules on property division to differing regulations concerning spousal support and inheritance, these disparities underscore the importance for accountants to consider all relevant jurisdictions during a proceeding. Post-divorce, when considering a client's new financial picture, reaching out to the divorce attorneys to make sure the client is compliant with their obligations will ensure a smooth transition for the client.
Estate planning amid a divorce is rarely a simple process. Equipped with the right strategies, however, accountants can help their clients through the situation effectively, land on fair outcomes, and move on to the next chapter of their lives with peace of mind.
