Estate Planning After Divorce: What You Need to Know
Divorce is a life-changing event. It impacts your finances, your family relationships, and your social connections. It also derails the careful future plans you may have made with – and for – your spouse.
One area that often gets overlooked in a divorce process, is estate planning. In this Blog, we’ll explore why post-divorce estate planning is critical, explain how Ontario law affects this process, and highlight some of the key steps you should take.
What is an Estate Plan?
But first, we need to cover off exactly what an estate plan is. It’s simply a comprehensive strategy to manage your assets and liabilities during your lifetime, and then distribute them after your death according to your wishes.
Importantly, it’s more than just making a valid Will. A good estate plan also includes:
- Powers of Attorney for Property and Powers of Attorney for Personal Care
- Trusts (used to manage assets for children or other beneficiaries)
- Designating beneficiaries of your life insurance policies, RRSPs and TFSAs
- Tax planning designed to minimize your probate fees, income tax, and capital gains taxes upon your death
- Succession planning for any business you run
- Charitable gifts through your Will or trusts
Why Update Your Estate Plan After Divorce?
Typically your estate plan will reflect your situation, financial status, assets, and goals while you were married. Now that you are divorced/divorcing, your estate plan naturally needs to reflect the change in your priorities and life circumstances – and, in most cases, the unsurprising desire to avoid enriching your former spouse in the event you die.
If you don’t change your estate plan, there may be several unwanted consequences, such as:
- Your former spouse inheriting your assets
- Beneficiary designations remaining unchanged, and still benefitting your spouse
- Family members disputing their entitlement.
Key Steps for Estate Planning After Divorce
Although this does not cover all aspects of your estate plan, here are some of the key ones to focus on when your separation and divorce is on the horizon:
-
Revoke or Update Your Will
This should be job number one. True, Ontario does have legislation, in the form of the Succession Law Reform Act, that addresses the effect of divorce on your Will. However, it comes with strict rules: It provides that it’s only once you get a final divorce judgment, that any gifts you made to your former spouse in your Will are automatically revoked – unless your Will explicitly states otherwise. The same goes for your decision to appoint them as your Estate Trustee.
This same revocation rule can apply if you or your spouse die at a time when you were separated, but there are likewise certain tests for when that occurs. You must have been living separate and apart at the time of your death due to a breakdown of your marriage, AND either of the following: 1) you lived separate and apart from each other for at least three years; or 2) you had a valid separation agreement, court order, or family arbitration agreement.
With these strict thresholds to meet, use your looming divorce as a cue to purposefully update your Will as soon as possible, so that it reflects your current situation and your wishes.
-
Update Beneficiary Designations
Beneficiary designations on assets such as RRSPs, TFSAs, pensions, and life insurance policies take precedence over your Will. If you don’t update them, your spouse may still receive those assets, because divorce does not automatically revoke them.
-
Review Powers of Attorney
Your Power of Attorney for Property and Power of Attorney for Personal Care are legal documents that designate someone to make decisions on your behalf if you are incapacitated. If your ex-spouse is still named in these documents, it’s very wise to reconsider these appointments after your divorce. Naturally you will want to appoint someone else who can be counted on to put your best interest in the forefront, should become incapable of managing your own affairs.
Related: How a Divorce Attorney in Toronto Can Help You
-
Tax Implications of Divorce and Estate Planning
Finally, divorce can have significant tax implications, particularly regarding the division of registered accounts, real estate, and spousal support payments. Proper estate planning can help minimize taxes for your estate and beneficiaries, so it’s important to consult with a financial advisor or tax professional, to get tailored advice.
Related: Managing Divorce at an Older Age – Navigating the Challenges of “Grey Divorce”
The Takeaway
As this list shows, your divorce should not only trigger some reflection as to your estate plan, it should prompt you to take firm steps towards adjusting it to accommodate your current (or upcoming) divorced status. Feel free to contact our offices, and we’ll help you navigate this process.