Life Insurance – August Law

The July 2024 passing of beloved Gen X actress Shannen Doherty offers important lessons about estate planning during divorce. Known for her iconic roles in “Beverly Hills, 90210,” “Heathers” and “Charmed,” Doherty not only faced a courageous and public battle with breast cancer but also raced against time to finalize her divorce and protect her estate. Her story shows why proper timing and planning are crucial when navigating divorce – one of life’s most challenging transitions.

The Power of Timing

According to reports, just one day before her death, Doherty filed for an uncontested divorce from her husband, Kurt Iswarienko, who signed the agreement the following day. This eleventh-hour timing proved crucial for her estate. By finalizing the divorce, Doherty ensured her assets—including a $6 million Malibu home and future residuals from her acting career—would be distributed according to her wishes rather than subject to community property laws.

Had the divorce not been finalized, the outcome could have been drastically different. In some states, if a person dies during an active divorce proceeding, the process either halts or is significantly altered. Without a finalized divorce agreement in a community property state like California, Iswarienko could have had a legitimate claim to significant portions of Doherty’s estate, potentially leading to years of costly legal battles and family conflict.

Common Estate Planning Mistakes During Divorce

While Doherty finalized her divorce just in time, many people make critical estate planning mistakes during divorce that can have lasting consequences for their families.

Here are the most common pitfalls to avoid:

Waiting Too Long to Update Beneficiary Designations. One of the biggest mistakes is assuming your divorce automatically removes your ex-spouse as a beneficiary from your accounts and insurance policies. The reality is more complicated. While some states have laws that automatically revoke ex-spouse beneficiary designations upon divorce, others don’t. Moreover, federal law may override state law for certain types of accounts, like employer-sponsored retirement plans. This means your ex-spouse could still inherit your 401(k) or life insurance proceeds even after divorce if you don’t actively change your beneficiaries. When you work with me to create your Life & Legacy Plan, I will support you in making sure your assets go to the people you want in the way you want. That includes changing your beneficiary designations if needed.

Forgetting About Digital Assets. In today’s digital world, your online presence and digital assets must be considered during divorce. Streaming service accounts, airline miles, cryptocurrency, digital photos, and social media accounts must be addressed. Many forget to update passwords and access information or specify who should inherit these digital assets. This oversight can leave your loved ones unable to access essential memories, valuable assets, or necessary account information.

Neglecting Incapacity Planning. Divorce often focuses people’s attention on what happens after death, but incapacity planning is equally important. Your ex-spouse may have been your healthcare proxy or had power of attorney over your financial accounts. During and after divorce, you need to designate new agents to make medical and financial decisions if you become incapacitated. Without updated incapacity planning documents, your ex-spouse might still have legal authority to make crucial decisions about your care, which you may not want.

Making Emotional Decisions. Divorce is emotionally charged, and many people make hasty decisions based on anger or hurt. For example, you might make choices that could trigger expensive legal battles after death. As a Personal Family Lawyer, I am your trusted advisor who can help you see the impact of your decisions and support you to create a Life & Legacy Plan that aligns with your long-term goals and values.

Protecting Your Assets During Divorce

To avoid these common mistakes and protect your assets during divorce, consider these three practical steps:

Step 1: Create an Asset Inventory

Document all your assets, including property, bank accounts, retirement accounts, investments, life insurance policies, and digital assets. Note which assets are yours alone and which ones are joint assets. This inventory will help ensure nothing is overlooked during the divorce process. When you meet with me for a Life & Legacy Planning^Ⓡ Session, I will support you with this step.

Step 2: Review and Change Beneficiary Designations

Systematically review and update beneficiary designations on all financial accounts, retirement plans, and insurance policies. Remember that beneficiary designations typically override what’s written in your will or trust.

Step 3: Create a Life & Legacy Plan

When you work with me to create your comprehensive Life & Legacy Plan, you’ll know your assets will go to the people you want in the way you want and that you’ll be cared for by those you trust most if you become unable to care for yourself. You’ll also know that your beneficiary designations will be updated, your assets accounted for, and that you’re making the best decisions for the long term.

Your Next Step

I help you navigate life’s transitions while protecting your assets and loved ones. I don’t just create estate planning documents – I provide ongoing support to ensure your plan evolves with your life changes and works when you and your loved ones need it most. Through the Life & Legacy Planning process, I will help you make informed decisions about your estate, especially during significant life transitions. Contact us today to get started.

This article is a service of August Law, a Personal Family Lawyer® Firm. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Life & Legacy Planning™ Session, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love.

The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer® firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

A comprehensive Life & Legacy Plan is about creating a strategy that lets you enjoy your life to the fullest while protecting your loved ones’ future when you can no longer be there. It might seem like life insurance is an easy way to help secure your loved ones’ future – and it is – but your policy must be set up in the right way to have the best possible impact on your family.

The way you set up your beneficiary designations on your insurance policy can significantly impact its effectiveness, how it’s used, and who controls it after you die. In this blog, we’ll explore how to name beneficiaries to ensure your loved ones have the funds they need to thrive when something happens to you.

DO NOT Name a Minor As The Beneficiary of Your Life Insurance Policy

Naming your child or grandchild as a direct (or even backup) beneficiary of your life insurance policy may seem like a natural choice.

However, if a minor child is the beneficiary of a life insurance policy, it guarantees a court process called “guardianship” or “conservatorship” must occur to name a legal guardian or conservator to manage the assets for your minor beneficiary until they turn 18. Then, at 18, your minor child receives everything left in the account–outright and unprotected–with no oversight or guidance. This is the worst possible outcome for everyone involved.

You might think the answer is to name a trusted family member or friend as the beneficiary of your life insurance, hoping they’ll use the funds for your kids, but that may not produce the desired outcome either.

If you name another adult as the beneficiary for a life insurance policy intended for your kids, your kids will have no legal right to the money. The adult you named as beneficiary can use the money however they want and don’t have to use it for your kids at all!

So what’s the solution? Keep reading until the end to find out what to do instead.

DO NOT Name Adult Beneficiaries Directly

Direct payouts to adult beneficiaries may seem straightforward, but can have unintended consequences. Life circumstances change, and the lump sum received from a life insurance policy might be at risk if not managed properly. By avoiding direct payouts, you can ensure that the financial security provided by the insurance is preserved for the long term.

One key concern is the potential for beneficiaries to hastily misuse or exhaust the funds. A sudden windfall might lead to imprudent spending, leaving your loved ones without the financial support you intended. Additionally, if your beneficiaries are not financially savvy, they may struggle to manage a lump sum effectively, meaning the policy might lose money over time.

Even if an adult beneficiary is financially responsible and savvy – or knows enough to speak to a financial advisor – life events can put the funds at risk. Because the life insurance proceeds now belong entirely to your beneficiaries in this case, the proceeds of the policy are now completely vulnerable to any future divorces or lawsuits that your beneficiary may go through in the future.

That means that if your beneficiary is divorced, sued, or accumulates debt, all the money they received from your insurance policy could be lost.

Plan For Your Life Insurance The Right Way: Use a Trust

A Trust is an agreement you make with a person or an institution you choose. This person is called your Trustee, and their job is to manage the assets you put into or leave to your Trust, according to the rules you create.

Instead of naming minors or adult loved ones as the direct beneficiaries of your life insurance, name your Trust as the beneficiary of your policy instead. By doing this, your loved ones will still receive the funds you intend for them while the decisions you made in the Trust maintain control over how the funds are managed and distributed. This ensures that your wishes for your assets and your loved ones are carried out even after you’re gone.

How does it work?

A well-drafted Trust allows you to specify conditions for distributing the Trust funds, ensuring that the funds are used for intended purposes such as your beneficiaries’ education, homeownership, or other specific needs. Distributions from the Trust can also depend on the ages and circumstances of each beneficiary. This level of control can prevent the misuse of funds and promote responsible financial behavior for everyone involved. Plus, assets held in a Trust bypass the probate process, ensuring a more efficient and timely distribution of funds to your beneficiaries. This can be crucial in providing immediate financial support to your loved ones when they need it the most.

And while you can choose to have your Trustee distribute life insurance proceeds directly out to your beneficiaries outright, at specific ages and stages, you may want to provide even more protection for your beneficiaries. One of the considerations we’ll help you make is whether to retain the assets in trust, giving your beneficiaries control over the Trust assets, but in a manner that keeps the inherited life insurance protected from lawsuits, future divorces, and creditors.

Let Us Set Up Your Entire Plan In The Best Way Possible

Setting up your life insurance policy with the right beneficiaries involves careful consideration of your unique family dynamics, financial goals, and long-term objectives while being proactive to avoid future issues. By doing so, you maximize the benefits of your life insurance to provide a lasting legacy of financial security and support for your loved ones.

But planning for your life insurance is only one step in creating a plan for everything you own and everyone you love today and in the future. My mission is to guide you to create a comprehensive estate plan that ensures your wishes are fulfilled and your family’s future is protected no matter what the future holds.

Schedule a complimentary call with my office to learn more. Contact us today to get started.

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