Navigating a divorce is incredibly challenging and every couple deals with it in their own way.
There are immediate problems that couples need to address during the divorce process, such as how childrearing will be managed and how to split assets fairly. Yet, many couples overlook how their separation might affect their wealth in later life, particularly when it comes to their estate planning.
Unfortunately, if you don’t make necessary changes to your estate planning when you divorce, you could face significant challenges in the future.
Read on to learn five important estate planning considerations during a divorce.
1. Update your Will
Updating your Will is one of the most important estate planning steps to take during a divorce. This is because your existing Will remains in place when you divorce, but your ex-spouse can no longer benefit from it. Instead, anything you left to them would be inherited by the next beneficiary, if you named one.
This is the same process that the executor of your Will would follow if your spouse died before you.
However, if you left your estate to your ex-spouse and didn’t give instructions about what should happen in the event of their death or a divorce, you could be left with no named beneficiaries. Consequently, if you die without updating your Will, your estate could be divided according to the “rules of intestacy”.
Under these rules, a spouse or civil partner inherits most of your estate. Yet, as you are no longer married, your children or other family members will likely inherit everything. While this might align with your wishes in some cases, you may want to leave part of your estate to other beneficiaries, such as a new partner.
As a result, if you get divorced, it may be wise to revisit your Will and make sure that it is updated to ensure it continues to reflect your wishes. It’s also important to regularly review your estate planning as your circumstances change. That way, you can ensure that your wishes are fulfilled when you pass away.
2. Choose a new Power of Attorney
Creating a Lasting Power of Attorney (LPA) is crucial to ensure that you have nominated attorneys to handle your financial affairs or make decisions about your health/well-being if you don’t have the mental capacity to do so yourself.
A divorce doesn’t affect your LPA, so your ex-spouse could still be an attorney after you separate. This might mean they have control over your finances or important decisions about your healthcare should something happen to you.
It may also mean that your family need to deal with your ex-spouse to access your bank accounts/investments or pay bills if you’re unable to, which could cause additional stress at a difficult time.
Fortunately, creating a new LPA should be easier than ever since the government launched a new online application service, so you may want to do this during the divorce process.
3. Nominate a new beneficiary for your pensions and death benefits
Taking pension assets into account during a divorce is crucial as they’re often one of the biggest assets couples have after their home. Unfortunately, PensionsAge reports that over two-thirds of divorcing couples don’t discuss their pensions.
As well as working out how to share pension assets fairly, you will also need to check who the beneficiaries of your pensions are. Pensions are not covered by your Will and you normally need to complete an “expression of wish” form to nominate a beneficiary.
If your ex-spouse is a beneficiary, you might want to contact your pension provider and choose somebody else to inherit your pensions. You may also need to update the beneficiaries of any life insurance policies you hold.
4. Review your Inheritance Tax planning strategy
Finding ways to mitigate Inheritance Tax (IHT) may be important as the number of families paying the levy continues to rise. According to the UK government, it raised £1.4 billion from IHT between April and May 2024 – an increase of £200 million compared with the same period in 2023.
Unfortunately, when you divorce, it could be more difficult to mitigate IHT and pass wealth to your loved ones.
In the 2024/25 financial year, you can pass on £325,000 without triggering an IHT charge. This is known as your “nil-rate band”. You may also benefit from a “residence nil-rate band” of an additional £175,000, when passing your main home to a direct descendant such as a child or grandchild.
If you are married or in a civil partnership, you will have an advantage when it comes to IHT planning as you can pass your entire estate to your spouse without triggering a tax charge. Additionally, they inherit your unused nil-rate bands, if not utilised to gift to other beneficiaries.
This means you could potentially pass on up to £1 million between you without triggering an IHT charge.
Yet, when you get divorced, you can no longer benefit from passing wealth to a spouse or civil partner without IHT or inherit unused nil-rate bands. This means it might be more difficult to mitigate IHT and you may need to explore options such as lifetime gifting or trusts.
5. Check how your property is owned
Your home is often the biggest asset to split during a divorce, and it’s important to consider how it’s owned.
When you purchase a property with a spouse, there are two potential forms of ownership. They are:
- Joint tenants – The property is jointly owned and when one party dies, the other automatically inherits their share.
- Tenants in common – Each person owns a separate share of the property. Your share of the property is inherited by whoever you nominate in your Will.
If you plan to sell the house and share the funds, you may not need to worry about how the property is owned. However, if one of you will remain living in the property, being tenants in common may be more suitable. This allows you both the freedom to leave your share of the house to your chosen beneficiaries.
People often overlook estate planning during a divorce. Fortunately, you may be able to protect your assets and pass wealth to your loved ones by following these important steps.
Get in touch
If you are navigating a divorce, we can support you.
Email hello@fcadvice.co.uk or call 0333 241 9900.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, tax planning, Lasting Powers of Attorney or Will writing.
Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.
Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
