Many doctors transfer assets to a spouse as part of an asset-protection plan. But, this strategy does not consider what might happen in a divorce.
Divorce affects 50 percent of the married population for first marriages and up to 75 percent of those married for a third time. As traumatic and expensive as this process is, there are many other issues that need careful attention.
Any discussion of asset protection should include the possible effects of a divorce and an understanding of the detail involved afterward. I've previously covered the issue of prenuptial agreements and why they are so important to physicians, as well as a common DIY strategy popular with doctors. Many doctors transfer assets like real estate and investments to their spouse and children with the idea that those individuals are "safer," as they don't have the same level of professional liability. Unfortunately this common fatal flaw in doctors' asset protection gives no realistic thought to what might happen in a divorce, or in the event that the person to whom the assets were transferred incurs his own serious liability - even something as common as a serious car accident. It's an interesting predicament when a doctor has to prove at the time of divorce that the transfer of the family home she made to her husband was "fake" and "was only meant to thwart her creditors," when the only paperwork is the quit claim deed that designates it as his "sole and separate property."
I turned to domestic relations attorney (the polite phrase for divorce lawyer) Doug Gardner, a partner with the multi-state, Arizona-based law firm of Davis Miles McGuire Gardner* for some additional detail. Gardner provided a great list of documents that need to be updated after a divorce and a look at some of the details many couples overlook, including who is listed in the beneficiary designations.
"I would say the most important overlooked aspect is making sure that the divorced party changes his/her beneficiary. Arizona, (as one example) has a statute that allows a probate court to not leave items to a former spouse if they were divorced after the will was signed, etc. However, for many federally governed issues (including ERISA pensions and 401(k) and other federally recognized retirement benefits) federal law pre-empts state law and will award based upon the beneficiary designation.
"Hypothetical: January - Husband signs up for 401(k) at open enrollment and by default his wife is listed as beneficiary. June - Husband is divorced, and plans to update his beneficiary at the next open enrollment. July - Husband dies. Ex-wife will receive 100 percent based upon his beneficiary designation."
Doug reminded me that a wide variety of assets are controlled outside the scope of a will or estate planning trust, that many doctors wrongly believe will override all other paperwork by beneficiary designations. This includes bank accounts with payable on death designations (POD) or that may be in joint names, auto titles that may similarly list a death beneficiary, qualified plans, life insurance, annuities, health savings accounts, and even the beneficiary deeds on real estate allowed in some jurisdictions. Here are some specific legal documents most divorce experts agree you need to update; this list is by no means exhaustive:
1. Your will or trust that often names your ex-spouse as both a beneficiary and trustee.
2. Healthcare Powers of Attorney and Medical Directive authorizations that control who can make medical decisions for you if you can't. You may also want to update any HIPPA authorizations that allow your spouse to receive private healthcare information on you.
3. Medical treatment consent forms for minor children that may be on file with their school, sports teams, etc.
4. Emergency notification choices. Do you want your ex-spouse to be the person called if you have an accident, are injured at work, etc.?
5. Title to real and personal property assets like real estate and vehicles. Even if you have been awarded them in the divorce, they still need to be changed. This protects you from claims against them and protects the spouses releasing the assets from subsequent liability the asset may create, like being involved in a lawsuit over your ex-wife's car accident.
Finally, I'd remind readers that these details are often not part of your divorce attorney's scope of representation, and it is expected that you handle them on your own or retain your attorney beyond and apart from the divorce itself to help identify these issues and fix them.
*Full disclosure, I joined this firm last year where I helped create focused practice groups in the areas of asset protection and wealth preservation.