Financial Planning After Divorce

When a marriage ends in divorce or a civil partnership in dissolution, there are a significant number of financial planning implications. In this article, we look at the impact on existing Wills, the laws of intestacy, nominations for death in service, and pension death benefits – useful reading for CII J02, R06, AF1, and AF5 exam takers.

This article is correct as at 29 October 2024.

Wills

While a Will is revoked automatically on marriage or entering into a civil partnership (unless the Will has been made in anticipation of the marriage or civil partnership),  divorce or dissolution of a civil partnership does not revoke a Will.

Instead, any provisions in the Will that benefit an ex-spouse or civil partner are automatically revoked:

• This includes bequests left to the ex-partner; and
• Appointments such as executor or trustee.

Legally speaking, the ex-partner is treated as if they had died before the person who made the Will.

The rest of the Will is still valid. So, if someone dies without updating their Will after divorce or dissolution, and the only beneficiary is an ex-partner, the estate will be subject to the intestacy rules.

This may result in assets being distributed in a way that is not in line with the deceased’s wishes. In particular, if they have started a new relationship, the new partner will not be accounted for unless they have already remarried or entered into a new civil partnership with them.

After a relationship breakdown, it is therefore crucial to review and update a Will to ensure the testator’s current wishes are clearly reflected.

Death in Service

Death in service benefits are usually a lump sum paid out to nominated beneficiaries if an employee dies while still employed. They are usually held under a discretionary trust, meaning the trustees have the final say over who receives the benefits.  The trustees are not legally bound by the nominations but will often take them into account.

Any existing nomination of an ex-partner as the beneficiary of death in service benefits may still stand after divorce / dissolution, unless action is taken to change the nomination.

If the nomination is not updated, the trustees may still consider the ex-partner, particularly if there was a longstanding relationship or if they believe that was the intention. It is therefore important to update the nomination form if the employee no longer wishes the ex-partner to receive the funds.

Many people choose to nominate their children as beneficiaries following a divorce. Trustees will usually consider minors and other dependants, and payments will be made into a trust to protect the funds until the children reach adulthood. 

Pensions

While pension funds will be considered as part of the financial settlement, it’s important to ensure any nominations are updated here too for the same reasons outlined above in relation to death in service.

Will Trusts

When entering a new long-term relationship, many individuals wish to ensure that children from a previous relationship are financially protected. Will trusts (essentially, inserting a clause to create a trust into a Will) can be an effective way to safeguard assets for children, while balancing responsibilities to a new partner.

For example, Will trusts can ensure that children from a previous relationship will receive their intended inheritance. Without such a trust, assets left to a new spouse/civil partner could be passed on to their own children or to others, potentially excluding the children from the first relationship.

Either an immediate post-death interest in possession (IPDI) trust or a discretionary trust could be used:

• An IPDI trust can allow a new partner (the life tenant) to benefit from certain assets during their lifetime, such as receiving income from investments or living in the family home, without owning the assets outright. Upon the death of the new partner, the remaining assets are passed on to the children from the previous marriage/partnership (the remaindermen). This structure provides financial security for the new partner while ensuring the children ultimately inherit the estate or specified assets.

• In a discretionary Will trust, the trustees have the flexibility to decide how and when to distribute assets to the beneficiaries, which can include both the new partner and the children. The person who sets up the trust (the settlor) can leave a letter of wishes to inform the trustees of their intentions. However, the trustees have discretion in making distributions based on the needs of the beneficiaries. This structure ensures that the assets are available for both the new partner and the children but gives trustees control to manage any potential conflicts of interest.

In conclusion, navigating life after a divorce or remarriage requires careful consideration, especially when it comes to finances and estate planning. Updating Wills, revising beneficiary designations, and considering the use of trusts are essential steps to protect assets and ensure wishes are met.

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