Divorce and separation: the importance of estate and tax planning during and post divorce proceedings

The recent statistics published by the Office of National Statistics (“ONS”) reveal that the number of divorces in the UK fell by 29.5% in 2022. This declining rate is largely attributed to the introduction of the mandatory waiting period as part of the Divorce, Dissolution and Separation Act (2020) that came into force in 2022. Under the new law, the parties are required to adhere to a mandatory 20-week waiting period before they can progress to the next stage of their divorce.

Parties going through divorce will no doubt be concerned as to how this impacts their assets from a family law perspective; and estate planning may not be an obvious consideration during this time. Nevertheless, the recent statistics suggest that divorcing spouses should start thinking about estate and wealth planning, both in the interim (whilst processing and dealing with their divorce), as well as once it has been finalised. This article serves to highlight the key areas of planning to consider from a Private Client perspective and how we can assist spouses during this difficult, but important time.

Separation vs divorce

The breakdown of a relationship can take many forms and with divorces taking longer to be finalised, there will be periods of time where the parties’ relationship may be viewed differently in the eyes of the law. For example, a separation has no legal effect on your Will and your spouse could still inherit under it, no matter how long you have been living apart. If your Will is overly reliant on your spouse, this may no longer reflect your personal circumstances and a new Will reflecting separation should be considered. Similarly, if you had no Will in place, your spouse can still inherit from you under the Intestacy Rules. For these reasons, estate planning can be critical even in the interim stage of the divorce proceedings.

If, however, your divorce has been finalised, this significantly impacts the position of your ex-spouse under your Will. Although your Will remains valid, your ex-spouse will no longer be able to benefit from it (unless stated otherwise). This is because your ex-spouse is treated as if they had pre-deceased you on the day the decree absolute was granted. Additionally, if your ex-spouse was appointed as an executor of your estate or a trustee of any Will trusts, a decree absolute automatically revokes their appointment. This creates problems both for the administration of your estate as well as potentially creating an intestacy situation if your Will left everything to your ex-spouse.

Wills

In light of the above, it will be important for parties to update their Wills as soon as possible. As a first step, clients are advised to undertake a close review of their assets and liabilities to understand how their estate may have changed post-divorce. In addition, you may have a continuing financial obligation to your spouse as part of the divorce settlement, which should be accurately reflected in your new Will. Further issues that may need to be considered include:

• Foreign assets – if you and your ex-spouse owned assets overseas (for example, a holiday home), your ownership may have changed post-divorce and your new Will should reflect this accordingly.

Additionally, clients should consider their domicile position and how a cross-border estate affects their inheritance tax planning. The general position is that if you are domiciled in England and Wales, you will be taxed on your worldwide assets.

• Gifting – any gifts made to your spouse while married would have been exempt from inheritance tax. This changes post-divorce, as you spouse exemption will no longer be available, and your estate will instead be subject to the available nil rate band (currently £325,000). This will be an important consideration for those who wish to leave assets to their former spouses in their Will.
• Matrimonial home – when spouses separate and the matrimonial home (or any other properties) are sold, this may trigger a capital gains tax liability (“CGT”). The CGT rules for divorcing and separating couples were changed as part of the 2023 Spring Budget and were considered in detail in our article available to view here. Importantly, for disposals or transfers made after 6 April 2023, the leaving spouse is allowed to elect how their Principal Private Residence (“PRR”) is appointed between their matrimonial home and any other home they acquired since leaving the matrimonial home.

Minor children

For divorced couples with minor children, it will be important to think about guardianship appointments. Although the appointment of a guardian will not take place where there is a surviving parent, this is often a contentious and emotive issue for ex-spouses. You can appoint your chosen guardian under the terms of the new Will or alternatively, where ex-spouses have maintained an amicable relationship, such appointments can be recorded in a separate document that is signed by both parties. This ensures that your appointments cannot be changed without the express agreement of the other party.

Lasting Powers of Attorney

Lasting Powers of Attorney (“LPAs”) continue to grow in popularity as parties seek to put in place arrangements to protect their financial and personal welfare should they lose mental capacity. As a result, ex-spouses may have put in place LPAs nominating each other as their attorneys. In general, a divorce will have the effect of terminating your ex-spouse’s appointment.

However, a party can specify in their LPA that they wish for their ex-spouse to continue acting, even if the marriage has broken down. In the absence of such provision, the question of whether your LPAs remain valid will depend on whether further attorneys or replacement attorneys have been appointed. It will therefore be crucial to seek legal advice on the validity of your LPAs post-divorce.

Assets passing outside your Will

If you have a workplace pension or a life insurance policy, these are assets that will generally pass outside of your estate and in accordance with any nomination forms that you have completed. If you have appointed your ex-spouse as a beneficiary under such policies, it is imperative that you review and update your nominations.

Many clients will often seek to nominate their minor children as beneficiaries of any lump sum payments, which may warrant further estate planning. Such planning may extend to the establishment of lifetime trusts (also known as ‘pilot trusts’) for the purposes of receiving such sums on your death, rather than being distributed outright to your children, for maximum wealth protection.

How we can help

A divorce is a stressful and emotional time for all parties involved. It is therefore important that you seek legal advice early on and consider how divorce may impact your estate and tax planning. At Edwin Coe LLP, we regularly assist clients at every stage of their divorce proceedings (including the interim stage, as well as post-divorce planning). We are able to act alongside specialist family lawyers to advise whether any estate or tax planning can or needs to be carried out or practical steps that need to be taken, such as updating your Wills or death in service nominations.

If you would like assistance with your estate planning, or have any queries about this topic, please do not hesitate to get in touch with Eva Moynihan or any member of the Private Client team.

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