Here’s what family lawyers must know about estate planning for a pending divorce – including key documents, account titles, and beneficiary designations.
By Sharon L. Klein, Family Wealth Strategist, Trusts & Estates Attorney
In the event of separation and/or divorce, advisors should counsel clients to review all estate planning documents, account titles and beneficiary designations. These documents should be updated as soon as possible to be certain chosen heirs are still appropriate, as well as designees for healthcare and power of attorney documents. Of course, during the pendency of a divorce, courts may wish to maintain the status quo and preserve marital property until final judicial determination. Accordingly, parties may be prohibited from altering their financial affairs, except in the ordinary course of business for customary and usual household expenses. Consequently, clients should change those aspects of their financial affairs it is possible to change as soon as practicable and be poised to change the balance as soon as they are able.
Estate Planning for a Pending Divorce: Documents to Consider
Documents a family law practitioner should consider include:
Wills and Trusts
You should review these documents immediately.
If an individual has been divorced and dies having failed to update his or her estate planning documents to reflect the divorce, some states revoke bequests to former spouses in wills or other estate planning documents. Many do not. Even if a so-called revocation-on-divorce statute does apply, those laws will be inapplicable during the pendency of the divorce, up until the final divorce decree is entered. For example, in Acosta-Santana v. Santana,1 a husband was in the process of getting divorced, but died before a final decree was entered. His will divided his assets among his three children and his wife. If the divorce had been finalized, the wife likely would have received less than half of the amount she received under the will because the husband’s premarital assets would not have been considered for equitable distribution purposes. The court denied the executor’s motion to continue the divorce proceeding in the husband’s place and instead dismissed the complaint with prejudice, finding divorce proceedings abate with the death of one of the parties prior to the entry of the final order of divorce. The New Jersey appellate court affirmed.
Some states (like New Jersey2) revoke any revocable dispositions or appointments of property to, and executor/trustee nominations of, a former spouse, as well as relatives of a former spouse. Other states (like New York3 and California4), revoke all dispositions or appointments of property from the divorced spouse to the former spouse and all nominations of the former spouse as executor and trustee, but do not extend the revocatory effect of divorce to the relatives of an ex-spouse. That distinction played a pivotal role in In Matter of Lewis,5 where the New York statute6 disqualified the decedent’s ex-husband from inheriting under her will or acting as executor. However, the ex-husband’s father (the decedent’s ex-father-in-law), was the successor beneficiary and executor and he was not disqualified under the terms of the statute. Presumably, the ex-husband would just inherit or obtain the property from his father, causing an end-run around the statute. While the court acknowledged this, it opined that the statute was clear and unambiguous in omitting the relatives of ex-spouses from disinheritance.
The Uniform Probate Code (UPC), in effect in Alaska,7 Arizona,8 Colorado,9 Idaho,10 Massachusetts,11 Michigan,12 Montana,13 New Jersey,14 New Mexico,15 North Dakota,16 South Dakota,17 and Utah,18 revokes dispositions to and fiduciary nominations of the former spouse, as well relatives of the former spouse.19 This approach would have prevented the outcome in the Lewis case, but might not effectuate the decedent’s intent in those cases where bequests to relatives of an ex-spouse (for example, step-children of the decedent) are still intended despite a divorce. Minnesota,20 Nebraska,21 and South Carolina22 – which have also adopted the UPC – have modified the language to revoke testamentary bequests to the decedent’s former spouse only, and not to the former spouse’s relatives. Maine revised its statute, which previously revoked testamentary bequests to the decedent’s former spouse only, and now also revokes bequests and fiduciary nominations of a former spouse and the former spouse’s relatives.23
The lesson to be learned: the most prudent course of action is not to rely on state default law at all. Divorced spouses, spouses in the process of getting a divorce and unmarried couples who are separated should give immediate attention to their planning documents, to ensure they reflect their intent. Ordinarily, wills can and should be changed during the pendency of divorce proceedings, as the Acosta-Santana v. Santana case clearly demonstrates (subject to elective share statutes and other legal restrictions). Importantly, there is generally no revocation on divorce regarding an ex-spouse’s interest in an irrevocable trust if that spouse is specifically named. Some practitioners use the concept of a “floating spouse,” defined as the spouse to whom the trust creator or beneficiary is married from time to time. If an ex-spouse actually is named as a trust beneficiary, other techniques may have to be considered to restructure the trust.24
Powers of Attorney and Healthcare Directives
It is important to carefully review powers of attorney, which allow a designated person to conduct financial transactions, and health care directives, which allow a designated person to make important health care and potentially end-of-life decisions, to ensure that an estranged spouse is removed from those roles.
In some states (like New Jersey25), the designation of the declarant’s spouse or domestic partner as health care representative is revoked upon divorce, legal separation or termination of the domestic partnership or civil union, unless otherwise specifically provided. In other states (like Alabama,26 Connecticut,27 and Hawaii28), an agent’s authority under a power of attorney terminates when an action is filed for the dissolution or annulment of the agent’s marriage to the principal or their legal separation, unless the power of attorney otherwise provides. Best practice, however, would not be to rely on state default statutes but to proactively change documents to ensure they reflect intent.
Retirement Accounts and Plans and Other Beneficiary Designations, Such as Life Insurance
State laws that do provide for revocation on divorce may not apply to retirement plan beneficiary designations, which should be reviewed promptly. Spousal rights in retirement plans governed by the Employee Retirement Income Security Act of 1974 (ERISA) are subject to special rules. In Orlowski v. Orlowski,29 the New Jersey Superior Court Appellate Division noted that, ordinarily, a Qualified Domestic Relations Order (QDRO) should be utilized to enforce counsel and expert fee awards only when there are no other assets sufficient to satisfy the awards. Finding that to be the case before them, the court held that unpaid awards for counsel fees and expert witness fees relating to child support, property distribution, and college tuition reimbursement are enforceable by a QDRO from ERISA protected pension funds when an ex-spouse is the alternative payee of the QDRO.
It is also important to reconsider designated beneficiaries of life insurance policies.30
In Sveen v. Melin,31 decided by the Supreme Court on June 11, 2018, the court determined that the retroactive application of a Minnesota statute does not violate the Contracts Clause of the US Constitution.
The statute under consideration provides that “the dissolution or annulment of a marriage revokes any revocable… beneficiary designation… made by an individual to the individual’s former spouse.” Under the statute, if one spouse has made the other the beneficiary of a life insurance policy or similar asset, their divorce automatically revokes that designation so that the insurance proceeds will instead pass to the contingent beneficiary or the policyholder’s estate upon death. The decedent’s children argued that under Minnesota’s revocation-on-divorce law, their father’s divorce canceled his ex-spouse’s beneficiary designation, leaving them as the rightful beneficiaries. The ex-spouse claimed that, because the law did not exist when the policy was purchased and she was named as the primary beneficiary, applying the later-enacted law to the policy violates the Constitution’s Contracts Clause.
The court found that the law does not substantially impair pre-existing contractual arrangements. First, the law is designed to reflect a policyholder’s intent – and so to support, rather than impair, the contractual scheme. It applies a prevalent legislative presumption that a divorcee would not want his former partner to benefit from his life insurance policy and other will substitutes. Second, the law is unlikely to disturb any policyholder’s expectations at the time of contracting, because an insured cannot reasonably rely on a beneficiary designation staying in place after a divorce. Lastly, the law supplies a mere default rule, which the policyholder can undo in a moment. If the law’s presumption about what an insured wants after divorcing is wrong, the insured may overthrow it simply by sending a change-of-beneficiary form to his insurer.
Again, however, the most poignant lesson to be learned from cases like this is not to rely on state default law.
Jointly named real estate and financial accounts
These documents similarly may need immediate attention.
Authorizations to access digital accounts, including financial accounts, email accounts, social media accounts, etc.
Note that authorizations to access online financial accounts, social media accounts, and other sensitive information are generally not revoked on divorce and will likely need to be changed as soon as possible. In the context of an account owner dying, the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA) provides guidance regarding an executor’s and trustee’s access to electronic records after the death of the account owner. RUFADAA has been introduced or enacted in at least 49 jurisdictions.
RUFADAA takes a three-tiered approach:32
- Directions given via a provider’s online tool that can be modified or deleted at all times (for example, Google’s “Inactive Account Manager,” or Facebook’s “legacy contacts”) prevail over any other direction in a will, trust, power of attorney or other record;
- If the user has not utilized an online tool, or if the custodian has not provided one, a user’s direction in a will, trust, power of attorney or other record prevails; and
- In the absence of any direction, the generic terms of service agreement (TOS) controls, which might provide that the account is terminated at death, and all data is deleted.
Accordingly, in order to avoid a provider’s generic TOS Agreement potentially controlling, it is important to use a provider’s online tool, if one is provided, to keep that designation updated during lifetime, particularly in the event of separation or divorce, and to address these issues in estate planning documents, which are also appropriately updated.
Use of Leverage: Credit Solutions During Divorce
Leverage may be very useful in a divorce proceeding. There are many instances in which the marital estate to be divided is comprised of assets that do not lend themselves to easy division– and the remaining assets are not sufficient to make both spouses whole. This might occur in cases including:
- Closely-held business interests.
- Partnership interests.
- Real estate (personal and investment).
- Artwork and other collectibles.
- Private market interests with liquidity restraints.
- Aircraft or watercraft.
In these circumstances, custom credit and leverage solutions can potentially provide the necessary liquidity to effectuate the asset division without major disruption to ownership of the underlying assets. Credit solutions can be tailored to the need, whether it is short-term borrowing with lines of credit or longer-term borrowing through defined term loans.
The Bottom Line: Collaboration is Key to Effectively Represent Clients Beyond the Divorce Decree
Clients benefit when matrimonial, trusts & estates, accounting, and investment professionals partner to integrate considerations that cross disciplines. Advisors who take a collaborative approach can most effectively represent clients by considering the many nuanced factors in this arena.
1 Acosta-Santana v. Santana, No. A-5646-16T4 (NJ App. Div. Dec. 5, 2018)
2 N.J.S.A. § 3B:3-14.
3 New York’s Estates Powers and Trusts Law § 5-1.4
4 Cal. Probate Code § 6122
5 In re Estate of Lewis, 25 N.Y.3d 456, 34 N.E.3d 833 (2015)
6 New York’s Estates Powers and Trusts Law § 5-1.4
7 A.S. § 13.12.804.
8 A.R.S. § 14-2804.
9 C.R.S.A. § 15-11-804.
10 I.C. § 15-2-804.
11 M.G.L.A. 190B §2-804.
12 M.C.L.A. § 700.2807.
13 M.C.A § 72-2-814.
14 N.J.S.A. § 3B:3-14.
15 N. M. S. A. 1978, §45-2-804.
16 NDCC § 30.1-10-04.
17 SDCL § 29A-2-804.
18 U.C.A. 1953 § 75-2-804.
19 Uniform Probate Code §2-804 (1969, last amended 2010).
20 M.S.A. § 524.2-802.
21 Neb. Rev. St. § 30-2333.
22 Code 1976 § 62-2-507.
23 M.R.S. 18-A § 2-508, approved by the Governor on April 20, 2018
24 Including decanting, discussed in: “What Family Law Practitioners Must Know About Modifying Irrevocable Trust Provisions”, by Sharon L. Klein
25 N.J.S.A. 26:2H-57
26 Ala. Code § 26-1A-110
27 Conn. Gen. Stat. Ann. Section 1-350i
28 H.R.S. § 551E-6
29 Orlowski v. Orlowski, 459 N.J. Super. 95, 208 A.3d 1 (App. Div. 2019)
30 Discussed in: What Family Law Practitioners Must Know About Life Insurance, by Sharon L. Klein
31 Sveen v. Melin, 138 S. Ct. 1815, 201 L. Ed 2d 180 (2018)
32 In New York, for example, see EPTL § 13-A -2.2
– Sponsored Content –
Sharon L. Klein is President of Family Wealth, Eastern US Region, for Wilmington Trust, where she also heads the National Matrimonial Advisory Solutions Group. She is a Fellow of the American College of Trust and Estate Counsel and a member of its Family Law Task Force, she chairs the Domestic Relations Committee of Trusts & Estates magazine, and is a member of the New York City Bar Association’s Matrimonial Committee. Beginning her career as a trusts & estates attorney, Sharon has over 25 years’ experience in the wealth advisory arena and is a nationally recognized speaker and author. www.wilmingtontrust.com/divorce
This article is for general information only and is not intended as an offer or solicitation for the sale of any financial product, service or other professional advice. Wilmington Trust does not provide tax, legal or accounting advice. Professional advice always requires consideration of individual circumstances. Wilmington Trust is a registered service mark. Wilmington Trust Corporation is a wholly-owned subsidiary of M&T Bank Corporation (M&T). © 2019 Wilmington Trust Corporation and its affiliates. All Rights Reserved.
Related Article and Podcast
What Family Lawyers Must Know About Pre-Marital Estate Planning
For family law practitioners, marital and pre-marital estate planning can be key in protecting clients in the event of divorce. Here are three sets of critical considerations that could be worth millions to your client.
Podcast: The New Tax Laws for Trust Income Following Divorce
When most family lawyers consider the impact of trusts in divorce, they are usually thinking about whether a divorcing spouse will get access to trust assets, either directly or indirectly. While that is very important, the focus of this podcast will be how recent changes in the law have impacted the income tax consequences of trusts after divorce.