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June 23, 2015 - Trusts and Estates Group News - Estate Planning in the Context of Divorce | A Matter of Life and Death

INTRODUCTION
In the context of one’s life, the terms “divorce” and “death” can conjure up equivalent levels of fear.  However, rational thought and careful planning can help to mitigate some of that fear as well as allow a person to survive a divorce and contemplate the wisdom of the adage “What does not kill you, makes you stronger.”  It is best to be prepared.  This article will provide some helpful guidance on preparation.

THE EXISTING ESTATE PLAN
It is typically the case, especially with first marriages, that spouses establish reciprocal estate plans that provide generously for the survivor.  The shadow of divorce would likely cause a spouse to reconsider.  However, because the process can be such a distraction, the issue is often disregarded.  Since divorce proceedings can be lengthy, the risk of death prior to final judgment or the execution of a separation agreement that waives inheritance rights is a reality that could allow a divorcing spouse to inherit under an existing Will or the laws of intestacy. 

THE EFFECT OF A DIVORCE COMPLAINT
If a divorce complaint has been filed and successfully served, many states implement an automatic restraining order that prevents both spouses from transferring their assets.  In addition, there may be prohibitions on changing Wills, trusts and beneficiaries on life insurance policies, pensions and other retirement plans.  Further, pursuant to the Retirement Equity Act of 1984 (ERISA), a notarized spousal waiver is necessary to name someone other than the spouse as beneficiary under a qualified plan.

PRENUPTIAL AND POSTNUPTIAL AGREEMENTS
If the spouses have a prenuptial or postnuptial agreement, it will likely contain provisions governing the division of assets on death or divorce.  Accordingly, the documents should be consulted prior to making any changes to an estate plan during the divorce process.

FRAUDULENT CONVEYANCES
The initial reaction of a spouse being sued for divorce is to transfer assets out of the reach of the other spouse.  However, since that other spouse is a creditor, transfers of this nature can be considered fraudulent under relevant statutes.  These statutes will provide remedies such as avoidance of the transfer, attachment of the transferred asset or the issuance of an injunction against further transfers.

THE SPOUSAL ELECTIVE SHARE
In most jurisdictions, a spouse cannot be completely disinherited and is granted a portion of a deceased spouse’s estate by statute.  The spouse can elect to receive the statutory share in lieu of what the deceased spouse’s Will had provided or even if there was no provision for the spouse at all.  This right continues unless a divorce judgment is final or a waiver of the share was included in a prenuptial or postnuptial agreement or separation agreement.

At least in Connecticut, the spousal elective share applies to only the portion of the deceased spouse’s estate that passes through probate under the Will.  Assets funded into a revocable trust during life will not be distributed under the Will and so are not subject to the spouse’s election against the Will.  With that in mind, persons contemplating divorce may fund revocable trusts as a means to further reduce the amount available to a spouse should a divorcing spouse die during the pendency of a divorce proceeding. However, a funded revocable trust is not insulated from a divorce judgment.

PLANNING DURING THE DIVORCE PROCESS
Subject to any automatic restraining orders and depending on the terms of a separation agreement or a governing court decree, a divorcing spouse’s new estate planning documents should first comply with any statutory, contractual or court directives.  The divorcing spouse’s second priority is likely the elimination or minimization of possible transfers to the other spouse.  As discussed above and to the extent allowed, an interim plan will often grant the statutory share to the spouse under the assumption that this is the amount the spouse would receive under any circumstance and therefore it is better to avoid the challenge.  Other planning considerations such as the appointment of different executors, trustees and guardians for minor children or dependent adult children should not be forgotten.  Further, revocation and re-execution of powers of attorney and health care directives is equally important.

PLANNING POST-DIVORCE
Depending on where one is domiciled, a finalized divorce may cause a revocation of an existing Will or void any provisions for the benefit of one’s former spouse.  Revocation of an existing Will would clearly require that a new Will be executed.  Even if only the provisions of an existing Will related to one’s former spouse are voided, a number of questions still arise.  Who will receive the assets in the absence of a spouse and are these designations still appropriate?  Who will serve as the executor if the previous spouse was named?  Who will serve as guardian of any minor child?

Estate plans involving trusts or implementing tax planning further complicate matters.  Certain estate plans involving tax planning may require that you be married to enjoy certain estate tax benefits.  These plans may no longer be useful or effective after a divorce.  Also, previous gifting techniques taking advantage of one’s married status will no longer be available after divorce.  Provisions in trusts related to one’s former spouse may be voided, thus raising similar questions to those identified above.  

On the other hand, certain estate planning documents may not be voided upon divorce.  Even after a divorce, a designation of beneficiary on a life insurance policy or retirement account naming a former spouse may still be valid.  If this was done in coordination with an existing estate plan, it will need to be re-evaluated. 

Divorce agreements and judgments will often require implementation of certain estate planning measures.  It is essential to make sure that one’s estate planning documents are in compliance with any requirements.  For instance, a divorcing spouse may be required to obtain life insurance for a period of time for children’s education expenses.  Special attention should be provided to these requirements in a divorce agreement, as any error could end in one’s estate becoming involved in costly litigation. 

Finally, divorcing spouses often find themselves contemplating re-marriage in the future, which involves a host of additional concerns and issues.  For instance, those entering into a second marriage may want to provide for a new spouse on their passing, while also making sure that assets “stay in the family” and not pass to their new spouse’s children.  Trusts can be very helpful in this circumstance.

CONCLUSION
Estate planning before, in contemplation of, during and after divorce requires careful consideration.  It is essential that the planning be done under the supervision of divorce counsel.  However, utilization of a well-versed estate planner is equally essential.  Consult your Murtha Cullina attorney for assistance.

 

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