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Estate Planning During and After Divorce

Winter 2008Cole Schotz DocketAttorney: Gary A. Phillips

Most people begin to think about their estate planning after the occurrence of a significant life event – having a child, the passing of a loved one, or getting married are just a few examples of a triggering event that prompts people to consider their estate planning.  Getting divorced is yet another event that should trigger people to review their existing estate plans to make sure they remain appropriate.

Interestingly, laws in New York and New Jersey have been passed to deal with spouses getting divorced because too often this is not an event where people are prompted to change their Wills.  In New York, E.P.T.L. 5-1.4, recently amended in July, 2008, provides that if after executing a Will, the decedent is divorced or separated by judicial decree, the divorce or judicial separation revokes any revocable disposition of property to the former spouse and any provision naming the former spouse as executor or trustee.  New Jersey has a similar, more expansive law, codified in N.J.S.A. 3B:3-14, which provides that divorce revokes (i) any revocable disposition of property not only to the former spouse but to relatives of the former spouse and (ii) the appointment of the former spouse or any relatives of the former spouse as a fiduciary.

Notwithstanding these laws, people should never rely on them as the source for determining how their estates will pass at their death.  First, these laws only are effective when the divorce judgment is final (and in New York only, when the separation decree is entered).  A divorce or separation proceeding can take a significant amount of time to complete, and during the pendency of the action, unfortunate things can happen.  If a spouse were to die prior to obtaining a divorce or separation judgment, the designation of the ex-spouse as the beneficiary and the fiduciary would not be revoked by New York or New Jersey law, resulting in an undesired distribution of property and appointment of representatives.  This scenario demands that the spouse consider revising his or her estate planning documents even prior to the divorce or separation judgment being obtained.

Second, while the law revokes the designation of the spouse as the beneficiary and fiduciary, it does not revoke other designations in a spouse’s Will which may no longer be appropriate.  For example, there may be a provision in the spouse’s Will which provides if the spouse is not survived by his or her spouse or any children, the assets will pass to a group of beneficiaries which includes the former spouse’s family or friends.  The former spouse’s family or friends also could be named as a successor executor or trustee, or even as a successor guardian for the minor children.  All of these appointments, in most instances, would be inappropriate in the event of a divorce or judicial separation, and in New York, are not revoked.  Thus, the Will needs to be carefully reviewed to ensure it reflects the spouse’s desires.

Third, a settlement agreement executed in connection with a divorce judgment may in certain situations obligate one spouse to provide for the other spouse at death.  To satisfy these obligations, it is imperative for the spouse who is obligated to provide the surviving spouse to update his or her estate planning documents to account for the amounts that need to be set aside pursuant to the divorce agreement.  The failure to do so could result in complicated and unnecessary estate and litigation issues.

There is more to an estate plan than a Will.  Often times, trusts are implemented to govern the disposition of assets.  In the event of divorce, these trusts need to be reviewed to determine if divorce has an impact on its terms.  In some instances, the trust may need to be liquidated because the terms no longer make sense in light of the divorce.

Powers of Attorney and Health Care Directives also typically are part of an estate plan.  Depending on the jurisdiction, these documents may also need to be revised to appoint new representatives if there is a divorce.  In both New York and New Jersey, an appointment of a former spouse as attorney-in-fact or health care agent would be revoked.  However, be cautious.  In New York, if relatives of the former spouse are appointed in these documents as successors, the appointments will not be revoked.

Asset ownership is another important component of estate planning, which needs to be carefully reviewed when obtaining a divorce.  Most importantly, the beneficiary designations of non-probate assets (those assets which pass outside of the Will and pass via beneficiary designation – typical assets include life insurance and retirement assets) should be modified.  While New York revokes the beneficiary designations of transfer on death accounts, life insurance, and retirement accounts, and New Jersey revokes the beneficiary designations of insurance and retirement accounts, again the divorced individual may not want to wait until the divorce is final.  Also, the law does not cover every asset, so rather rely on the law, it is important to take action into your own hands. 

It is important to note that for certain retirement plan assets, you are not permitted to have someone other than your spouse as beneficiary without consent, so you may not have the option to change the beneficiary from a spouse while the divorce is pending. 

People getting divorced should not lose sight of the fact that their existing estate plans as a result of the divorce may no longer make sense.  Failure to consider the changes could have unfortunate consequences.

 

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