Divorce and Estate Planning

by ACTEC Fellows Richard R. Gans and Diana S.C. Zeydel

Going through a divorce can be emotionally and financially stressful. Knowledge is power. Understand what estate planning documents are impacted by a divorce from ACTEC Fellows Richard R. Gans and Diana S.C. Zeydel, experts in the trust and estate field.

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I’m Richard Gans. I’m an ACTEC Fellow from Sarasota, Florida and I’m here today with Diana Zeydel, who is an ACTEC Fellow from Miami, Florida and our topic today is Divorce and Estate Planning. So I get this question sometimes, I’ve named my spouse in my will as my beneficiary and executor… if I die before the divorce is final does my spouse get all my property?

And the answer to that generally would be no; that under most state statutes the spouse will be treated as having predeceased for purposes of your estate plan and so the spouse would not receive your assets or be appointed as your executor.

So what about things like life insurance and IRAs, does the same rule apply there?

Maybe not – under the laws of some states- yes but under many states- no, so those are assets where, because you have a beneficiary designation, you would need to change your beneficiary designation.

And what about assets that a couple might own jointly, is there sort of an automatic presumption that one of the spouses die with those assets or does something different happen?

There probably isn’t – there’s only one kind of tenancy which is a Tenancy by the Entireties and is only permitted between husband and wife and so if the parties cease to be married that would dissolve the Tenancy by the Entirety and it would become owned 50/50. However, if a Joint with Right of Survivorship- or you sometimes see on an account JTWROS- in that case, probably the joint tenancy continues and so you would need to dissolve that in order to avoid the surviving spouse receiving the whole account.

When people get divorced oftentimes there’s a lawyer involved, can the divorce agreement change some of the stuff that you’ve just told me so, for example, can a divorce agreement require that the spouse continue to keep the ex-spouse in the will?

A divorce agreement could certainly do that, that would be known as a Marital Settlement Agreement and the spouses can contract. You have to be careful though because now, if you’re no longer married, these requests become claims. Instead of being a marital bequest that could get a tax deduction it now becomes a claim, and so you may have someone coming into the estate to assert a claim against the estate and that may or may not be a comfortable position.

So along those same lines, people don’t always do what they say they’re going to do and suppose that the divorce agreement or the divorce arrangement says, husband or wife must have a will that says certain such-and-such things and it turns out that when the person dies that the Will doesn’t say that? What happens then?

So now you have an agreement between the spouses that’s an enforceable contract so the surviving non-spouse, the surviving former spouse, can come in and assert a claim against the estate to receive what was agreed under the marital agreement.

Suppose that I would like to disinherit my spouse during the pendency of the divorce, can I do that?

Probably not entirely, the laws of most states would require a spouse to receive a certain share of the estate and that share cannot be avoided unless the parties have divorced.  However, you could modify your estate plan to create a bequest for the spouse that is limited to what state law would otherwise require.

So oftentimes things, when there’s a divorce, assets get divided and one spouse will get some and another spouse will get another. Is there any kind of income tax issues there we need to be worried about?

There could be, but if the spouses are still married there’s a part of the Internal Revenue Code that allows spouses to transfer property between themselves without that being treated as a sale. So that means there’s no income tax, you just receive the property with its historical basis and that would be the simplest way to handle the division.

So there’s no income tax on the division but is there any kind of time frame but that has to get done during which or…

You still have to be married to get the income tax benefits and if you don’t want these things to be treated as gifts there is a provision that allows transfers between spouses a year before the divorce and two years after to not have a gift tax result.

Gotcha. So it sounds like there’s a lot of moving parts in this area. Would it be a good idea for the client’s estate planning lawyer and the client’s marital lawyer to compare notes and get on the same page here?

Yes, that’s always a good idea because those are two separate areas of the law but as you’ve heard from this talk it integrates, it’s connected very closely together, so having the lawyers on the estate planning side and the matrimonial side coordinate is very important.

Okay, great advice. Thank you very much, Diana.

Thank you, Rick.