How Divorce Can Impact Your Estate Plan – Beneficiary Designations

The last article regarding the impact of divorce on one’s estate plan talked about property settlement agreements and the obligations that must be incorporated into the estate plan.  This next article will discuss how most individuals going through a divorce have qualified retirement accounts, life insurance policies and cash, savings or brokerage accounts that may have a beneficiary designation or payable on death or transfer on death designation that needs to be updated.  Very often the named beneficiary is the former spouse.  What happens if the beneficiary designation is not updated and a person dies having named his or her former spouse on these accounts? 

Under Virginia law, upon the entry of a decree of divorce, “any revocable beneficiary designation. . .that provides for the payment of any death benefit to the other party is revoked.  A death benefit prevented from passing to a former spouse by this section shall be as if the former spouse had predeceased the decedent.”  Va. Code §20-111.1(A).  The statute includes payments from life insurance, annuities, retirement accounts, compensation agreements or other contracts where assets are paid at death.  This law is favorable for those that forget to update their beneficiary designations, however, there are exceptions.  The law does not apply (a) if the property settlement agreement and/or divorce decree provides for the former spouse to be named; or (b) to any trust or any death benefit payable to a trust.  Va. Code §20-111.1(C).  Furthermore, the Virginia law may be preempted by Federal law. 

If the Virginia law is preempted by a Federal law, the Virginia law states that in the event the death benefit is paid to a former spouse for no consideration and the former spouse was not otherwise entitled to such payment, the former spouse will be “personally liable for the amount of the payment to the person who would have been entitled to it were this section not preempted.”  Va. Code §20-111.1(D).  Thus, if a person remarries, but fails to name their new spouse as a beneficiary on their Federal retirement account and continues to name their former spouse, arguably, the new spouse could seek reimbursement from the former spouse.

However, in the case of Hillman vs. Maretta, a widow sued the decedent’s former spouse for the amount the former spouse received under the decedent’s federal employees’ group life insurance (“FEGLI”).  The parties acknowledged that Va. Code §20-111.1(A) was preempted by Federal law.  However, the widow argued that Va. Code §20-111.1(D) regarding personal liability was not preempted.  After careful analysis and consideration, the Circuit Court of Fairfax County held in favor of the widow.  On appeal to the Virginia Supreme Court, the Court ruled that the trial court erred and that Federal law trumps state law.  Ultimately, the U.S. Supreme Court agreed with the Virginia Supreme Court.       

Thus, in 2012, Virginia’s statute was modified to require every divorce decree to include a notice warning the parties that beneficiary designations may not be automatically revoked by operation of law as a result of the divorce.  Therefore, the parties are responsible for updating their beneficiary designations to avoid any unintended consequences.  As a result of the Hillman case, updating beneficiary designations, particularly beneficiary designations that are governed by Federal law, is critical.

So ask yourself – when was the last time you updated your beneficiary designations?  #divorce #estateplanning #beneficiarydesignation

How Divorce Can Impact Your Estate Plan – Property Settlement Agreements

With the increased divorce rate in today’s society, many individuals experiencing a divorce focus on the issues directly involved in the divorce.  For example, they may focus on spousal support, child support and the division of assets, but those same individuals forget that after a divorce or even during, there are additional considerations involving their estate plan.  This article is the beginning of several articles that will highlight a number of those additional considerations.  We begin with a discussion about property settlement agreements and the requirement to maintain life insurance. 

As a result of most divorces, a property or marital settlement agreement (“PSA”) is executed in an effort to dictate the obligations of each party to the other party.  In most cases the focus is on finalizing the PSA and not the effect of the PSA on other aspects of an individual’s life, such as his or her estate plan.  However, during this phase of the divorce, it may be helpful to consult with an estate planning attorney to ensure that the PSA permits some level of flexibility from an estate planning perspective. 

For example, if there are children from the marriage, very often the PSA will contain a provision requiring each party to maintain life insurance with a certain death benefit.  Thus, one spouse may be required to maintain five hundred thousand dollars ($500,000.00) of life insurance and name the other spouse as the beneficiary, name the children as beneficiaries or name the other spouse as trustee for the benefit of the children.  The purpose of such a provision is to provide a substitution for child support in the event of the death of either parent.  Very often the requirement to maintain the life insurance ceases when the obligation to pay child support ends.

But what happens if a death occurs and the life insurance proceeds are paid out to the former spouse directly or for the benefit of minor children?  In the first instance, the former spouse can receive and use the monies without much oversight.  Hopefully, the PSA specifies the permitted uses, but the PSA may be silent and/or the former spouse may disregard the PSA.  If the minor children are named as direct beneficiaries, then a court proceeding requesting guardianship of the child’s estate may be required and the court’s oversight continues until the child reaches age 18, at which point the child has the ability to receive unfettered access to the funds.  If the PSA simply states that the former spouse is to be named trustee for the benefit of the children, what are the provisions of the trust agreement?  Does the so-called trust remain discretionary and then become available when the child reaches age 18? 

The complexity surrounding the beneficiary designation and possible involvement of the court can be resolved if the PSA permits the parties to name a revocable living trust that would include provisions for the benefit of the children.  Therefore, the beneficiary designation is simpler since only the revocable living trust is named.  Moreover, a properly drafted revocable living trust agreement would contain provisions specifically detailing the trustee, dispositive provisions for the funds and handling any ‘what ifs.’  For example, what if the named trustee (i.e., former spouse) predeceases or what if a child predeceases, who will manage the funds and what happens to the funds in those circumstances?

In the case where complex estate planning exists, such as irrevocable life insurance trusts, the need to review the estate planning is important to prevent negative tax consequences and to ensure that the proper beneficiaries ultimately receive the assets.  Ideally, the initial drafting of such complex estate planning will take into account the possibility of a future divorce.  For example, the trust agreements can address what happens in the event of divorce with respect to a spouse continuing as a beneficiary and/or trustee.  The PSA would then detail how the assets connected to the complex estate planning are handled or distributed, and by revisiting the estate plan post-divorce, any necessary adjustments can be made.

Therefore, for those who have experienced a divorce or are in the midst of a divorce, have you revisited your estate plan recently?  What obligations to maintain life insurance do you have?  Does the PSA have certain requirements for the creation of a trust, and if so, what are those requirements?  It is better to begin to review all these issues sooner before an event, such as incapacity or death, makes it impossible to resolve later.  #estateplanning #divorce #lifeinsurance #revocabletrust

A Lesson from Sumner Redstone’s Competency Battle

For a variety of reasons, many have been following the drama filled court battle involving Sumner Redstone’s capacity that was dismissed earlier this week.  Unfortunately, a battle over control of an individual and his or her money is not an uncommon occurrence.  Typically, the higher the stakes the more likely a challenge will be lodged if a so-called beneficiary is cut out, which appears to be part of the rationale behind the Redstone case.  For the individual who has been cut out, there may be nothing to lose by objecting.  On the other hand, for the individual creating the Last Will and Testament or revocable living trust, there may be a desire to avoid a major legal battle between those beneficiaries who are to receive distributions after he or she is gone.  If that is the case, then one way to deter such a battle is to have a ‘no contest’ or ‘in terrorem’ clause.

A no contest clause simply states that if a beneficiary objects to the provisions of the Last Will and Testament or revocable living trust, then they run the risk of completely losing or diminishing their share of any distribution.  It may also mean that any of their descendants may lose or diminish their share depending on how the provision is drafted.  The goal is to dissuade beneficiaries from objecting and possibly overturning the intent behind certain provisions of the Last Will and Testament or revocable living trust. 

The use of no contest clauses depends on whether the jurisdiction in which one resides recognizes such provisions as valid.  For example, not all jurisdictions recognize such clauses within revocable living trusts.  Some jurisdictions place emphasis on a person’s final wishes as evidenced by the execution of a Last Will and Testament or revocable living trust and it is difficult to overturn that intent.  Other jurisdictions void such clauses if there is good faith, probable cause or reasonable justification for bringing a suit, which may lessen the deterrent factor in using a no contest clause.  However, these defenses also recognize that at times there are in fact valid reasons for objecting, such as undue influence, lack of capacity, or the like.  In all three neighboring jurisdictions (Virginia, Maryland and the District of Columbia), each recognizes no contest clauses in some fashion. 

Thus, it may be that in a case like Redstone’s, a no contest clause would have prevented court action.  But if there is a likelihood of litigation, the use of such clauses should be carefully considered.  #sumnerredstone #incapacity #competency #nocontestclause #estateplanning 



May is National Elder Law Month

In 1963, President Kennedy declared May to be Senior Citizens Month to honor those who are 65 and older.  Since then every President has proclaimed May to be a month to show support for older Americans.  President Jimmy Carter changed the name in 1980 to Older Americans Month and the National Academy of Elder Law Attorneys supports this annual proclamation by declaring the month of May to be National Elder Law Month.

But what is encompassed in elder law?  And how can an elder law attorney assist older Americans?  Here is a brief list of some of the major issues that an elder law attorney advises upon:

  • Incapacity planning that would include a discussion regarding financial and medical powers of attorney
  • Tax planning
  • Estate planning, including a discussion surrounding the management of assets during incapacity and upon death
  • Medicaid
  • Medicare
  • Long-term care, including continuing care retirement communities (CCRCs), skilled nursing facilities (SNFs) and assisted living facilities (ALFs)
  • Social Security (SSDI and SSI)
  • Special Needs planning (e.g., special/supplemental needs trusts)
  • Conservatorship and guardianship
  • Asset protection
  • Elder abuse and exploitation
  • Retirement planning, including beneficiary designations, death benefits and spousal benefits
  • Mental health law
  • Estate and Trust Administration

Keep in mind that some elder law attorneys are like your internist, that is, they can spot the issues and advise in broad terms.  Other elder law attorneys are specialists.  For example, certain elder law attorneys may handle only social security disability claims and appeals while others only litigate nursing home abuse cases.   Whatever the issue, it is important to make sure the relationship with an elder law attorney is a good fit for your circumstances and helps achieve your goals.  In the meantime, this month and beyond be sure to celebrate older Americans!  #elderlaw #olderamericansmonth @aclgov #nationalelderlawmonth