The Marriage of Divorce and Estate Planning

In case you missed the series about the impact of divorce on estate planning, here is a brief recap of some points to consider.

1.  The Property Settlement Agreement may require that you maintain life insurance for any minor children.  If that is the case, then have you revisited your estate plan recently?  What obligations to maintain life insurance do you have?  Does the Property Settlement Agreement have certain requirements for the creation of a trust, and if so, what are those requirements?  Have the requirements of the Property Settlement Agreement been fulfilled or incorporated through your estate plan?  Are there any provisions of the Property Settlement Agreement that will survive death?

2. When was the last time you updated your beneficiary designations on qualified retirement accounts (e.g., 401(k) or IRA accounts), annuities, life insurance or payable on death or transfer of death designations on bank or brokerage accounts?

3.  What should happen to your real and personal property?  Are there steps you need to take to ensure your real and personal property are distributed to the individuals or entities you want to have benefit?

4.  If you are divorcing and have a disabled child, how is that child being provided for upon the incapacity or death of a parent?  Is eligibility for public benefits preserved through a properly structured special or supplemental needs trust?  Who has authority to make healthcare decisions for the child and in what manner?  Has guardianship been determined and the terms in which parents plan to share guardianship specified, if applicable?

5.  What happens if an estate plan already exists and you do nothing to update it?

#estateplanning #divorce @bgnthebgn

How Divorce Can Impact Your Estate Plan – Failure to Update an Existing Plan

Now that we have addressed property settlement agreements, beneficiary designations, real and personal property and special needs, what happens if an estate plan already exists and you do nothing to update it?  Presumably, the existing plan was prepared during the marriage and has the former spouse in fiduciary positions and named as a beneficiary.  The entire plan should be updated to reflect new trustees, personal representatives/executors, financial powers of attorney and healthcare agents.  But often, recently divorced individuals simply do not have the inclination to handle one more legal matter (particularly if the divorce was not amicable).

Virginia law has a savings clause that may apply.  Under Virginia law, if a person creates a last will and testament while married, divorces and subsequently dies without updating his or her last will and testament, the divorce “revokes any disposition or appointment of property made by the will to the former spouse.”  Va. Code §64.2-412.  In addition, any appointment of the former spouse as a fiduciary under the will, including as executor, trustee, conservator or guardian, is revoked.  However, this law does not change any financial power of attorney or healthcare power of attorney under which the former spouse may be named.  Furthermore, the law does address provisions contained in a trust agreement.  Therefore, a former spouse may have authority to act or be treated as a beneficiary unless changes are made or other state statutes apply

Moreover, if there is an irrevocable trust or “spousal lifetime access trust” (SLAT) that benefits a spouse, then there may continue to be income tax consequences to the creator of that irrevocable trust even though the parties divorce.  The regulatory and legislative history surrounding the applicable tax code sections (Sections 71, 672, 677 and 682)  is not as clear as it should be, in certain circumstances, as to whether a grantor (or creator of the trust) will still be held liable for the income tax associated with the irrevocable trust that otherwise benefits an ex-spouse.  Therefore, the trust agreement and relevant tax law need to be reviewed and a determination made regarding any ongoing tax liability.

Overall, taking into account all of the considerations described throughout this series, it is clear that after a divorce (and perhaps even during a divorce), it is imperative that you begin the process of updating your estate plan to avoid the potential of having a former spouse in a position of authority during incapacity or upon death and to avoid a former spouse unintentionally benefiting from your demise. #beginthebegin #divorce #estateplanning #updateyourestateplan @bgnthebgn

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