When You're No Longer a Couple: Estate Planning After Divorce or Death
Most of our estate planning clients come to us as husband and wife. The estate plan is typically prepared with each spouse providing for the other on the death of the first spouse, and for the couple's children or other beneficiaries on the death of the second spouse. But marriages do not always end because of the death of one of the parties. It is a well-publicized fact that approximately 50% of all marriages end in divorce. For whatever reason the marriage ends, the surviving spouse in the case of a spouse's death, and both the husband and wife in the case of a divorce, need to consider several estate planning issues going forward. Some of these issues are common to both situations, and some are not. Following is a discussion of a few of these.
It has been a well-established rule for many years that transfers from one spouse to another at death are not subject to federal or state estate tax, regardless of the amount of the bequest, as long as the bequest passes outright to the surviving spouse or to a certain type of trust for the surviving spouse’s benefit. Such transfers are commonly referred to as marital deduction bequests. The theory of estate taxation is that the tax will be deferred until both parties are deceased.
Whether a marriage ends due to death or divorce, the deferral of the tax over the life expectancies of two lives is now cut in half to the life expectancy of one life, so planning for the payment of the tax becomes a more immediate concern. The good news in all of this is that with the rapidly increasing federal estate tax exemption ($12.92M per person in 2023), very few estates will be subject to tax. Due to the portability rule in the federal tax system for married couples, one spouse’s exemption can be added to the other spouse’s, giving the surviving spouse an exemption of $25.84M. The addition of the exemptions can also be accomplished through the old traditional method of so-called marital-credit shelter trust planning.
At the state level, Connecticut also has an exemption of $12.92M per person in 2023. Connecticut does not permit portability, but exemptions can be added through the traditional marital-credit shelter trust planning. One silver lining with regard to the Connecticut estate tax is that the maximum rate only goes up to 12%, whereas the maximum federal rate is 40%.
All of the rules regarding the use of both spouse’s exemptions is out the window for divorced couples. Accordingly, after the parties are divorced, each party must review his or her exposure to federal and state death taxes and plan accordingly for the payment of the tax.
One of the first things that needs to be taken care of by a surviving spouse after the death of his or her spouse, or by a divorcee after the case goes to judgment, is a review of all beneficiary designations for any and all assets that are payable at death by beneficiary designation, including but not limited to life insurance policies, annuities contracts, transfer on death accounts, and retirement plans (such as pension plans, 401(k) and 403(b) plans, and IRAs). In almost all estate plans, spouses name each other as the primary beneficiary of their beneficiary designated assets, and, if they have children, they name the children as the equal contingent beneficiaries. In cases where trusts are involved, the trust may be named as a beneficiary.
In the case of a death of a spouse, the contingent beneficiary or beneficiaries will automatically become the new primary beneficiary or beneficiaries. In the case of a divorce, the former spouse will remain the primary beneficiary regardless of the change in his or her relationship to the owner of the asset. If the owner of the asset fails to complete a new beneficiary designation form removing the former spouse as the primary beneficiary and dies, the death benefit will be paid to the former spouse. Of course, all divorcees must comply with the divorce settlement agreement, which may require that the former spouse remain as the beneficiary of a certain asset or assets for a period of years or permanently.
If a contingent beneficiary has moved up to primary beneficiary status. either due to the death of the prior primary beneficiary or removal of the prior primary beneficiary after a divorce, the surviving spouse or the divorcee must be careful of how the beneficiary designation reads. If, for example, after the death of a spouse or after a divorce, the couple’s two children become the primary beneficiaries, and the designation provides that they are to share the death benefit equally, the beneficiary designation must be examined carefully to make sure that if a child predeceases the surviving spouse or the divorcee, the deceased child’s one-half share of the death benefit will pass to that child’s children and not to his or her sibling, who will be the sole surviving child. The method by which the benefit passes to the deceased child’s children is called the per stirpes method. It is the method used in almost all wills and trusts. Some beneficiary designation forms have a box to check to elect a per stirpes distribution, and some do not. There are two solutions if there is no per stirpes option on the form. One is to have the attorney prepare an addendum to the beneficiary designation form that includes the necessary language for a per stirpes distribution. If the insurance company, IRA custodian, or plan administrator of a pension plan will accept the addendum, then all is well and good. If, however, the addendum is not accepted, then the surviving spouse or the divorcee must be vigilant to change his or her beneficiary designations in the case where the beneficiary predeceases the surviving spouse or the divorcee.
Estate Planning Documents
All estate planning documents should be reviewed after the death of a spouse or after a divorce. Just about every will and trust provides (or should provide) for the disposition of assets and the appointment of a successor executor and trustee if the deceased spouse was the first named executor or trustee. Just about every incapacity document, including a power of attorney, health care directives document, and conservator appointment also provides for one or more successors if the spouse is the first named fiduciary and the spouse dies. That being said, the surviving spouse may want to change a successor fiduciary or add one or more new successor fiduciaries to any document. In some cases, the surviving spouse may want to make some changes to the dispositive provisions in his or her will and/or trust.
While wills, trusts, powers of attorney, health care directives documents, and conservator appointments are drafted to take the death of a spouse into consideration, they are not drafted to take divorce into consideration. A Connecticut statute solves the problem for wills signed on or after January 1, 1997. Under that statute, the divorcee’s will is valid, but the former spouse is deemed to have predeceased the divorcee for purposes of receiving assets under the will and for purposes of the appointment of executor. Wills signed prior to January 1, 1997, are revoked, and the divorced parties are intestate. The disposition of divorcees’ assets will, therefore, be determined by statute. Trust agreements, powers of attorney, health care directives documents, and conservator appointments are not revoked by statute, and unless a divorcee executes new documents, his or her former spouse will have authority to act in the event the divorcee becomes incapacitated. In almost all cases, this is not the intended result of the divorcee. Therefore, the divorcee should have all of his or her documents carefully reviewed after a divorce and should consider executing new documents to have new fiduciaries named and make the appropriate provisions in the will and trust for the disposition of assets.
If you need to make revisions to any estate planning documents, or if you need to create new documents, please call our estate planning coordinator, Eva, to make an appointment. She can be reached at 860-812-1749 or firstname.lastname@example.org.