Wednesday, January 21, 2009

Estate Planning and Divorce: The Dangers of Doing Nothing

John and Sally have decide to divorce after 20 years of marriage and John goes to see a family law attorney. If John delays in making changes to his estate plan, the Automatic Temporary Restraining Orders (ATRO), set forth on the back of the Family Law Summons could thwart his goals. However, with proper planning, John can protect his assets and make sure they go to the people he chooses, and not his spouse.

Several years prior to seeking a divorce, John and Sally had a living trust drafted for their families benefit. The parties transferred their home into the trust. John also had life insurance and a 401(k) plan, with Sally named as the primary beneficiary.

The John and Sally Family Trust provide that if one of them dies, everything goes to the surviving spouse, then their children.

The divorce will not be amicable, and John makes it crystal clear to his attorney that he does not want Sally to get anything.

Even though John went to an experienced family law attorney, the attorney did not advise John regarding his estate planning. Accordingly, John doesn't understand that even if he files for divorce, if he does nothing to revise his estate plan, and he dies before a judgment of divorce is entered, Sally will get everything.

Unless John obtains a "Status Only Judgment", which terminates the marital status prior to all of the issues being resolved, the filing of a petition for divorce has no effect on John and Sally's estate plan. It remains in full force and effect. If John were to die, Sally would get all of the trust assets, the life insurance and the 401(k).

Only after a status only judgment is entered will the trust assets, and joint tenancy property, and property and John's name be distributed as if Sally had died before John. Even then, unless John changes the beneficiary of his 401(k) and life insurance policies, Sally will receive those assets even after a status only judgment has been entered.

If John did not modify his estate plan before filing a petition for divorce, because of the ATROs it may be too late.

So what should John have done? Once John files the petition for divorce he is bound by the ATROs, which can prevent him from cost saving estate planning. Once Sally is served with the petition for divorce, she is also bound by the ATROs. Unless John and Sally consent, or the court orders otherwise, each of them is bound by the ATROs until their divorce is final.

The ATROs can interfere with John's ability to create important estate planning documents which can help John's children or other loved ones avoid probate.

Even though a will and an unfunded trust can be created while the ATROs are in place, without any notice to or consent by the other spouse, the assets cannot be funded into the trust without the consent of the other party or a court order. And if the assets are not funded John or Sally's beneficiaries may get stuck with the delays and costs of probate before they receive their inheritance. These are things that can be avoided with good legal advice.

If John failed to modify his estate plan before filing the petition for dissolution, he must consider taking action to avoid the spouse-takes-all plan. Such actions might include:

1. Consider revoking the trust (with proper notice to other spouse);

2. Consider severing the joint tenancy (with proper notice);

3. Consider preparing a new trust (unfunded in ATROs in effect) to benefit the children/family;

4. Consider requesting consent to fund the new Trust (or don't fund the Trust and rely on the Will to "pour over" the assets into the new Trust. Probate fees and delays are seldom a good thing, but it would be much better than the property going to the wrong people.)

5. Consider revoking the old pour over Will and preparing a new Will to "pour over" into the new Trust.

It's never too early to address estate planning issues, but far too often, it's too late. If you are thinking about a divorce, bring the issue of updating your estate plan up as soon as possible with a good family law or estate planning attorney.

For further information:
Robert J. Busch, Jr., Attorney