Over my 23 years of estate planning and estate
administration practice, a few stories have highlighted the importance of
having an estate plan in place during a divorce and following through with the
transfer and documentation of assets after the divorce. Otherwise, your desires
may not be achieved.
Story #1: Unintended Beneficiary
Brandon received a large multi-million dollar settlement
because he was in an accident. Brandon and Emily signed a prenuptial agreement
prior to getting married to keep the settlement money as Brandon’s sole and
separate property. Brandon held his settlement money in a trust. After they had
been married for a while, Brandon added Emily as an 80% beneficiary of his
Trust. His remaining family members were a 20% beneficiary of his Trust.
After a ten-year marriage, Emily filed for a divorce.
Brandon got sick and two days before the filing of the divorce decree with the
Court, he died from unknown causes. Brandon’s Trust stated that Emily would
receive 80% of the Trust if they were married at his death. They were married
at his death because in Arizona, the divorce is not final until the decree is
filed. Emily received 80% of his Trust, or approximately $14.4 million and
Brandon’s family members received 20% of his Trust, or approximately $3.6
million.
If Brandon had changed his estate plan at the time of filing
his divorce, which would have only entailed advising his lawyer and signing a
trust amendment, his family members would have received 100% of the Trust after
estate taxes are paid (or approximately $10.8 million), instead of the 20% that
they received because he did not change his estate plan.
Moral to the story: When filing for divorce, change
your estate plan immediately, or your soon to be ex-spouse will receive your
assets if you die prior to finalization of the divorce. Not only will your
ex-spouse receive your assets, but he or she will also be able to make
decisions about your financial and health care decisions if you were to become
incompetent before the divorce was final. The ex-spouse will usually also be in
control of your assets as the Personal Representative and Trustee of your Trust
if needed unless changed prior to the divorce becoming final.
Story #2: Extra Expenses
John and Sarah agreed to a divorce. The documents stated
that all of their retirement plans would be divided in half, which would
require a lawyer to draft three orders that must be filed with the court. Since
they were splitting the costs, to keep the costs down, they agreed to equalize
the values of the qualified plans such that the excess was distributed to one
of them from the other using one order and they each kept their own retirement
plans. The lawyer drafted one order which was not yet signed and filed with the
court when John and his new wife died on their honeymoon. Three orders had to
be prepared and filed because the parties had to follow the documents as
written.
Moral to the story: Obtain the orders and get them
filed as soon as possible after the divorce decree is filed.
Dickinson Wright PLLC attorneys advise their divorce clients
to change their estate plan immediately upon filing for divorce. Additionally,
we draft our estate planning documents to avoid these worst case scenarios.
Please contact Robin Miskell in the Phoenix, Arizona office at 602-889-5329 if
you have questions.
