Divorce and the Estate Plan

By: Jennifer L. Zegel

Many legal issues surround divorce, such as the determination of custody, support, and equitable distribution of marital property, in addition to all of the emotional issues that surface before, during, and after divorce proceedings. Updating an estate plan is generally at the bottom of the list, if it even makes the list, when a person is going though a divorce. However, updating estate planning documents, such as a Will, Power of Attorney, Health Care Power of Attorney, Advanced Medical Directive (Living Will), and Revocable Trusts should be a top priority. In some situations, it may even be required by the terms of a divorce or property settlement agreement.

In Pennsylvania, some estate planning documents are automatically altered as soon as a petition for Divorce is filed. For example, under 20 Pa. Cons. Stat. § 5605(c), provisions that name a spouse as an Agent under a Power of Attorney, Health Care Power of Attorney, and Advanced Medical Directive are deemed invalid and revoked upon filing for divorce. If no successor Agent is named in the documents or if the successor can no longer act, the document will be inoperable. One exception, is that if you revise your Power of Attorney after divorce, or in contemplation of divorce, and you still name your spouse as your Agent, then the designation will be upheld.

In Pennsylvania, provisions in a Will or Revocable Trust that leave part, or all, of your assets to a spouse, or names your spouse as a fiduciary (executor or trustee) become ineffective after both a divorce petition has been filed and grounds for divorce have been established, as set forth in 20 Pa. Cons. Stat. §§ 2507 and 6111.1. The timing of the revocation of provisions pertaining to a spouse in a Will or Revocable Trust are a little different than in Power of Attorney documents. Once grounds for divorce are established, which take place during the divorce proceedings, and not automatically at the time of filing for divorce, any part of the estate that was to pass through the Will or Revocable Trust to the ex-spouse will pass to the contingent beneficiaries named in the documents. The successor fiduciaries named in these documents after your ex-spouse’s designation will control.

Additionally, you may want to revise the alternate fiduciaries named in your Will. Is your ex-spouse’s brother, sister, or friend named as your successor personal representative or trustee? If they are, do you really want them to continue to serve in these roles? These designations are not nullified by divorce. In addition to many legal changes that are a result of divorce, the change in family dynamics and friendships can completely alter a previously well thought out estate plan.

Guardianship provisions set forth in a Will for minor children should also be re-examined. Although, you cannot remove a parent’s right to care for a minor child (unless they are proven as an unfit parent by a court of law), the persons you and your spouse may have previously designated as guardians for your minor children may not be who you want to serve in these roles in the event both you and your ex-spouse die.

Other issues that arise in estate planning after divorce are designations of a spouse as a beneficiary of a life insurance policy, annuity contract, or other contractual agreement (including most retirement accounts, brokerage accounts, IRAs and 401(K)’s. In most States, like Pennsylvania, these designations become ineffective upon divorce, so long as the designation was revocable at the time of the policy-holder or owner’s death. Such a designation also becomes ineffective if the owner dies during divorce proceedings after grounds for divorce have been established. In this situation, the ex-spouse is treated as if he or she had predeceased the owner and the insurance policy or other account will go to the contingent beneficiary. Once a divorce is finalized, the primary and contingent beneficiaries listed for each account or policy should be updated to ensure that the designations carry out your current wishes.

However, it is important to be aware that the result of spousal beneficiary designations after divorce under federal law is different than Pennsylvania law. If a spouse is a beneficiary under a retirement plan governed by the Employee Retirement Income Security Act (ERISA), the beneficiary designation is not automatically revoked upon filing or even finalizing a divorce. Beneficiary designations through ERISA and other federally administered retirement plans must be revisited once a divorce is finalized. Otherwise, a spouse can still inherit. These designations cannot be changed without spousal consent (even after divorce) or a court order. Often times, spousal interests in these types of assets are dealt with through property settlement agreements.

In some cases, an individual may still want to provide assets to a former spouse, or may be required to keep a spouse named as a beneficiary under a life insurance policy in accordance with the terms a property settlement agreement. The law that invalidates bequests to ex-spouses does not apply if the language in the Will or Revocable Trust makes it clear that the bequest should survive divorce or the document is executed after a divorce is final.

High net worth individuals may have additional concerns when examining an estate plan after a divorce. These include (i) the loss or reduced ability to gift assets in conformity with a pre-existing estate plan or lifetime gifting scheme; (ii) the reduction or loss of the deferral of federal and state inheritance taxes generally achieved by an estate plan created for a married couple; and (iii) the effects of the divorce on federal estate and gift tax exclusion amounts (in 2014, a married couple can transfer $10,680,000; and an individual can transfer $5,340,000 during life or at death without incurring federal estate or gift tax).

When spouses are involved in a closely held business, corporate documents should be reviewed as part of the divorce process, such as shareholder agreements, buy/sell agreements and other related documents controlling the distribution of power and assets of the company. These documents are particularly relevant to the continued operation of the business and may have a significant effect on each of the parties’ individual estate plans as they move forward with their separation.

Divorce impacts all aspects of one’s life. Revising an estate plan in the aftermath of divorce can be a delicate matter. The attorneys at Reger Rizzo & Darnall LLP are here to assist you and guide you through the process of establishing or updating an estate plan after divorce that will minimize future disputes and conform with your needs, wishes, and requirements.

For questions, comments or additional information, please contact Jen Zegel, partner in our Estates & Trusts Group, at jzegel@regerlaw.com or via phone at 215.495.6523.