Posts Tagged ‘Employee Retirement Security Income Act of 1974’

Divorced, Separated or Filing Soon? Think About Your Estate Plan

JULY 23, 2012 VOLUME 19 NUMBER 28
We’re sorry to hear about your marriage breaking up, and we know you have a lot of other things on your mind. But could we get you to think about your estate plan for a moment? We suspect that in the process of getting divorced or separated, you haven’t given it any thought.

At Fleming & Curti, PLC, we have seen a number of cases where a separated or recently divorced spouse has died without having taken care of estate planning. If you have recently gotten divorced or legally separated, or if you or your spouse have recently filed, you should consider the effect of this major life change on your will, living trust, beneficiary designations and custody arrangements set up for your children. In fact, we wish you would think about it for a moment if you have ever gotten divorced — a number of the cases we have handled have involved someone who didn’t get around to making appropriate changes for years after the divorce. Here are some of the issues you should think about, and discuss with either your divorce lawyer or your estate planning attorney:

Default state law. In Arizona (and in some other states — but we don’t practice law in those states) there is a statute that says divorce causes your ex-spouse to be treated as if he or she died before you. So if your will leaves everything to your husband, and then you get divorced, he should be treated as having died, which means your will now leaves everything according to the alternate provisions you spelled out. Same thing for life insurance beneficiary designations — even joint tenancy titling in real estate. If you would like to read the Arizona law on divorce and estate planning, it is available online.

But don’t rely on that law. There are a number of problems with doing so, and they are mostly not things the legislature could even fix if they tackled the issues. For instance: what about a decree of legal separation? In Arizona, that is not a divorce — the spouses are still married. The law assumes that if they wanted to really sever all rights they might have in one another’s estates, they would have gotten divorced (or had the marriage annulled). Consequently, a decree of legal separation will not have the same effect.

What about people who want their ex-spouses to receive property even though they have gotten divorced? We do see this — fairly often, in fact. Because of the presumption that the divorce effectively changed the spouses’ estate plans, if you want to leave anything to an ex-spouse you would be well-advised to sign a new will (or trust) and make it clear that your divorce has not changed your wishes.

What about couples who are not yet divorced, but who are in the middle of filing? Perhaps they have even been involved in a protracted, bitter legal struggle — but until the divorce is final, they are not divorced for purposes of estate planning. So if you are in the process of getting divorced, you would be well advised to talk with your lawyer (either the divorce lawyer or your estate planning lawyer) about what you should do between now and the finalization of the divorce decree. But note: there is a related rule which kicks in automatically in every pending Arizona divorce proceeding. It prevents the spouses from making any transfers of property or changing ownership arrangements (you can read the automatic “preliminary injunction” online), so be very careful about how you change your estate plan. The more contested the proceeding, the more urgent the need to make the change — and the more dangerous it can be to do it. So talk to your lawyer(s).

Federal law. Some kinds of property are not governed by the Arizona law treating divorced spouses as having each died before the other. The most important illustration: benefits governed by ERISA, (known to its friends as the Employee Retirement Income Security Act of 1974). Even if your divorce decree says, for instance, “husband gives up all rights he may have in wife’s retirement account at XYZ, Inc.” it may not be effective. It is critically important that you make sure that (a) your divorce decree qualifies as a QDRO (a Qualified Domestic Relations Order) and that you have taken steps to formalize the change in beneficiaries and (b) you actually get a new beneficiary designation in place. Again and again we see long-divorced spouses who have never gotten around to changing the beneficiary on their work-sponsored insurance or retirement plans, and whose ex-spouses end up with the benefits.

Look at your decree — and show it to us. Suppose your divorce decree requires you to maintain life insurance payable to your kids. Fifteen years later, after a remarriage (and the birth of two more kids by your second spouse) you decide to update your estate plan. We tell you what changes we want you to make in your life insurance beneficiary designation. Do you think we need to know about your almost-forgotten divorce decree before actually making those changes? You bet we do — and you need to remember to look at it from time to time, too, if it contains any instructions which might continue to apply to you.

Custody of your children. Maybe you were in a bitter divorce, and you think your ex-spouse is really not a good parent. Can you provide that someone else gets custody of your children on your death?

Probably not. But that doesn’t mean that you shouldn’t make any provisions for guardianship. What if your ex-spouse dies before you, or chooses not to seek custody after your death? You should have a conversation with your estate planning attorney about guardianship, even if your expression of preference may not be effective. It might turn out to have been important.

You need new powers of attorney. Just as your ex-spouse ceases to be your heir after the divorce, he or she also loses the role as agent under both your financial and health care power of attorney (under Arizona law, at least). But that could mean that you haven’t named an agent at all — and the last thing you want is for your new spouse, or your brother or sister, to be fighting with your ex-spouse about whether the documents are valid. You need to sign new powers of attorney — in fact, we think it is even more important that you do that while the divorce is pending (since the automatic rules have not yet kicked in).

What about your joint revocable living trust? Oh, what a good question. This one often requires some close communication between your divorce and estate planning attorneys. You need to separate assets and estate plans, but you have to be careful not to violate that automatic preliminary injunction we talked about earlier. Get both attorneys talking to one another (and maybe your spouse’s divorce attorney, too) as early as possible. And if your joint trust is irrevocable (as it might be, for instance, if it holds life insurance), the problems can be even more difficult, and cooperation more important.

How are step-kids treated? Remarrying someone who brings children into the marriage? You need to talk with us about how to treat your step-children (and maybe other step-relatives). The legal system makes some assumptions about how you want your children treated; those same assumptions may not apply to step-children, and so you need to be especially careful — and specific — in order to get your wishes recognized.

That’s just a sampling of some of the estate planning issues we see in cases involving divorced — or divorcing — spouses. There are a lot more issues out there, and some of them are very complex. For us, the key is communication: you need to tell us about your marital history, and we need to let you know why that can be important.

Federal Law on Beneficiaries Overrides State Divorce Rules

MARCH 26, 2001 VOLUME 8, NUMBER 39

Assume that Mr. and Mrs. Smith, happily married, sign wills leaving all their assets to one another. Some years later their marriage fails, and the Smiths divorce. Will their old wills still be valid?

Arizona, like many other states, has a provision that effectively revokes Mr. and Mrs. Smith’s wills. Each is treated as having died before the other, so whatever alternate provisions they have made will take effect instead. This seems fair and proper; we can assume that Mr. and Mrs. Smith no longer wish to leave everything to each other if they no longer live together. In fact, Arizona law goes further, and provides that the Smiths’ designation of life insurance beneficiaries, joint tenancy and other substitutes for wills are also invalidated.

Washington state law is similar, and so the results in that state should be about the same. If Mr. and Mrs. Smith (or, in the case offered for our current review, Mr. and Mrs. Egelhoff) get divorced, any designation of joint ownership or beneficiary designation is automatically revoked.

Donna Rae and David A. Egelhoff were divorced in 1994. Mr. Egelhoff was an employee at the Boeing Company, and had a company pension and life insurance policy. Both named his wife as beneficiary. Mr. Egelhoff was killed in an automobile accident two months after the divorce, before he had gotten around to changing the beneficiary designations.

Mr. Egelhoff’s two children from a prior marriage pointed to the Washington statute, and argued that they should receive both the life insurance and the pension benefits. The problem: both plans were covered by the Employee Retirement Security Income Act of 1974, popularly known as ERISA.

Most employer-provided plans that include pension and life insurance benefits are governed by ERISA. In order to protect workers from state variations, ERISA expressly provides that state law is ineffective in any attempt to determine ownership rights in the plans. The so-called “pre-emption” provision of ERISA overrides any state law to the contrary.

But, argued Mr. Egelhoff’s children, the Washington law did not really affect ownership of the retirement plan and life insurance. The Washington State Supreme Court agreed, and ordered the benefits paid to the children. Mrs. Egelhoff appealed to the United States Supreme Court.

Last week the U.S. Supreme Court overruled the state courts and ordered that the proceeds belonged to Mrs. Egelhoff. Mr. Egelhoff could have changed the beneficiary designations, but he would have to have done so in accordance with the strict provisions of the retirement plan and federal law. Washington’s state law (and almost certainly Arizona’s as well) failed to protect Mr. Egelhoff’s children from his failure to make the formal change. The Court’s holding only applies to benefits plans covered by ERISA, but since most retirement plans and company life insurance benefits are covered the effect is far-reaching. The state law that automatically rewrites a divorcing couple’s wills is still valid, but not necessarily the provisions relating to life insurance and pension rights. Egelhoff v. Egelhoff, March 21, 2001.

©2017 Fleming & Curti, PLC