Marriage, Divorce and Estate Planning

Prenuptial or postnuptial agreements must be reviewed as soon as a decision is made to end the marriage. (Yes, we all know the joke that these agreements should be reviewed before a decision is made to end the marriage.) These agreements will usually constrain or expand your estate planning options. In addition, virtually any will executed during the existence of the marriage would have to be changed when the marriage deteriorates to the point that a spouse decides to divorce. Furthermore, prompt action must usually be taken with regard to assets passing outside of probate, such as life insurance, pensions and retirement plans.

From an estate planning perspective, all of the above should be accomplished prior to entering into any stipulation or separation agreement. However, it is essential that the estate planner consult with the matrimonial attorney prior to making changes. According to one family law practitioner, the court's first impressions of the spouse that changed his estate plan immediately before filing, or in the early stages of, the matrimonial proceeding, could be negatively affected.

Key Marriage Provisions

Estates, Powers and Trusts Law (EPTL) Regarding Marriage

Using New York as an example, under the state's estate, property and trust law (EPTL 5-1.1-A), absent an agreement, one cannot disinherit a spouse. Generally, a surviving spouse is entitled to the greater of the amount provided for him or her under the deceased spouse's will, or one-third of the deceased spouse's net estate. Should the decedent die intestate (without a valid will), generally, under New York law (EPTL 4-1.1), absent an agreement, a surviving spouse is entitled to the deceased spouse's entire estate if the decedent died without issue (i.e., decedent was not survived by children, grandchildren, and so on) or one-half of the deceased spouse's estate if the decedent was survived by issue. Reviewing the provisions of EPTL 4-1.1, it should be clear that it may be in the surviving spouse's best interests to seek to qualify as a surviving spouse and invalidate his or her spouse's Last Will and Testament.

A spouse can bargain away, or simply waive, his or her rights under EPTL 4-1.1 or EPTL 5-1.1-A by entering into an prenuptial agreement or a postnuptial agreement. Generally, for agreements of this type to be enforceable, the parties must each be represented by independent counsel. In addition, it is highly recommended that the party seeking the prenuptial agreement make a full disclosure of assets at the time of entering into the agreement, since the courts are increasingly adopting a view that a fiduciary and confidential relationship exists between the parties. (See Estate of Greiff, 92 N.Y.2d 341 (1998)).

For purposes of election by a surviving spouse (EPTL 5-1.1-A), certain assets passing outside of probate (i.e., outside of the will) are included in the computation of the decedent's net estate and, therefore, are part of the one-third share that can be claimed by the surviving spouse. These assets are known as 'testamentary substitutes' and include: gifts causa mortis (gifts made in contemplation of death); bank accounts in the decedent's name in trust for another person; bank accounts in the name of the decedent and another person payable on death to the survivor; any disposition of property made by the decedent whereby property, at the date of his or her death, is held by the decedent and another person as joint tenants with a right of survivorship or as tenants by the entirety where the disposition was made after Aug. 31, 1966; any money, securities or other property payable under a savings, retirement, pension, deferred compensation, death benefit, stock bonus or profit-sharing plan, with certain exceptions, but shall not constitute a testamentary substitute if the decedent designated the beneficiary of the plan benefits on or before Sept. 1, 1992 and did not change such beneficiary designation thereafter; and security accounts owned by the decedent and payable on death to another person.

When computing testamentary substitutes, it is important to note that transactions benefiting the surviving spouse or any other person shall be treated as testamentary substitutes and included in the net estate. In other words, when making the computation, the numerator includes testamentary substitutes benefiting the surviving spouse and the denominator includes testamentary substitutes benefiting the surviving spouse or any other person. It is also important to note that, in most cases, a transaction that is irrevocable or is revocable only with the consent of a person having a substantial adverse interest, will constitute a testamentary substitute only if it is effected after the date of the marriage.

The procedures for exercising the spousal right of election can be found in subsection (d) of EPTL 5-1.1-A. The procedures include deadlines for making the election (generally, within six months from the date of issuance of letters testamentary or of administration but in no event later than two years after the date of decedent's death) and the requirements of notice and filing of the election.

Subsection (e) of EPTL 5-1.1-A is entitled, 'Waiver or release of right of election.' Basically, this subsection provides for waiver or release by prenuptial and postnuptial agreement. The agreement or waiver does not have to be bilateral. It is sufficient only for the party waiving his or her rights to execute the document. The agreement can be executed with or without consideration. The agreement, waiver or release must be in writing and subscribed by the maker thereof, and acknowledged or proved in the manner required by the laws of this state for the recording of a conveyance of real property. An incredible number of cases (reported and unreported) focus on the issue of whether or not a document was properly 'acknowledged or proved.' It is essential to meet this requirement.

For purposes of both EPTL 4-1.1 and EPTL 5-1.1-A, a husband or wife is a surviving spouse unless disqualified. EPTL 5-1.2 sets forth the circumstances of disqualification, which include a final decree or judgment of divorce, of annulment or declaring the nullity of a marriage or dissolving such marriage on the ground of absence, recognized as valid under the law of this state, in effect when the deceased spouse died.

Other circumstances that result in disqualification include a final decree or judgment of separation, recognized as valid under the law of this state, rendered against the spouse, and in effect when the deceased spouse died. In addition, a spouse is disqualified if he or she abandoned the deceased spouse, and such abandonment continued until the time of death, or if the spouse, having the duty to support the other spouse, failed or refused to provide support though he or she had the means or ability to do so.

Finally, for those whose emotions tempt them to seek the quick divorce abroad, they need to be aware that a spouse is disqualified if he or she had procured outside of this state a final decree or judgment of divorce from the deceased spouse, of annulment or declaring the nullity of the marriage with the deceased spouse or dissolving such marriage on the ground of absence, not recognized as valid under the law of this state. Clearly, in situations where the marriage has gone bad and a spouse is in bad health, being patient can have its rewards.

Revocatory Effects

Divorce or Annulment

Pursuant to EPTL 5-1.4, if, after executing a will, the testator is divorced, his marriage is annulled or its nullity declared or such marriage is dissolved on the ground of absence, the divorce, annulment, declaration of nullity or dissolution revokes any disposition or appointment of property made by the will to the former spouse and any provision therein naming the former spouse as executor or trustee, unless the will expressly provides otherwise.

It is important to note that this statute only revokes the bequests to, and fiduciary appointments of, the former spouse. Should a testator, for example, have his brother-in-law named as executor, trustee and guardian of his children, a new will should, in most cases, be drafted immediately. In addition, note that a legal separation does not automatically revoke the bequest to or appointment of the former spouse. Case law reveals that in order for a separation agreement to have the effect of revoking a prior bequest, the agreement must either contain a provision whereby the spouse explicitly renounces any testamentary disposition in his or her favor made prior to the date of the separation agreement or employ language that clearly and unequivocally manifests an intent on the part of the spouses that they are no longer beneficiaries under each other's wills. (See In re Maruccia, 54 N.Y.2d 196 (1981)).

Many cases center on agreements made in contemplation of divorce where one of the spouses dies before a final decree on divorce is entered. An established principle of law in this area is that where a decedent dies during the pendency of a divorce action, the action abates because the marital relationship between the parties no longer exists. (See Matter of Forgione, 237 A.D.2d 438 (2^nd Dept. 1997)). However, where it is clear from the agreement that the parties intended the agreement to be an independent contract to be performed regardless of whether the parties ever actually terminated their marriage, a party (or her estate) has a right to enforce that agreement (See Brower v. Brower, 226 A.D.2d 92 (3^rd Dept. 1997)).

Life Insurance Policies

Life Insurance Policies, Pensions, Retirement Plans and Totten Trusts

EPTL 13-3.2 governs the rights of beneficiaries of pensions, death benefits, IRAs and 401(k) plans. Basically, the statute provides that the rights of beneficiaries designated under these policies or plans 'shall not be impaired or defeated by any statute, or rule of law governing the transfer of property by will, gift or intestacy.' (Id. subd (a)). Essentially, a party other than the person designated as the beneficiary of the policy or account has the burden of proving that the funds should be paid to him or her. Unlike probate assets, there is no automatic revocation of a disposition of pensions, death benefits, IRAs and 401(k) plans to a former spouse.

In Freeman v. Freeman, 116 F.Supp. 379 (E.D.N.Y. 2001) the decedent had named his wife as beneficiary of his IRA. The couple separated and his wife commenced divorce proceedings before his death. The decedent executed a new will in which his wife was disinherited, but which was silent on the IRA. He never removed his wife as the designated beneficiary on his IRA. The couple had not divorced at his death. The decedent's residuary beneficiaries argued that his will effectively changed the beneficiary designation on his IRA. The court held against the residuary beneficiaries because the will did not make an unambiguous disposition of the IRA required under case law.

In an interesting case involving totten trusts, the decedent had established numerous bank accounts in trust for his wife in the sum of almost half a million dollars. The decedent and his wife divorced prior to his death. Their separation agreement was silent with regard to the totten trusts, as was his last will, which was executed subsequent to their divorce. The court held that the former spouse was entitled to the totten trust funds. (See Eredics v. Chase Manhattan Bank, 186 Misc2d 19 (Sup.Ct., Nassau Cty., 2000)).

While the residuary beneficiaries should prevail in situations where the decedent/testator includes in the will unambiguous language specifically identifying and disposing of the IRA or totten trust, it should be obvious that it is far safer to change the beneficiary designations on the IRA, life insurance policy, pension plan and totten trust promptly. Expensive litigation can often be avoided by changing the beneficiary designations. It should be noted, however, that most employer retirement plans (Employee Retirement Income Security Act [ERISA] and Retirement Equity Act of 1984 [REA]) require spousal waivers before the spouse can be eliminated as a beneficiary.

Conclusion

Divorce is undoubtedly a very stressful and all-consuming event. Residences must be acquired and sometimes sold, lives must be rebuilt and innocent children need to be protected. In such times, a new estate plan might not feel like a high priority. But without addressing estate planning, it is possible to extend the misery of divorce in ways your clients previously could not have imagined.

Frank J. Gobes is the sole proprietor of the Law Office of Frank J. Gobes, located in White Plains, NY. This article originally ran in the New York Law Journal, a sister publication of this newsletter.

Trusts and estates law is replete with special rules, or exceptions to the general rules, designed to recognize and protect the financial side of the marriage partnership. What happens, however, when husbands or wives decide that they no longer wish to be married? Once the decision is made to end the marriage, one spouse usually wishes to minimize any benefits that the other spouse could obtain from the estate.

Estate Plan Changes

Changes to the estate plan should be made by a qualified estates attorney, acting in concert with a qualified matrimonial attorney, as soon as a decision is made to end the marriage. Inaction could leave the spouse to the vagary of default legislation that is not well-designed to handle the period of time from 'I definitely want a divorce' up to the date of the final divorce decree. In fact, as discussed below, without proper planning, there are situations where estate assets can be taken by the ex-spouse years after a final divorce decree has been entered.

Prenuptial or postnuptial agreements must be reviewed as soon as a decision is made to end the marriage. (Yes, we all know the joke that these agreements should be reviewed before a decision is made to end the marriage.) These agreements will usually constrain or expand your estate planning options. In addition, virtually any will executed during the existence of the marriage would have to be changed when the marriage deteriorates to the point that a spouse decides to divorce. Furthermore, prompt action must usually be taken with regard to assets passing outside of probate, such as life insurance, pensions and retirement plans.

From an estate planning perspective, all of the above should be accomplished prior to entering into any stipulation or separation agreement. However, it is essential that the estate planner consult with the matrimonial attorney prior to making changes. According to one family law practitioner, the court's first impressions of the spouse that changed his estate plan immediately before filing, or in the early stages of, the matrimonial proceeding, could be negatively affected.

Key Marriage Provisions

Estates, Powers and Trusts Law (EPTL) Regarding Marriage

Using New York as an example, under the state's estate, property and trust law (EPTL 5-1.1-A), absent an agreement, one cannot disinherit a spouse. Generally, a surviving spouse is entitled to the greater of the amount provided for him or her under the deceased spouse's will, or one-third of the deceased spouse's net estate. Should the decedent die intestate (without a valid will), generally, under New York law (EPTL 4-1.1), absent an agreement, a surviving spouse is entitled to the deceased spouse's entire estate if the decedent died without issue (i.e., decedent was not survived by children, grandchildren, and so on) or one-half of the deceased spouse's estate if the decedent was survived by issue. Reviewing the provisions of EPTL 4-1.1, it should be clear that it may be in the surviving spouse's best interests to seek to qualify as a surviving spouse and invalidate his or her spouse's Last Will and Testament.

A spouse can bargain away, or simply waive, his or her rights under EPTL 4-1.1 or EPTL 5-1.1-A by entering into an prenuptial agreement or a postnuptial agreement. Generally, for agreements of this type to be enforceable, the parties must each be represented by independent counsel. In addition, it is highly recommended that the party seeking the prenuptial agreement make a full disclosure of assets at the time of entering into the agreement, since the courts are increasingly adopting a view that a fiduciary and confidential relationship exists between the parties. (See Estate of Greiff, 92 N.Y.2d 341 (1998)).

For purposes of election by a surviving spouse (EPTL 5-1.1-A), certain assets passing outside of probate (i.e., outside of the will) are included in the computation of the decedent's net estate and, therefore, are part of the one-third share that can be claimed by the surviving spouse. These assets are known as 'testamentary substitutes' and include: gifts causa mortis (gifts made in contemplation of death); bank accounts in the decedent's name in trust for another person; bank accounts in the name of the decedent and another person payable on death to the survivor; any disposition of property made by the decedent whereby property, at the date of his or her death, is held by the decedent and another person as joint tenants with a right of survivorship or as tenants by the entirety where the disposition was made after Aug. 31, 1966; any money, securities or other property payable under a savings, retirement, pension, deferred compensation, death benefit, stock bonus or profit-sharing plan, with certain exceptions, but shall not constitute a testamentary substitute if the decedent designated the beneficiary of the plan benefits on or before Sept. 1, 1992 and did not change such beneficiary designation thereafter; and security accounts owned by the decedent and payable on death to another person.

When computing testamentary substitutes, it is important to note that transactions benefiting the surviving spouse or any other person shall be treated as testamentary substitutes and included in the net estate. In other words, when making the computation, the numerator includes testamentary substitutes benefiting the surviving spouse and the denominator includes testamentary substitutes benefiting the surviving spouse or any other person. It is also important to note that, in most cases, a transaction that is irrevocable or is revocable only with the consent of a person having a substantial adverse interest, will constitute a testamentary substitute only if it is effected after the date of the marriage.

The procedures for exercising the spousal right of election can be found in subsection (d) of EPTL 5-1.1-A. The procedures include deadlines for making the election (generally, within six months from the date of issuance of letters testamentary or of administration but in no event later than two years after the date of decedent's death) and the requirements of notice and filing of the election.

Subsection (e) of EPTL 5-1.1-A is entitled, 'Waiver or release of right of election.' Basically, this subsection provides for waiver or release by prenuptial and postnuptial agreement. The agreement or waiver does not have to be bilateral. It is sufficient only for the party waiving his or her rights to execute the document. The agreement can be executed with or without consideration. The agreement, waiver or release must be in writing and subscribed by the maker thereof, and acknowledged or proved in the manner required by the laws of this state for the recording of a conveyance of real property. An incredible number of cases (reported and unreported) focus on the issue of whether or not a document was properly 'acknowledged or proved.' It is essential to meet this requirement.

For purposes of both EPTL 4-1.1 and EPTL 5-1.1-A, a husband or wife is a surviving spouse unless disqualified. EPTL 5-1.2 sets forth the circumstances of disqualification, which include a final decree or judgment of divorce, of annulment or declaring the nullity of a marriage or dissolving such marriage on the ground of absence, recognized as valid under the law of this state, in effect when the deceased spouse died.

Other circumstances that result in disqualification include a final decree or judgment of separation, recognized as valid under the law of this state, rendered against the spouse, and in effect when the deceased spouse died. In addition, a spouse is disqualified if he or she abandoned the deceased spouse, and such abandonment continued until the time of death, or if the spouse, having the duty to support the other spouse, failed or refused to provide support though he or she had the means or ability to do so.

Finally, for those whose emotions tempt them to seek the quick divorce abroad, they need to be aware that a spouse is disqualified if he or she had procured outside of this state a final decree or judgment of divorce from the deceased spouse, of annulment or declaring the nullity of the marriage with the deceased spouse or dissolving such marriage on the ground of absence, not recognized as valid under the law of this state. Clearly, in situations where the marriage has gone bad and a spouse is in bad health, being patient can have its rewards.

Revocatory Effects

Divorce or Annulment

Pursuant to EPTL 5-1.4, if, after executing a will, the testator is divorced, his marriage is annulled or its nullity declared or such marriage is dissolved on the ground of absence, the divorce, annulment, declaration of nullity or dissolution revokes any disposition or appointment of property made by the will to the former spouse and any provision therein naming the former spouse as executor or trustee, unless the will expressly provides otherwise.

It is important to note that this statute only revokes the bequests to, and fiduciary appointments of, the former spouse. Should a testator, for example, have his brother-in-law named as executor, trustee and guardian of his children, a new will should, in most cases, be drafted immediately. In addition, note that a legal separation does not automatically revoke the bequest to or appointment of the former spouse. Case law reveals that in order for a separation agreement to have the effect of revoking a prior bequest, the agreement must either contain a provision whereby the spouse explicitly renounces any testamentary disposition in his or her favor made prior to the date of the separation agreement or employ language that clearly and unequivocally manifests an intent on the part of the spouses that they are no longer beneficiaries under each other's wills. (See In re Maruccia, 54 N.Y.2d 196 (1981)).

Many cases center on agreements made in contemplation of divorce where one of the spouses dies before a final decree on divorce is entered. An established principle of law in this area is that where a decedent dies during the pendency of a divorce action, the action abates because the marital relationship between the parties no longer exists. (See Matter of Forgione, 237 A.D.2d 438 (2^nd Dept. 1997)). However, where it is clear from the agreement that the parties intended the agreement to be an independent contract to be performed regardless of whether the parties ever actually terminated their marriage, a party (or her estate) has a right to enforce that agreement ( See Brower v. Brower, 226 A.D.2d 92 (3 rd Dept. 1997)).

Life Insurance Policies

Life Insurance Policies, Pensions, Retirement Plans and Totten Trusts

EPTL 13-3.2 governs the rights of beneficiaries of pensions, death benefits, IRAs and 401(k) plans. Basically, the statute provides that the rights of beneficiaries designated under these policies or plans 'shall not be impaired or defeated by any statute, or rule of law governing the transfer of property by will, gift or intestacy.' (Id. subd (a)). Essentially, a party other than the person designated as the beneficiary of the policy or account has the burden of proving that the funds should be paid to him or her. Unlike probate assets, there is no automatic revocation of a disposition of pensions, death benefits, IRAs and 401(k) plans to a former spouse.

In Freeman v. Freeman, 116 F.Supp. 379 (E.D.N.Y. 2001) the decedent had named his wife as beneficiary of his IRA. The couple separated and his wife commenced divorce proceedings before his death. The decedent executed a new will in which his wife was disinherited, but which was silent on the IRA. He never removed his wife as the designated beneficiary on his IRA. The couple had not divorced at his death. The decedent's residuary beneficiaries argued that his will effectively changed the beneficiary designation on his IRA. The court held against the residuary beneficiaries because the will did not make an unambiguous disposition of the IRA required under case law.

In an interesting case involving totten trusts, the decedent had established numerous bank accounts in trust for his wife in the sum of almost half a million dollars. The decedent and his wife divorced prior to his death. Their separation agreement was silent with regard to the totten trusts, as was his last will, which was executed subsequent to their divorce. The court held that the former spouse was entitled to the totten trust funds. ( See Eredics v. Chase Manhattan Bank, 186 Misc2d 19 (Sup.Ct., Nassau Cty., 2000)).

While the residuary beneficiaries should prevail in situations where the decedent/testator includes in the will unambiguous language specifically identifying and disposing of the IRA or totten trust, it should be obvious that it is far safer to change the beneficiary designations on the IRA, life insurance policy, pension plan and totten trust promptly. Expensive litigation can often be avoided by changing the beneficiary designations. It should be noted, however, that most employer retirement plans (Employee Retirement Income Security Act [ERISA] and Retirement Equity Act of 1984 [REA]) require spousal waivers before the spouse can be eliminated as a beneficiary.

Conclusion

Divorce is undoubtedly a very stressful and all-consuming event. Residences must be acquired and sometimes sold, lives must be rebuilt and innocent children need to be protected. In such times, a new estate plan might not feel like a high priority. But without addressing estate planning, it is possible to extend the misery of divorce in ways your clients previously could not have imagined.

Frank J. Gobes is the sole proprietor of the Law Office of Frank J. Gobes, located in White Plains, NY. This article originally ran in the New York Law Journal, a sister publication of this newsletter.