New Probate Code Affects Estate Planning At Divorce
When a divorce petition is filed, the spouses generally may not
transfer or dispose of property without the other spouse's consent or a
court order. Still, the wise lawyer will counsel clients to plan their
estates including preparing new wills and power of attorney, and
changing beneficiaries on all transfer instruments in
anticipation of the divorce judgment.
By Barbara S. Hughes
Editor's Note:
To view Wisconsin Statutes and Acts referenced in this article you
must have and/or install Adobe
Acrobat Reader 3.0 on your computer.
As divorce settlement or trial
approaches, estate planning may be the farthest thing from the divorcing
client's mind. Does the divorce attorney have an obligation to see that
the client prepares and executes a new will? Does the attorney have any
further obligations? What if the client is balking at additional
"unnecessary" fees?
This article discusses estate planning that the divorce attorney
should cover with the client during the pendency and, in particular, at
the time of the final divorce hearing. It also summarizes current law
concerning the effects of the divorce judgment on existing estate
planning instruments, including the impact of the new probate code which
became effective Jan. 1, 1999. 1
Clients can reasonably expect that divorce-related legal advice
should encompass, at a minimum, basic estate replanning for the changed
family situation and the client's financial condition. In today's
litigious cultural setting, the wise course is to make sure the client
executes a new will and powers of attorney, and understands exactly how
to name beneficiaries on nontestamentary instruments of transfer. If the
attorney lacks recent estate planning experience, he or she should work
with competent cocounsel to see that estate planning documents are ready
for the client to execute at the time of divorce.
It is important that the client realize the cost of an attorney
preparing a new will and assisting the client to set up valid
dispositive directions for nontestamentary transfers is minimal compared
to the amount of time and the cost required to negotiate and draft a
final stipulation or to take a case to trial.
Estate planning as part of the divorce process
One way to ensure that the client views estate planning as a
necessary part of the divorce process is to plan and draft a will during
the pendency, or even prior to filing the petition. During the pendency
there are some limitations on what can be accomplished. The spousal
elective and marital property and rights to a selection of personalty
continue until the judgment is granted. The surviving spouse cannot
elect specifically bequeathed items of personalty unless the items are
normal household furnishings, furniture, and appliances necessary to
maintain the home.2
Upon filing of the divorce petition, section 767.087(1)(b) of the
Wisconsin Statutes restricts the transfer or disposition of property
without consent of the other spouse or a court order, "except in the
usual course of business, in order to secure necessities or in order to
pay reasonable costs and expenses of the action, including attorney
fees." Some attorneys would argue that this statute prevents changing
beneficiary designations after filing. Even if this is not the case,
temporary orders routinely contain prohibitions against changing life
insurance and other beneficiary designations. Nonetheless, if a spouse
dies during the pendency, the divorce action abates, leaving the divorce
court without jurisdiction to address violation of a temporary order.3 Chapter 766, relevant portions of the
recently revised probate code, and the dispositive documents will govern
disposition of assets. While a surviving spouse might bring an action
requesting imposition of a constructive trust upon assets transferred in
violation of a temporary order, the success of such an action is
uncertain.
The cost of preparing two wills may weigh against clients having a
pendency document. Clients should be informed that they generally have
the right to direct the disposition of their gifted and inherited
assets, as well as their one-half interest in marital property that is
titled or held solely in their names. If the client finds it important
enough that the spouse not receive any more than the spouse is legally
entitled to have, the expense of a prefiling or pendency will can be
justified. Moreover, the additional cost of revising the will after the
judgment may be quite modest.
If a will is executed during the pendency or prior to filing the
divorce, the will should be reviewed at the time of the final hearing
for necessary changes and re-executed promptly after the hearing. As the
divorce process continues, clients may have changed their views about an
appropriate disposition scheme and the individuals who would be the most
effective personal representative, trustee, and guardian. Furthermore,
the pool of property controlled by the client's estate planning
documents will almost always be different once the divorce is over.
Estate planning documents must conform to any requirement of
the judgment, especially any requirements for life insurance and/or
retirement plan or account beneficiary designations.
New probate code effects on estate planning
What effects does the divorce judgment have upon the client's
existing estate planning documents and beneficiary designations under
current law, particularly as affected by the new probate code and
related provisions?
1) The judgment revokes will and revocable trust provisions, and any
dispositions created by law, to the former spouse and to relatives of
the former spouse.4 Previously, the judgment
affected neither the dispositive provisions of revocable trusts nor will
provisions benefitting the relatives of a former spouse.
2) Likewise, the judgment now revokes any revocable provisions made by
the client in a "governing instrument"5
granting a power of appointment to the former spouse or relative of the
former spouse.6
3) Further, the judgment now revokes beneficiary designations naming
the former spouse and relatives of the former spouse.7
4) In addition, the judgment severs the interests of the client and
former spouse in property held by them as joint tenants with right of
survivorship or as survivorship marital property and transforms these
interests into tenancies in common.8
5) If the client and former spouse's marital property agreement
contains a "Washington Will" provision9 or
other agreement to make a particular disposition in a will or other
governing instrument, generally this too is revoked by the judgment.10
6) If the client's existing estate planning documents have nominated
the former spouse or relative as trustee or personal representative, the
judgment now revokes these nominations.11
Section 854.15(5) provides for exceptions in which the section 854.15
revocations will be inapplicable. These exceptions are: if the express
terms of a governing instrument or court order provide otherwise; if the
express terms of a contract relating to the division of the client's and
former spouse's property made by them before or after the marriage or
the divorce, annulment, or similar event provide otherwise; if the
divorce, annulment, or similar event is nullified; if the client and
former spouse remarry each other; or if there is a finding of the
decedent's contrary intent, which may be construed using extrinsic
evidence.
New will after divorce still recommended
Even though the new probate code largely eliminates the possibility
that the former spouse will inadvertently receive benefits under the
client's beneficiary designations and estate planning documents, there
remain pressing reasons for a client to execute a new will, or revocable
trust and pourover will.
- If there are no children, the client may need to name entirely new
primary beneficiaries under the instrument.
- If there is a minor child, the client should give careful thought to
nominating a third party as guardian of the child's estate.
Absent trust provisions or a guardianship nomination to the contrary,
the former spouse as surviving parent will become the de facto guardian
of a minor child's estate and will control all assets passing to the
child. Moreover, if the client intends that distribution of assets
passing to a minor child or young adult be delayed past age 18, either a
testamentary or revocable trust will be necessary. This presents the
opportunity to select a trustee to manage the children's inherited
assets until they reach an age of responsibility. If the client prefers
to have court supervision of the management of the child's estate, a
testamentary trust is indicated. If the client does not want to have
continuing court supervision until trust termination, a revocable trust
and pourover will are appropriate.
- If there is a minor child, the client should update the nomination
of guardian of the person.
The client should reevaluate the appropriateness of the alternate
guardian nominated in the existing will, particularly if the previous
nomination was for a relative of the former spouse. Can that individual
be depended upon to see that the child has ample time with the client's
own family members? Likewise, is there any issue of unfitness of the
former spouse to be the child's guardian? If the client strongly
believes that the former spouse is unfit to be the child's guardian, the
client can express this belief in the article nominating the guardian.
However, the client should express the reasons for this belief in a
separate affidavit. If the reasons are expressed in the will itself,
this may expose the estate to a lawsuit over potentially libelous
statements. The accompanying sidebar contains sample will language that
may be useful in an appropriate case.
Other document modifications
In addition to executing a new will, at the time of divorce the
client may have regained the ability to change beneficiary designations
on the nontestamentary instruments of transfer. 12 Typically, there will be several
instruments in which the former spouse was the named primary
beneficiary. The client must obtain and execute change of beneficiary
designation forms for life insurance policies, annuities, trusts,
employment death benefits, 13 IRA, Keogh,
and other retirement accounts.
The client also may have regained the ability to modify documents
indicating the manner of holding assets that were held jointly during
the marriage. The client should obtain new deeds, titles, or
registration for jointly held assets that the divorce judgment has
assigned to the client (for example, real estate, vehicles, stocks and
bonds, and joint bank and brokerage accounts).
Beyond the will and documents providing for nontestamentary
transfers, the attorney also should urge the client to execute a durable
power of attorney for managing financial affairs, effective either
immediately or upon the client's incapacity, and a health care power of
attorney, effective upon activation by two examining physicians after
incapacity occurs. The use of powers of attorney should not be limited
to the elderly, since accidents can incapacitate individuals of any age.
An unmarried adult with multiple financial responsibilities is in a much
riskier position than a married adult for whom the spouse often can
handle many financial matters. In the health care power of attorney, the
client will name the person who should make the health-care decisions.
This is especially important if the chosen agent is not a family
member.
Estate tax consequences of divorce
In the large majority of divorce cases, estate tax consequences of
divorce property division need not be considered. However, if a larger
estate is involved, the disposition scheme must be reviewed from a death
tax planning perspective. The larger the marital estate, the greater the
potential importance of careful tax planning at the time of negotiating
the final stipulation. If a federally taxable estate is involved,
significant opportunities may exist for minimizing taxes, along with
some pitfalls.
![](/SiteCollectionImages/WisconsinLawyer/1999/03/hughes.jpg)
|
Barbara S. Hughes, U.W. 1986, is a partner
in the Madison law firm of Hill, Glowacki, Jaeger, Reiley, Zimmer &
Hughes. Her practice emphasis is marital property, estate planning,
probate and trust administration, and elder law; until 1997, her
caseload also included family law. She is a past chair of the State
Bar's Elder Law Section and author of a
chapter entitled "Special Ethical Considerations" in Advising Older Clients and Their
Families, Vol. 1 (State Bar of Wisconsin CLE Books). The author's
family law partners, Thomas R. Glowacki and Kathleen Reiley, contributed
to this article. |
Although interspousal transfers of property pursuant to divorce incur
no income tax consequences, there are potential estate tax consequences
that divorce attorneys may neglect to consider. Transfer of life
insurance policy ownership is one example of a nontestamentary transfer
with a potential estate tax problem. If the transferor insured should
die within three years of the transfer, all life insurance proceeds on
transferred policies will be included in the transferor's gross estate.
Likewise, if the marital estate was substantial, the parties may have
relied upon the use of a marital deduction trust in their wills to
minimize or avoid federal estate taxation at the first spouse's death.
This option will no longer be available upon divorce.
If the parties are grantors of funded or unfunded revocable or
irrevocable trusts, the trust instruments must be reviewed and revised
as appropriate. If irrevocable, the funding method can be changed to
avoid the terms of the trust.
In dealing with larger estates, the divorce attorney must either
maintain an up-to-date knowledge of estate tax planning or involve
estate planning cocounsel in reviewing a proposed property division.
Conclusion
Estate planning is both an appropriate and a necessary part of
closing the divorce client's file. The planning should occur during
negotiations and be completed before the final hearing to ensure that
the client will actually execute a new will, make appropriate changes of
beneficiary designation for certain nontestamentary transfers, retitle
jointly held assets, and sign a durable power of attorney for finances
and a health care power of attorney. While the new probate code provides
protection against inadvertent transfers on death to the former spouse
and his or her family members, the attorney should impress upon the
client the need for taking the next steps to update the estate plan,
even if the only assets of value are life insurance and retirement
accounts.
Endnotes
1 For an excellent summary of the
new probate code, 1997
Wis. Act 188, which is based upon the Uniform Probate Code, see H.
Erlanger, Wisconsin's New
Probate Code, 71 Wis. Law. 6 (Oct. 1998). Section 233 of the
Act provides that it first applies to deaths occurring on Jan. 1, 1999,
except with respect to irrevocable governing instruments executed before
that date.
2 Wis. Stat. § 861.33(1)(b).
3See Socha v. Socha, 204 Wis. 2d 474, 555
N.W.2d 152 (Ct. App. 1996); see also Pettygrove by Scholl v. Pettygrove,
132 Wis. 2d 456, 393 N.W.2d 116 (Ct. App. 1986).
4 Wis. Stat. §§ 854.15(3)(a),
(b). Pursuant to Wis. Stat. section 854.15(1)(d),
relatives of the decedent's former spouse are individuals who are
related to the former spouse by blood, adoption, or marriage and who,
after the divorce, annulment, or similar event, are not related to the
decedent by blood, adoption, or marriage.
5 Wis. Stat. section 854.01
defines "governing instrument" as any of the following: will; deed;
trust instrument; insurance or annuity policy; contract; pension,
profit-sharing, retirement, or similar benefit plan; marital property
agreement under section 766.58(3)(f);
beneficiary designation under section 40.02(8)(a); instrument under
chapter 705; instrument creating or exercising a power of appointment or
any other dispositive, appointive, or nominative instrument that
transfers property at death.
6 Wis. Stat. § 854.15(3)(c).
7 Wis. Stat. § 854.15(3)(a).
8 Wis. Stat. § 854.15(3)(e).
9 The term "Washington Will"
provision refers to a marital property agreement provision, authorized
by Wis. Stat. section 766.58(3)(f),
that upon the death of either spouse, any of either or both spouses'
property is to pass without probate by nontestamentary disposition to a
designated person, trust or other entity. A petition and certificate
procedure is used to confirm the transfer. See Wis. Stat.
§ 867.046. Washington State permits a similar procedure.
10 Wis. Stat. § 767.266(1).
Under prior law, "Washington Will" provisions were revoked by a divorce
judgment, unless the judgment specifically provided otherwise.
11 Wis. Stat. § 854.15(3)(d).
12 In some cases the final
stipulation and judgment may restrict the client's freedom somewhat,
requiring the client to set up a family trust and to name a trustee for
the minor children, or to name the former spouse as beneficiary on a
particular life insurance policy.
13 Surviorship provisions in a
qualified domestic relations order must be reviewed before trial.
Wisconsin Lawyer