Steve Leimberg's Estate Planning Newsletter - Archive Message #1990 Date: From: Subject:

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1 Steve Leimberg's Estate Planning Newsletter - Archive Message #1990 Date: 23-Jul-12 From: Steve Leimberg's Estate Planning Newsletter Subject: Jeff Baskies: New Florida Statute Clarifies Impact of Divorce on Non-Probate Assets Effective July 1, 2012, a new Florida law takes effect concerning beneficiary designations on life insurance policies, annuities, IRAs, 401ks and other employee benefit plans. The new statute clarifies that upon the entry of a final judgment of dissolution or annulment (herein referred to as divorce ) a divorced ex-spouse is to be treated as predeceased for purposes of most nonprobate assets, including employee benefit plans, IRAs, life insurance policies, transfer-on-death and pay-on-death accounts and qualified and non-qualified annuities of the other divorced spouse. Because of the importance of this new statute and these exceptions to it, all Florida residents who are divorced (whose marriages were terminated by dissolution or were annulled) are urged to promptly review their estate plans, their beneficiary designations and the titling of their assets, with the assistance of counsel Now, Jeff Baskies provides LISI members with his analysis of the recent enactment of Florida Statute Section , As Jeff points out, this is an important reminder to all estate planners, divorce/family attorneys and allied professionals who work with divorced/divorcing clients, regardless of the state. Jeffrey A. Baskies is an honors graduate of Trinity College and Harvard Law School. Jeff is a Florida Bar certified expert in Wills, Trusts and Estates law who practices at Katz Baskies LLC, a Boca Raton, FL, boutique trusts & estates, tax & business law firm. In total, Jeff has more than 100 published articles. He has been a frequent LISI contributor, and his articles have also been published in Trusts & Estates, Estate Planning, Probate Practice Reporter, Probate and Property, the Florida Bar Journal, Lawyers Weekly USA and other journals. He's been frequently quoted as an expert estate planner in the Wall Street Journal, the New York Times, the Boston Globe, Forbes Magazine and other news publications. Jeff has been listed in Best Lawyers in America, in the Worth magazine list of the Top 100 attorneys, in Florida Trend's Legal Elite, in Florida SuperLawyers (including listing as one of the Top 100 attorneys in Florida 2009, 2010, 2011 and 2012) and in other similar publications. He can be reached at

2 Before we get to Jeff s commentary, members should take note of the fact that a new 60 Second Planner by Bob Keebler was just posted to the LISI homepage. In his commentary, Bob reviews CCA in which the IRS recently confirmed the deductibility of Medicare premiums under Code section 162. You don't need any special equipment - just click on this link. Members shouldn t miss out on the chance to register for Bob Keebler s Learn It Live seminars being held in Milwaukee August 20 th and August 21 st and again in Chicago on August 22 nd and 23 rd. Bob describes them as a Private Two Day Seminar for Lawyers, CPAs, and Financial Advisors Covering what the Lawyer, CPA, and Financial Advisor Need to Know About Sophisticated Planning and Drafting for IRA & Qualified Plan Distributions, Including How to Plan with a $5,000,000 Exemption. The cost for this private two-day seminar is $995, but register by August 10th to receive a $295 discount! For Information about the seminar or material, please call or emily.rosenberg@keeblerandassociates.com Now, here is Jeff Baskies commentary: EXECUTIVE SUMMARY: Effective July 1, 2012, a new Florida law (new Section , F.S.) takes effect concerning beneficiary designations on life insurance policies, annuities, IRAs, 401ks and other employee benefit plans. The new statute clarifies that upon the entry of a final judgment of dissolution or annulment (herein referred to as divorce ) a divorced ex-spouse is to be treated as predeceased for purposes of most non-probate assets, including employee benefit plans, IRAs, life insurance policies, transfer-on-death and pay-on-death accounts and qualified and nonqualified annuities of the other divorced spouse. However, the legislature did not extend this presumption to joint accounts with rights of survivorship, so any accounts titled as such should be reviewed. The statutory change is a welcome addition to Florida law, which already provided that a divorce treated the ex-spouse as predeceased for purposes of a Will or Revocable Trust. However, Florida law was not as clear regarding nonprobate and non-trust assets, which led to a great deal of litigation and case law which generally held that absent a clear direction in a Marital Settlement Agreement, courts should not look past a beneficiary designation. These changes in Florida law highlight for everyone the importance of estate

3 planning in the context of divorces and remind us to insist that all divorced and divorcing clients revisit their estate plans, account titles and beneficiary designations. FACTS: Background Currently, Florida law provides that the dissolution or annulment of a marriage (a divorce) invalidates provisions in Wills and Revocable Trusts for the benefit of the ex-spouse. Thus, any provision in a Will or Revocable Trust purporting to leave assets to an ex-spouse (assuming the Will or Trust provisions were executed prior to the divorce) will be treated as void, unless the Will/Trust or divorce judgment expressly provides otherwise. These rules can be found in F.S (2) (Florida probate code provision regarding wills) and F.S (Florida trust code provision regarding revocable trusts). Essentially, the current statutes treat the ex-spouse as if she/he died at the time of the divorce, unless the Will, Revocable Trust, or final judgment (which might incorporate terms of a marital settlement agreement) provide otherwise. As a result, if married couples have Wills leaving their estates to the survivor, and if they divorce, and if one spouse dies without ever changing the Will, the ex-spouse does not inherit under the deceased spouse s Will. Instead the Will is read as if the ex-spouse predeceased. The same is true for Revocable Trusts. However, until now, Florida law did not have a similar provision impacting beneficiary designations on assets that passed outside Wills or Revocable Trusts (referred to herein collectively as non-probate assets). Thus, until now, it was possible that the provisions of a Will for an ex-spouse would be void, but the provisions of a life insurance policy would not. In some cases, that meant the probate estate might pass to the children while a multimillion dollar life insurance policy might still pass to the ex-spouse just because the deceased never bothered to change his will and beneficiary designation. As one would imagine, this dichotomy in the law led to a great deal of litigation. As recently as 2011, a case made its way to the Florida Supreme Court on this issue. In Crawford v. Barker, the Florida Supreme court held that general language in a Marital Settlement Agreement that the Husband would retain a deferred compensation plan did not over-ride the beneficiary designation on that

4 plan when he died (which was still the ex-wife). The court stated the issue as follows: The conflict issue involved in this case is whether language in a marital settlement agreement, which specifically refers to a beneficiary-designated policy, plan, or account, such as a deferred compensation fund, but does not state who is or is not to receive the death benefits and does not specify the beneficiary, trumps the predissolution beneficiary designation in the separate document. The issue in this case is one of contract interpretation. And the court held as follows: We hold that general language, such as a statement of who is to receive ownership of the policy, plan, or account, is not specific enough to override the plain language of a beneficiary designation in the separate document. The holding still left open the door for litigation over the language in Marital Settlement Agreements and court orders. So without this new statute, the stage was set for continued litigation. Of course, clients who retained competent estate planning attorneys during and/or after their divorces hopefully avoided the issues by revising their Wills, Trusts and beneficiary designations; however, many divorced spouses never bothered to seek counsel. Therefore, the new statute is welcome relief for divorced clients who never went back to see their estate planning attorneys, or even those who did but never fixed their beneficiary designations on non-probate assets. The New Statute Under the new law, from July 1, 2012, if a beneficiary designation is made prior to the owner's death on an employee benefit plan or other similar non-probate asset (see the list below), the designation is void upon divorce (i.e. when the marriage is terminated by a final judgment of divorce, dissolution or annulment). The new law applies to: Life insurance policies, qualified annuities or similar tax deferred

5 contracts held within an employee benefit plan or tax-qualified account; Life insurance policies, qualified annuities or similar tax deferred contracts not held within an employee benefit plan or tax-qualified account; Employee benefit plans; Individual Retirement Accounts (IRAs); Pay-on-death accounts; and Securities or other accounts registered in a transfer-on-death form. There are several exceptions to the new law. The statute does not void a beneficiary designation: To the extent that federal (or other state) law provides otherwise; To the extent the designation of the former spouse was irrevocable under applicable law; If the governing instrument is signed by the decedent after the judgment is entered and the governing instrument expressly provides that the asset will be payable to the former spouse; If a court order required the decedent to acquire or maintain the asset for the benefit of the former spouse or children of the marriage or if the court order provided the spouse did not have the right to unilaterally terminate or change the beneficiary (i.e. if the marital settlement and final judgment require the ex-husband to maintain insurance on his life payable to the exwife, then until the agreement or order are no longer binding, the beneficiary designation in favor of the ex-wife will be valid); If the decedent remarries the individual whose interest would have been revoked and they remain married until the decedent s death; and If the asset is held in 2 or more names in such a fashion where the death of one co-owner vests ownership of the asset in the surviving co-owner(s) (i.e. the statute does not apply to accounts held as joint tenants with rights of survivorship). Obviously, the most important and potentially controversial exception relates to joint accounts (see f, above). A decision was made not to address those accounts in this context. While I believe Florida law currently provides that tenancy by the entireties accounts (which might otherwise be covered by f, above) are converted to tenancies in common upon a divorce, I do not believe there is a similar rule for joint accounts with rights of survivorship. If this issue creates

6 ongoing problems or a trap for the unwary, perhaps subsequent clean-up legislation will address joint accounts. Procedural Issues In addition to the new substantive legal issues, the statue provides payment procedures for the custodians of assets (payors) in and out of employee benefit plans to follow. For payors of life insurance policies, qualified annuities or other tax-deferred contracts held within employee benefit plans, payors of employee benefit plans, and custodians of IRAs, if the governing instrument does not explicitly specify the relationship between the beneficiary and the decedent, or if the governing instrument explicitly provides that the beneficiary is not the decedent s spouse, then the payor may pay out to the beneficiary and not be liable for such payments. On the other hand, if the governing instrument specifies the primary beneficiary explicitly designated in the governing instrument is the decedent s spouse, then the payor must examine a death certificate prior to making any payment, and in certain circumstances the payor must obtain an affidavit (the terms of which are in the statute) in order to avoid liability for a payout. In the case of pay-on-death accounts, securities or other accounts registered in transfer-on-death form, and life insurance, annuities or similar contracts not held within an employee plan or tax-qualified retirement account, the payor is not liable for making any payment on account of the decedent s death to the named beneficiary. While this immunity for payors of accounts not held in employee benefit plans or tax-qualified plans was likely necessary to garner legislative support from the banking and insurance lobbies, such immunity likely increases the chances of future litigation. The rightful beneficiaries (due to the ex-spouse legally being treated as predeceased) may have to sue and chase a wrongful ex-spouse who runs to close out one or more accounts that are subject to this new law. COMMENT: Because of the importance of this new statute and these exceptions to it, all Florida residents who are divorced (whose marriages were terminated by dissolution or were annulled) are urged to promptly review their estate plans,

7 their beneficiary designations and the titling of their assets, with the assistance of counsel. Moreover, this is an important issue and reminder to all estate planners, divorce/family attorneys and those allied professionals who work with divorced/divorcing clients, regardless of the state. Divorced and divorcing clients are in a unique situation and more than most other clients need to be reminded to address their estate planning, including revising wills and trusts, retitling accounts and changing beneficiary designations. Addressing their estate plans and these issues is vital for clients in the process of and after divorce. HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE! Jeff Baskies CITE AS: LISI Estate Planning Newsletter #1990 (July 23, 2012) at Copyright 2012 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited Without Express Permission CITES: Florida Statutes sections , (2) and ; Crawford v. Barker, 64 So. 3d 1246 (Fla. 2011)