Til Death or Divorce Do Us Part By Carole M. Bass and Rebecca A. Provder

Transcription

1 Til Death or Divorce Do Us Part By Carole M. Bass and Rebecca A. Provder Death and divorce - two d words that no one wants to talk about, but which cannot be ignored. While working together at the same firm, the authors a trusts and estates lawyer and a matrimonial lawyer have seen firsthand the significant overlap between their two fields, and how considering both can achieve optimal results for clients. This article will highlight some of the areas in which trusts and estates and matrimonial law intersect. Why Get a Prenup? Prenuptial agreements are no longer only for celebrities or the ultra-wealthy. While still popular among high net worth individuals, older couples, and couples with children from prior relationships, prenuptial agreements now appeal to a much broader segment of the population. Contrary to popular belief, there is no one-size-fits-all prenuptial agreement. Depending upon the couple s desires, the topics covered in a prenuptial agreement can be narrow or broad. They may address various topics, such as property division upon divorce, financial responsibilities during marriage, spousal support, and estate rights upon death. Through prenuptial agreements, couples may opt out of statutory provisions that would otherwise apply in the event of death or divorce. In New York, prenuptial agreements that are executed with the proper formalities are typically upheld. Each party should be represented by separate and independent counsel in connection with the prenuptial agreement. It is also advisable for prenuptial agreements to be drafted, negotiated, and executed as far in advance of the wedding date as possible. Estate Planning and Prenups When one spouse dies, the surviving spouse has certain automatic inheritance rights under New York law. If the deceased spouse dies intestate (without a will), the surviving spouse receives the entire intestate estate if there are no children. If there are children, then the surviving spouse receives the first $50,000 plus one-half of the balance of the intestate estate (the Intestate Share ). If a spouse dies testate (with a will), the survivor has the right to an outright inheritance equal to one-third of the deceased spouse s net estate (the Elective Share ). In a prenuptial agreement, the parties can waive their rights to both the Intestate Share and the Elective Share. Instead, they can negotiate estate rights that take into account the parties particular family dynamics, as well as their own personal goals and objectives. This can be especially useful, for example, where one or both of the parties have children from a prior 1

2 relationship. The prenuptial agreement can provide a basis for allocating assets between the new spouse and those children. Absent a prenuptial agreement, a spouse retains the right to claim the Intestate Share or the Elective Share during the pendency of a divorce proceeding unless otherwise disqualified under state law. In a prenuptial agreement, the parties can address the possibility of a death occurring while the divorce is pending. Postnuptial Agreements Whereas a prenuptial agreement is entered into before marriage, a postnuptial agreement is entered into after marriage. In contrast to a separation agreement, which is entered into in contemplation of a divorce, a postnuptial agreement is entered into in contemplation of an ongoing marriage. Common reasons for postnuptial agreements include insufficient time to finalize a prenuptial agreement, modifying a prenuptial agreement, and attempting to reconcile after marital difficulties. In most situations, a prenuptial agreement is preferable to a postnuptial agreement. Nevertheless, postnuptial agreements can be an important source of protection and accountants should consider them as an option for clients. Why Every Divorce Client Needs Estate Planning Clients who are going through a divorce need to review and change their existing estate planning documents. Estate planning should be addressed at the commencement of a divorce, and again when the divorce is finalized. While provisions in favor of a former spouse under a will or in a revocable trust are automatically revoked under New York law if there is a final decree of divorce, a judicial separation, or an annulment, revocation does not occur upon commencement of a divorce proceeding. Changes need to be effectuated by executing a new will or by amending or restating a revocable trust. Even if the will is changed, a surviving spouse retains the right to claim the Elective Share during the pendency of a divorce proceeding, unless he or she is otherwise disqualified as a surviving spouse under state law. If there is no will in place, it is important to sign one in order to avoid intestacy while a divorce is pending. As with the Elective Share, a surviving spouse is not automatically disqualified from inheriting under intestacy upon commencement of divorce proceedings. Significantly, even after a divorce is finalized, provisions in favor of the former spouse's relatives are not automatically revoked under New York law. Another important issue to consider while estate planning during and after a divorce is provisions for minor children. Absent special circumstances, a child s surviving parent would be the child s physical guardian, but an individual might prefer to name someone other than his or her exspouse to serve as guardian of the child s property. Another way to keep control of the child s 2

3 property away from an ex-spouse is to create a trust for the child and name someone other than the ex-spouse as the trustee. An individual in the midst of a divorce may also want to remove his or her soon to be ex-spouse as his or her health care agent, and as agent under his or her power of attorney. Beneficiary Designations In New York, statutory automatic restraints imposed during a divorce case prohibit either party from changing beneficiary designations on life insurance policies, changing title of joint accounts, or taking certain other actions during the pendency of the proceeding without the written consent of the other party or an order of the court. Once the divorce is finalized, however, it is essential that individuals update beneficiary designations on life insurance and retirement plans, and change account titles. Written notification should also immediately be given to all applicable insurance companies and financial institutions. It is also important to note that under New York law, retirement plan designations are revoked only to the extent permitted by law. Revocation can be preempted by federal law, including the federal Employee Retirement Income Security Act of 1974 ( ERISA ). It is incumbent upon advisors to remind their clients to update retirement plan designations following a divorce. In-Law Proofing the Estate Plan: Can an Irrevocable Trust be up for Grabs in a Divorce? The very lawyerly answer to whether an irrevocable trust can be up for grabs in a divorce case is - it depends. The answer varies according to state law and the facts of a given case. Therefore, while it is commonplace for advisors to tell their clients that placing funds in a trust for a beneficiary will provide ironclad protection in the event of that beneficiary s divorce, it may not be so clear cut in practice. While putting funds in a trust for children or other beneficiaries is more protective than leaving the funds to such beneficiaries outright, it should not be assumed that the assets will be completely protected in the event of a divorce. Child Support and Spousal Maintenance As a general rule, a creditor cannot reach a beneficiary s interest in a spendthrift trust or force a distribution by the trustee prior to receipt of trust property by the beneficiary. However, the rules restricting access to spendthrift trusts by creditors may not apply to spousal maintenance and child support obligations. Many if not most modern trusts are drafted as discretionary trusts, meaning that distributions to the beneficiary are wholly within the discretion of the trust and often without regard to any ascertainable standard. A beneficiary s interest in such a discretionary trust may be so tenuous that it does not equate to a property right that can be subject to attachment by creditors. Keep in mind, however, that income is broadly defined under New York law. Therefore, a court may include trust income when calculating child support and maintenance in certain cases, 3

4 such as when distributions to the beneficiary are regular and periodic, or those distributions make up the beneficiary s main source of income. Equitable Distribution If funds are actually distributed from a trust and commingled with marital assets during the marriage, they may be up for grabs in a divorce case. Furthermore, it is important not to assume that a client will remain in New York or that the client s children live in New York. The client, his or her children, or other trust beneficiaries may live in another state or may move to another jurisdiction at a future date. While a divorcing party s interest in the corpus of a trust established by a third party would be considered separate property in New York, and thus not subject to equitable distribution, this is not true in all states. For example, in certain states, trust interests and other gifts and inheritances may be subject to distribution in the event of a divorce. It is important to keep in mind, especially due to the transient nature of society and the varying divorce laws from state to state, that prenuptial agreements can provide extra protection for trust assets and distributions. When Prenups or Divorce Agreements and Estate Plans Don t Match Up Advisors should be aware of obligations under a prior divorce, prenuptial, or postnuptial agreement that a client may have to a former spouse, current spouse, or children. Those obligations need to be coordinated with the estate plan. When a will and a divorce agreement, prenuptial, or postnuptial agreement are in conflict, then the spouse or former spouse has a contract claim against the estate. D is for Divorce: How Accountants Can Help A primary disclosure device during a divorce case is a statement of net worth, which sets forth a party s expenses, assets, liabilities, and income. Accountants can assist in the preparation of the net worth statement to help ensure its accuracy. In contrast to a net worth statement, which is reflective of expenses and assets at a fixed period of time, a lifestyle analysis may be performed to illustrate the marital standard of living over a period of time. For example, a lifestyle analysis may examine the parties income and expenses over three to five years before the commencement of a divorce case. The lifestyle analysis may be used to help determine support needs. In addition, during the analysis, a forensic accountant may uncover assets one spouse was previously unaware of, and may reveal other sources of income. In most cases, the value of all property must be determined before reaching a property settlement. Forensic accountants are routinely retained in divorce cases to value businesses and other assets. Even if they are not performing the appraisal, the business accountant should be involved in the process given their in-depth knowledge and understanding of the subject business. 4

5 Tax consequences must be considered in equitably dividing property in divorce, as well as determining the amount of spousal support. Accountants should be consulted in a divorce case to help ensure that the proper tax implications are considered. Conclusions The d words, however unpleasant, should be confronted directly. As trusted advisors, accountants are in an ideal position to ensure that a combined plan is being implemented to address the possibility of divorce and the effectuality of death. Carole M. Bass is a partner in the trusts and estates and matrimonial and family law practice groups at Moses & Singer LLP. She can be reached at cbass@mosessinger.com or Rebecca A. Provder is a partner in the matrimonial and family law practice group at Moses & Singer LLP. She can be reached at rprovder@mosessinger.com or This article originally appeared in the March 2016 issue of the TaxStringer. Reprinted with permission from The New York State Society of Certified Public Accountants. 5