ANTICIPATING DEATH IN DIVORCE

Transcription

1 ANTICIPATING DEATH IN DIVORCE by Katherine H. Tiffany Carter, Smith, Merriam, Rogers & Traxler, P.A. P.O. Box Greenville, S.C (864) Greenville County Bar Association 2015 Year End CLE February 13, 2015

2 I. Waivers/Termination of Rights to Inherit and Other Spousal Rights A. Spousal Rights At Death of Other Spouse When one spouse dies, his/her surviving spouse may be entitled to certain rights in the property or estate of the deceased spouse. 1. If the decedent died without a valid will, then the surviving spouse is entitled to an intestate share of the decedent s estate, which is 50% of the estate if the decedent has no surviving issue, or 100% of the estate if the decedent has no surviving issue. See S.C. Code Ann If the decedent dies with a valid will that was executed before the parties marriage, and that will makes no provision for the surviving spouse, then the surviving spouse may be entitled to seek an omitted spouse share of the decedent s estate, which is the same share he or she would have received if the decedent left no will (See I.A.1 above). See S.C. Code Ann If the decedent dies with a valid will executed after the parties marriage which makes no provision for his/her spouse, then the surviving spouse is entitled to seek an elective share of the decedent s estate, of up to 1/3 of the decedent s probate estate as computed by S.C. Code Ann , and subject to conditions and payment as set forth in S.C. Code Ann , , and See S.C. Code Ann The surviving spouse is entitled to exempt property from the decedent s estate, which includes a value not exceeding $25,000 (in excess of any security interests) in household furniture, automobiles, furnishings, appliances and personal effects. See S.C. Code Ann The surviving spouse is entitled to a homestead exemption, in a value not to exceed $50,000 in any real property or personal property that the surviving spouse uses as a residence. See S.C. Code Ann B. Termination or Waiver of Surviving Spouse Rights 1. The status of surviving spouse is terminated, and the ability to claim the above rights are extinguished if/when the decedent and spouse are divorced prior to the decedent s death. See S.C. Code Ann (a) and (b)(1). The status of surviving spouse can be terminated before divorce, once the family court issues a final order as to equitable division. See S.C. Code Ann (b)(3)(providing that a surviving spouse does not include a party to an order which purports to terminate all marital property rights or confirms equitable distribution between spouses and the decedent and spouse are not living together at the time of death).

3 2. The rights accorded to a surviving spouse can be waived prior to entry of a family court final order, upon execution of a property settlement agreement. See S.C. Code Ann (B)(providing that a complete property settlement agreement entered into after or in anticipation of separation or divorce operates as a waiver of rights to elective share, homestead allowance and exempt property in the estate of the other spouse; as a disclaimer of any rights to an intestate share in the estate of the other spouse; and as a disclaimer of any previous provisions made by will of the other spouse). 3. The status of surviving spouse and the ability to claim the above rights can be waived in writing prior to marriage, such as in an antenuptial agreement. See S.C. Code Ann (B)(providing for waiver of these rights prior to or after marriage by written contract, agreement, or waiver voluntarily signed by the waiving party after fair and reasonable disclosures to the waiving party of the other party s property and financial obligations have been given in writing. ). C. Revocation of Will or Trust If a spouse executed a will or created a revocable trust during marriage with provisions for the other spouse, such provisions are revoked in the event of 1) divorce, 2) annulment, 3) declaration of invalidity of a marriage, 4) court order which purports to terminate all marital property rights OR confirms equitable distribution of marital property between spouses, or 5) contract relating to the division of the marital estate made between divorced individuals before or after the marriage, divorce or annulment. See S.C. Code Ann (c) (providing that such events revoke any disposition or appointment of property made by a spouse in a will or revocable intervivos trust for the benefit of the other spouse). II. Life Insurance to Secure Support Obligations Spouses receiving support often seek to have the paying spouse maintain or allow for life insurance on his/her life. In this way, a spouse (or child) who is dependent on the support being paid can receive some financial security when payment of that support is terminated by the death of the paying spouse. A. Agreement to Maintain Life Insurance Parties can agree to include the maintenance of life insurance as part of an agreement in a family court action. See Section II.C below for further information on agreements to maintain life insurance.

4 B. Decision by Court If the parties cannot agree on whether one spouse should maintain life insurance for the other spouse s benefit, the Family Court will have to address and decide the request. 1. Jurisdiction The Family Court has the jurisdiction to require that life insurance be maintained to secure such support obligations in the event of a paying spouse s death. This jurisdiction is found in S.C. Code Ann and (D). See also Smith v. Smith, 687 S.E.2d 720 (Ct. App. 2009)(holding that the family court may order a payor spouse to obtain life insurance as security for alimony or child support obligations). Section applies to security for child support, providing that the Family Court may at any stage make such orders touching the care, custody and maintenance of the children of the marriage and what, if any, security shall be given for the same as the circumstances of the parties and the nature of case as well as the interests of the children may be fit, equitable and just. Section (D) applies to security for alimony, providing that the Family Court can require a spouse to carry and maintain life insurance so as to assure support of a spouse beyond the death of a payor spouse. However, the Family Court must give due consideration to the cost of premiums; any insurance plans the parties carried during their marriage; the insurability of the payor spouse; the probable economic condition of the supported spouse upon the death of the payor spouse; and any other factors the Court may deem relevant. See S.C. Code Ann (D). 2. Determination The Supreme Court has held that the statutory provisions for life insurance as security for support must be strictly construed and will not be extended beyond the clear legislative intent. Gilfillin v. Gilfillin, 544 S.E.2d 829 (S.C. 2001). Prior to enactment of the statutory provisions, case law addressing life insurance included a requirement that the court make a finding that special circumstances or compelling reasons existed in order to require a spouse to maintain life insurance on his or her life for the benefit of the other spouse. The language of does not include the requirement of special circumstances or compelling reasons before the family court can require life insurance on a payor spouse. However, in 2005 the Supreme Court held that the special circumstances

5 requirement applied, holding that when the statute was enacted in 1990, the legislature was aware of precedent and anticipated that it would be included in the court s application of the statute. Wooten v. Wooten, 615 S.E.2d 98 (S.C. 2005). The Supreme Court emphasized that it was special circumstances and not compelling reasons (which would impose a higher burden) that were required. The Family Court must conduct a comprehensive review of the statutory factors in (D) to determine whether special circumstances exist to warrant the purchase or maintenance of life insurance on the payor spouse. Id. The analysis begins with the supported spouse, and the Family Court must decide the supported spouse s need for security, i.e. consideration of the supported spouse s probable economic condition in the event of the payor s death, by examining the supported spouse s age; the supported spouse s health; and supported spouse s income earning ability and accumulated assets. Id. If the Family Court finds that the supported spouse needs security, then the Family Court must decide the payor spouse s abilty to provide life insurance, by examining the payor spouse s age; the payor spouse s health; the payor spouse s insurability; and the payor spouse s income earning ability and accumulated assets. Id. The Family Court then considers the cost of premiums for life insurance on the payor spouse and whether any insurance plans were carried on the payor spouse during the parties marriage. Id. Finally, if the Family Court finds that life insurance on the payor spouse is required, it will have to consider the cost of the premiums for such life insurance, and whether the cost should be assigned to the payor spouse, the support spouse, or allocated between both spouses. Id. C. What if Spouse Violates Order/Agreement to Maintain Life Insurance? Even with an agreement or order requiring a spouse to maintain life insurance for the benefit of the other spouse, the insured spouse might fail to comply with the agreement or order. The insured spouse might remove the other spouse as beneficiary or name a new spouse as beneficiary instead. If this goes undetected, then there could be a conflict between the supported spouse who was supposed to be designated as a life insurance beneficiary, and the new spouse or other persons who were actually designated as beneficiary(ies). In this situation, the supported spouse can prevail against the named beneficiary(ies). A court order requiring a spouse to designate the other spouse as beneficiary to life insurance will be enforced, allowing the other spouse to collect life insurance benefits rather than the beneficiary designated by the insured spouse. See Jefferson Pilot Life Ins. Co v. Gum, 393 S.E.2d 180 (S.C. 1990);

6 Glover v. Investment Life Ins. Co. of America, 439 S.E.2d 297 (S.C. Ct. App. 1993); Taylor v. Taylor, 352 S.E.2d 156 (S.C. Ct. App. 1987). A settlement agreement requiring a spouse to designate the other spouse as beneficiary to life insurance can be enforced even if the agreement has not been incorporated into an order at the time of the insured spouse s death. See Lane v. Williamson, 414 S.E.2d 177 (S.C. 1992). While an insured person may have the right, under the terms of a life insurance policy, to change the designation of the beneficiary to the life insurance, the insured may also contract away the right to change such designation. Therefore, a spouse who enters into a settlement agreement in a Family Court action requiring him/her to designate the other as beneficiary to life insurance is deemed to have contracted away or given up the right to change or designate anyone other than the other spouse as beneficiary. See Lane v. Williamson, 414 S.E.2d 177 (S.C. 1992)(finding that a father s agreement to maintain life insurance to secure child support was binding, and where father designated someone else as beneficiary, his ex-spouse was allowed collect life insurance proceeds from the designated beneficiary). D. Is a QDRO Required? If the life insurance to be maintained for a supported spouse is provided through the payor spouse s employer, a Qualified Domestic Relations Order is likely required to secure the supported spouse s designation as beneficiary. Employer provided life insurance has been deemed to be an employee benefit plan which is subject to ERISA. See Metropolitan Life Ins. Co. v. Pettit, 164 F.3d 857 (4 th Cir. 1998); 29 U.S.C.A. 1144(a); 1002(3) and 1002(1). ERISA supersedes any and all state laws as they relate to any employee benefit plans, and provides the exclusive method for a former spouse to secure an interest in the other spouse s benefit plan. Under ERISA, a QDRO is the acceptable method for a former spouse to attach an interest in the former spouse s benefit plan. See Id. III. Waiver or Termination of Beneficiary Interests If, during their marriage, spouses designate each other as beneficiary to life insurance or retirement benefits but then separate or divorce, they might enter into an agreement that makes no provision(s) for either spouse to receive life insurance or retirement benefits from the other, or they agree or at least intend that neither is to have any rights to receive any life insurance or retirement benefits of the other. But is such an Agreement enough to terminate the beneficiary designations that were made during marriage?

7 A. Waiver/Relinquishment by Agreement Prior to 2014, the Court of Cppeals held that a divorce in and of itself did not generally affect or defeat a spouse s rights as a designated beneficiary to life insurance on the other spouse, or as a beneficiary to the other spouse s retirement account. See Estate of Revis by Revis v. Revis, 484 S.E.2d 112 (S.C. Ct. App. 1997); Stribling v. Stribling, 632 S.E.2d 291 (S.C. Ct. App. 2006). However, a spouse could contract away his or her beneficiary interest through a separation or property settlement agreement, even if the insured spouse failed to change the original beneficiary designation. See Id. But for a separation agreement to have an effective relinquishment of a beneficiary interest, more than general language of release was required. Austen v. Snipes, 636 S.E.2d 644 (S.C. Ct. App. 2006). The agreement had to address a particular account or policy, and include language of release applicable to that specific account/policy and beneficiary interest. See Stribling v. Stribling, 632 S.E.2d 291 (S.C. Ct. App. 2006); Estate of Revis by Revis v. Revis, 484 S.E.2d 112 (S.C. Ct. App. 1997). If the agreement included only general language of release without specifically mentioning an account or policy with a beneficiary interest, the court was required to determine the intent of the account owner (as to the account/policy at issue) according to the facts of the particular case. See Id. B. S.C. Code Ann In 2014, was enacted which provides that in the event of 1) divorce, 2) annulment, 3) declaration of invalidity of a marriage, 4) court order which purports to terminate all marital property rights OR confirms equitable distribution of marital property between spouses, such event revokes any life insurance beneficiary designations, annuity designations, retirement plan beneficiary designations and transfer on death accounts. See S.C. Code Ann (c). S.C. Code Ann (c) also provides that a contract relating to the division of the marital estate made between divorced individuals before or after the marriage, divorce or annulment revokes any life insurance beneficiary designations, annuity designations, retirement plan beneficiary designations and transfer on death accounts made by the divorced individual to the divorced individual s former spouse. This statute makes it clear that the entry of an order by the Family Court operates to revoke previously made beneficiary designations for life insurance and retirement benefit. It also provides that a settlement agreement in a Family Court action can operate to revoke beneficiary designations. Contrary to prior case law, the Reporter s Comment states that there is a presumption that a decedent intended to remove any previous beneficiary designations, and that without a contrary indication by the decedent, a former spouse will not receive any probate or nonprobate transfer as a result of the decedent s death.

8 This language indicates that specific language in a settlement agreement (which waived prior beneficiary designations to life insurance or retirement), or in the absence of such language, evidence of intent (for such interests to be waived or extinguished), may no longer be needed to insure revocation or waiver of previously made beneficiary designations. But for now it might be prudent to continue to include such specific language. IV. Effect of Spouse s Death During Family Court Action Division of Marital Assets A. Death of a Spouse Does Not Abate Division of Marital Property by the Family Court The Court of Appeals has held that at the time marital litigation is filed with the Family Court, the property acquired during the parties marriage becomes vested in an estate called marital property, in which the parties have a vested interest that is subject to equitable distribution by the family court. Hodge v. Hodge, 409 S.E.2d 436 (Ct. App. 1991). The Court of Appeals has further held that the issue of property division is not abated if one spouse dies while the Family Court action is pending, as a spouse s interest in marital property is vested and fixed by the filing of the Family Court action, and the only court which has jurisdiction to divide the marital estate is the Family Court. Id. Therefore, if a Family Court action is filed which seeks division of marital property, and one spouse dies before the action is concluded, the Family Court action, at least as to identification and division of marital property, proceeds to a final hearing before the Family Court. B. Substitution of Estate for Deceased Spouse as Party to Family Court Action The deceased spouse s estate should be substituted in place of the deceased spouse as a party to the Family Court action. See Hillman v. Pinion, 554 S.E.2d 427 (Ct. App. 2001). If that substitution is not made within a reasonable time, then the Family Court action might be dismissed as to the deceased spouse. See SCRCP 25. If the Family Court action is dismissed as to the deceased spouse (either by failure to timely substitute the estate, or under a mistaken belief that the spouse s death abates the entire family court action), then the estate of the deceased spouse could forfeit any interest in the marital estate, and thereby reduce the assets to be included in the decedent s estate. See SCRCP 25 and Hillman v. Pinion, 554 S.E.2d 427 (Ct. App. 2001). Another reason to pursue division of marital property by the Family Court is to prevent an claims by the living spouse against the deceased spouse s estate, as once a Final Order of equitable division is issued, the living spouse no longer qualifies as a surviving spouse and cannot exercise certain rights against the estate. See S.C. Code Ann , Section I above and Section III.C. below

9 Note that upon the death of a spouse, the deceased spouse s attorney in the Family Court action will lose his/her authority to act on behalf of the deceased spouse, which will require that the Family Court attorney be retained as the attorney for the deceased spouse s estate to seek substitution of the estate in place of the deceased spouse or, if another attorney represents the deceased spouse s estate, that attorney will have to petition for substitution of the estate as party to the Family Court action. See Hillman v. Pinion, 554 S.E.2d 427 (Ct. App. 2001). C. Effect of Family Court Final Order Identifying and Dividing Marital Property Once the family court issues its final order identifying and dividing the marital property of the parties, the provisions of exclude the living spouse as a surviving spouse of the deceased spouse. This prevents the living spouse from receiving his/her share of marital property from the family court and then attempting to claim other rights to the decedent s estate as discussed in Section I above. V. Custody of Minor Child Upon Death of Parent(s) A. S.C. Code Ann and Testamentary Guardians Section provides that a parent of a child under 21 years old can dispose of the custody of that child until he/she is 21 years old to any other person. The parent may do so by last will or testament made and probated according to law. Such provisions are often made by a parent by designating a testamentary guardian for the child in the parent s will. B. Approval by Family Court Required In order for the designated guardian to acquire custody of a child under , the designation must be approved upon petition by the family court. But states that it does not limit the right and duty of a court of competent jurisdiction at any time to transfer and assign custody of a child for its best interest. According to (A)(1)(e), the Family Court has exclusive jurisdiction and shall be the sole court for actions concerning any child living or found within the geographical limits of its jurisdiction whose custody is the subject of controversy. See also (A)(20)(providing that the Family Court has jurisdiction to award custody of children to either spouse, or to any other proper person or institution); (A)(34)(providing that the Family Court has jurisdiction to order custody with all rights of guardianship); (A)(45)(providing that the Family Court has the

10 jurisdiction to hear and determine actions concerning control of the person of a minor, including guardianship of the minor). But despite the provisions of which allow a parent to dispose of the custody of their child up to age 21, the Family Court can only address custody of a child up to the age of 18. See Holcombe v. Kennison, 388 S.E.2d 807 (S.C. 1990); S.C. Code Ann (A). So despite the provision of for custody of a child up to the age of 21, the Family Court will only address custody of a child who is under 18. C. Standing to Seek/Receive Custody Upon Death of a Parent The Family Court can award custody of a child to the child s parent or any other proper person or institution. S.C. Code Ann (A)(20); Middleton v. Johnson, 633 S.E.2d 162, 167 (Ct. App. 2006). Therefore, third parties have standing to bring an action for custody of a child against the legal and/or biological parents of a child. Id., citing Kramer v. Kramer, 323 S.C. 212, 473 S.E.2d 846 (Ct. App. 1996) and Donahue v. Lawrence, 280 S.C. 382, 312 S.E.2d 594 (Ct. App. 1984). See also (46) and (providing for one who is not the natural parent of a child, but who is found to be the de facto custodian of a child, to receive custody of a child). Therefore, when a parent of a child has died, the final determination of the child s custody is left to the Family Court, which may entertain competing claims (by a designated guardian or any interested person ) and which must award custody of a child according to what is in the best interests of that child. D. Presumption in Favor of Biological Parent If a child s custodial parent dies, there is a rebuttable presumption that the right to custody of the minor child automatically reverts to the surviving parent. Dodge v.dodge, 505 S.E.2d 344 (Ct. App. 1998). Where the natural parent is deemed fit, the issue of custody will typically be decided in favor of the natural parent. Kay v. Rowland, 331 S.E.2d 781 (1985); Dodge v. Dodge, 505 S.E.2d 344 (Ct. App. 1998); Kramer v. Kramer, 473 S.E.2d 846 (Ct. App. 1996). But in all custody controversies, including those between natural parents and third parties, the best interest of the child remains the primary and controlling consideration. Dodge v. Dodge, 505 S.E.2d 344 (Ct. App. 1998), citing Hogan v. Platts, 430 S.E.2d 510 (1993); Middleton v. Johnson, 633 S.E.2d 162, 167 (Ct. App. 2006). And even the superior rights of the natural parent must yield where the interest and welfare of the child clearly require alternative custodial supervision. Id., citing Oehler v. Clinton, 317 S.E.2d 445 (1984).