Going through a legal separation or divorce is a very stressful, emotional and financially taxing period in anyone’s life. There are many pressing issues that take center stage in a divorce, especially if you have minor children, that usually other important matters are forgotten or ignored.
One of the last things that may come to your mind while going through a legal separation or divorce is what changes you should make to your estate plan and when you should make them. This question is significant however, and could prevent additional legal problems, if you are proactive. Even if you never created an estate plan while you were married, it now becomes an essential personal responsibility, especially if you have minor children.
Arizona law (A.R.S. §14-2804(A)) states that, unless reaffirmed, a divorce revokes any revocable disposition to a former spouse or to a relative of a former spouse, revokes any nomination to a fiduciary appointment (trustee, personal representative, guardian, etc.) given to a former spouse or relative of a former spouse, and even severs the survivorship interest of a former spouse in property held as joint tenants with rights of survivorship or community property with rights of survivorship.
Under A.R.S. § 14-2804(I) however, a divorce does not include a decree of separation if the marriage between husband and wife is not actually terminated. Therefore, if a husband and wife are going through a divorce, and one spouse dies before the divorce has been finalized and a final decree of divorce is issued by the court, the couple is not considered divorced, and the “almost” ex-spouse maintains his or her status as a surviving spouse for inheritance purposes.
Therefore, many legal issues arise when a married couple goes through a divorce that can affect them and their estates. The following are some examples of these issues, which should be reviewed and considered with a qualified estate planning professional the moment a divorce is filed:
- Power of Attorneys: Financial and medical power of attorneys usually will list your spouse as the primary agent to take care of all your financial and medical affairs and decisions if you are alive but incapacitated. Many times in-laws or friends are listed as your alternate agents, where the relationship originated with your former spouse. These documents needs to be reviewed and updated immediately upon filing for a divorce decree, and you should not wait until the divorce has been finalized before making changes to your power of attorney documents.
- Last Will and Testament: Your last will and testament indicates who will become the Personal Representative of your estate if you were to pass, who will inherit your assets, and other important decisions. Although the court may limit your ability to transfer or move around money and real property until the divorce is finalized, you can change your last will and testament immediately even before your divorce is finalized. You can acknowledge your spouse and intentionally disinherit him or her. You can name a personal representative who is not your soon-to-be former spouse. I recommend your last will and testament be updated immediately upon filing for a divorce not waiting until the divorce has been finalized before making these important changes.
- Beneficiary Designation Changes: Although the divorce court may restrict what you can and can’t do with your beneficiary designations during a pending divorce, as there may be a community interest in your retirement plan, insurance policies, pensions, etc., you should still speak with your financial advisor to formulate a plan and contemplate the adjustments you will make immediately upon the finalization of your divorce. Many times these beneficiary designations are left unchanged for months, if not years, after the divorce is finalized. Although, under Arizona law, a former spouse beneficiary designation would be deemed null and void, not personally making the necessary changes may leave your estate with an intestate distribution or a problematic distribution to a minor child, necessitating a minor conservatorship, or even a probate proceeding. I recommend you meet with your qualified estate planning professional and financial advisor to determine what changes should be made immediately upon filing for divorce, and then schedule with your professional advisors to make the planned changes immediately upon the final divorce decree and property settlement agreement being signed.
- Guardian/Conservator for Minor Children: If a former spouse is no longer your beneficiary under a last will and testament, life insurance, IRA or other contract with a beneficiary designation, who will be named as your beneficiary? Most of the time, a single parent will still want his or her children as the beneficiary. Unfortunately, if the child is a minor, the minor’s share cannot be distributed to the child until he or she is at least 18 years of age. In the meantime, without proper planning, the funds will need to be put in the control of a conservator for said minor. Under Arizona law, the person under Arizona law, with the highest priority to serve as the conservator will be your ex-spouse, who is the minor’s biological parent. Most single parents do not want a former spouse to be in control of the inheritance they have left to a minor child. Additionally, most parents do not want an 18 year old adult child to receive the entire share of a parent’s estate, as they usually are not responsible enough to manage a large sum of money and could be manipulated or influenced by the surviving parent, friends or others. A properly planned revocable living trust or even a testamentary trust (which is a last will and testament with trust provisions for beneficiaries) can avoid most of these issues. I would suggest that you meet with a qualified estate planning professional during your divorce proceedings to set up a revocable living trust or a testamentary trust contained in a last will and testament, which can be funded (titling assets to the trust) immediately after the divorce has been finalized.
- Successor Trustees for Minor or Adult Children: Choosing successor Trustees for your children is an important part of any estate plan. This responsibility is especially important after going through a divorce as the possible persons you may consider choosing most like has been cut in half. A trustee is the person that will manage the assets you have left behind for your child, following your instructions as to when, where and how they will receive their inheritance, protecting them from making poor financial decisions. As with any estate plan, it is important to discuss the instructions you wish to leave behind in detail with a qualified estate planning attorney, to make sure that your goals and protections you want for your children are actually built into the estate plan you left behind.
- Separate Property Revocable Living Trusts: Revocable living trust planning is less about avoiding probate and taxes and more about family planning and protection than ever before. With the current 2014 estate tax exemption being over $5 million, most single parents will not have to worry about estate taxes. There is a considerable amount of family planning, however, that can be discussed and created for both minor and adult children that may preserve, protect and motivate your children for years to come. Although not always recommended, I usually suggest that single parents with minor children, or adult children where protection may be important, create a separate property revocable living trust. With proper planning a separate property revocable living trust can also serve to protect the single parent in the case of a future remarriage from subsequent divorces and other issues.
- Deed Work: The court will usually place a moratorium on altering title to assets during a divorce. This moratorium presents an interesting dilemma if one spouse passes away during the divorce, prior to the final divorce decree being entered. Upon the final decree of divorce, the property settlement agreement usually splits up assets including real estate, and the order becomes binding upon the estate of a descendent and his or her heirs if not followed through on changing titled before death. If a divorcing spouse passes away before a final divorce decree has been entered, however, the couple is still legally married at death, and the divorcing spouse is entitled to all rights and privileges as a surviving spouse, including statutory allowances, rights to land and property held as joint tenants with right of survivorship and or community property with right of survivorship. This unintentional inheritance by divorcing spouse can be partially avoided with proper planning and petitioning the court to convert joint tenancy property with right of survivorship or community property with right of survivorship to either tenants in common or community property (without any right of survivorship). This conversion, prior to a final decree of divorce, will allow each spouse’s interest in his or her real property to flow under his or her last will and testament (hopefully that has also been updated to disinherit the divorcing spouse), allowing assets to go to beneficiaries other than the divorcing spouse. Please note that you may not be able to disinherit a divorcing spouse completely as statutory allowances may still be afforded to the divorcing spouse, if the final decree is not entered into before death. I recommend a divorcing spouse look into the possibility of converting real property title to a form of ownership where he or she could independently control distribution if a death happened prior to a final decree of divorce being entered. After the final divorce decree, I recommend the same person discuss with a qualified estate planning professional the benefits a separate property revocable living trust may afford him or her and their family.
If you have any questions regarding family based estate planning, living trusts, probate administration, guardianships, conservatorships or any other legal issues, please call the attorneys at Rowley Chapman & Barney, Ltd. (480) 833-1113.
Kenneth C. Barney is a partner and an Arizona Estate Planning Attorney, practicing in all the areas of the law shown above, since 1999.