More than half of marriages in the U.S. end in divorce, and for most, it is one of the most horrendous experiences of their lives. So, when the lawyer delivers the final divorce papers, the last thing on the mind of either former spouse is updating their estate plan. However, failure to do so could result in a real “mess.”
What Happens When an Estate Plan Fails to Be Updated
Bob and Mary got married in 1993. Mary had one daughter, Jane, from a prior marriage. Even though Bob never officially adopted Jane, he treated Jane as if she were his daughter throughout the entire marriage. The joint trust referred to Jane as “the only living child of the settlors” and named her as the residuary beneficiary. These terms have significant meaning under the law, and the failure to take that into consideration following a divorce can present a real problem.
Bob and Mary divorced in April of 2019, and Bob passed away a couple of months later. As is often the case when a couple gets divorced, they did not update their estate planning documents to reflect their change in marital status. Did Bob still want Jane to inherit after the divorce? We’ll never know, but his estate plan speaks for itself. He may have only wanted Jane to benefit if he remained married to Mary.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Following Bob’s death, Mary acknowledged she was no longer a beneficiary of the joint trust under California law (see discussion below) because of the divorce. Nevertheless, Jane filed a lawsuit, arguing that the divorce did not revoke Bob’s bequest to her. Stepchildren often don’t view divorcing spouses as an end to their relationship with the stepparent, especially emotionally, but the law is mixed on its views, as we’ll see below.
Legal Precedents for Exes and Bequests
In California, as with many states, once a divorce judgment is entered by the court, certain bequests and nominations relating to the surviving spouse are automatically revoked. For example, CA Probate Code §5040 provides that certain non-probate transfers (e.g., via revocable living trusts, individual retirement accounts (IRAs) and other retirement vehicles, such as pensions and 401(k)s, transfer on death and pay on death designations executed before or during the marriage) are automatically revoked upon the entry of a divorce judgment.
Notably, life insurance policy and irrevocable trust beneficiary designations are not automatically revoked.
The CA Probate Code is silent about whether gifts to stepchildren are voided by a divorce when the document was executed prior to the divorce. But California case law offers guidance regarding how gifts to former stepchildren are treated:
- In Estate of Hermon, the Court of Appeals stated that “when a testator provides for his spouse’s children, he normally intends to exclude children of an ex-spouse after dissolution, unless a contrary intention is indicated elsewhere in his will.”
- And in Estate of Jones, the Court of Appeals expanded the foregoing rule, stating that the court could look beyond the instrument for evidence of the deceased former stepparent���s ongoing relationship with the child following the divorce to determine if the deceased former stepparent would likely have wanted the gift to go to the child.
As previously stated, just because the wife and husband legally divorce, it may not mean the emotional attachment or the stepparent’s relationship with the stepchild will end. Thus, if the estate planning documents aren’t amended to clarify whether the stepchild or stepchildren no longer inherit, it should not come as a surprise if the stepchild “lawyers up” and tries to get a piece of the action. If the estate is large enough, there are no shortages of estate litigation attorneys only too happy to take on a case like this for a percentage of the recovery.
Lessons to Take Away
If you are going through a divorce, updating your estate plan is probably the last thing you want to focus on – but it is crucial that you do so. While non-probate transfers to former spouses may be automatically terminated by statute in certain circumstances, keep in mind that these may still be legally challenged by the ex-spouse or the stepchild or stepchildren. Additionally, non-probate transfers to former spouses via an irrevocable trust, such as the typical dynasty trust and the irrevocable life insurance trust (ILIT), are not automatically revoked in the event of divorce, unless the trust document explicitly states so.
If your current estate plan makes bequests to children or other family members of your soon to be ex-spouse, you must revisit these documents and amend them either to revoke the gift, or to specifically state your intention to provide for them after divorce. Otherwise, at death your assets may be distributed in ways that you did not intend.
Note that every state has laws like California’s, and laws are constantly changing. Thus, no matter where you reside, we recommend that you consult with your estate planning attorney to effectively protect yourself and the disposition of your property in the event of divorce.
-
Cord Cutting Could Help You Save Over $10,000 in 10 YearsHow cutting the cord can save you money and how those savings can grow over time.
-
The '8-Year Rule of Social Security' — A Retirement RuleThe '8-Year Rule of Social Security' holds that it's best to be like Ike — Eisenhower, that is. The five-star General knew a thing or two about good timing.
-
You Were Planning to Retire This Year: Should You Go Ahead?If the economic climate is making you doubt whether you should retire this year, these three questions will help you make up your mind.
-
Are You Owed Money Thanks to the SSFA? You Might Need to Do Something to Get ItThe Social Security Fairness Act removed restrictions on benefits for people with government pensions. If you're one of them, don't leave money on the table. Here's how you can be proactive in claiming what you're due.
-
From Wills to Wishes: An Expert Guide to Your Estate Planning PlaybookConsider supplementing your traditional legal documents with this essential road map to guide your loved ones through the emotional and logistical details that will follow your loss.
-
Your Home + Your IRA = Your Long-Term Care SolutionIf you're worried that long-term care costs will drain your retirement savings, consider a personalized retirement plan that could solve your problem.
-
I'm a Financial Planner: Retirees Should Never Do These Four Things in a RecessionRecessions are scary business, especially for retirees. They can scare even the most prepared folks into making bad moves — like these.
-
A Retirement Planner's Advice for Taking the Guesswork Out of Income PlanningOnce you've saved for retirement, you'll need your nest egg to support you for as many as 30 years. For that, you need a clear income strategy, not guesswork.
-
Why Smart Retirees Are Ditching Traditional Financial PlansFinancial plans based purely on growth, like the 60/40 portfolio, are built for a different era. Today’s retirees need plans based on real-life risks and goals and that feature these four elements.
-
To My Small Business: Well, I've Been Afraid of Changin', 'Cause I've Built My Life Around YouWhile thinking about succession planning might feel like anticipating a landslide (here's to you, Fleetwood Mac), there are strategies you can implement to manage the uncertainty and the transition.
