What is the difference between a prenuptial agreement and a postnuptial agreement?
A prenuptial agreement is a contract that can be entered into before marriage. It will typically revolve around the distribution of assets in the event of a divorce. In addition to this element, the estate planning implications can and should be addressed. There is no cookie-cutter prenuptial agreement that is right for everyone. The agreement should be crafted to satisfy the specific aims of the individuals involved on a case by case basis. To this end, each party entering into the agreement should be represented by their own independent counsel. With regard to estate planning and prenups, the surviving spouse has rights under New York intestate succession laws. All of the intestate property would convey to the surviving spouse if there were no children. There are also intestacy laws that apply to situations with a surviving spouse and children. When the agreement is being executed, you can waive the right to an inheritance via the intestate succession statutes. A postnuptial agreement is another enforceable contract that is entered into after the marriage. This will often be prudent when there are conflicts that impact the marital dynamic. Once again, the agreement should include estate planning considerations. This is especially important when there are children involved.
What type of estate planning documents can I change before my divorce is finalized?
During the transition period, it's critical to review all estate planning documents that were executed during the marriage as well as beneficiary designations to ensure they reflect your wishes. Certain types of documents can be changed while the divorce is pending, while others must wait until the divorce decree is issued. For example, during the divorce is pending the powers of attorney and health care documents should be updated so that the soon-to-be ex-spouses are removed if desired, and the right individuals are appointed to make important financial and health care decisions on their behalf. In addition, in most states, a will or a trust can be changed (if not jointly executed during the marriage) and authorizations to access digital accounts, including financial accounts, email accounts, and social media accounts can be changed before the divorce is finalized. While other documents including retirement plans and accounts and jointly owned real estate property, cooperative shares, and financial accounts usually cannot be changed until the divorce decree is issued. When you decide to get divorced, it's best to work collaboratively with an estate planning attorney and a matrimonial attorney. They can help you make certain decisions about what documents and designations should be changed during the pendency period and estate planning documents and designations that should be changed shortly after the divorce if finalized to avoid potential conflicts.
What is automatically revoked by New York law when my divorce is finalized?
After you get divorced, your spouse cannot inherit your property through the terms of a will or revocable living trust. The same thing applies to a transfer on death account, which is an account with a beneficiary. In addition, they cannot act as a beneficiary of a life insurance policy. Within legal parameters (see the next section), the revocation of benefits will extend to pension and retirement plans. Finally, upon divorce, a joint tenancy will convert to a tenancy in common.
What do I need to know about ERISA?
The acronym stands for the Employment Retirement Income Security Act of 1974. It sets minimum standards for 401(k) plans. A provision gives a surviving spouse the right to inherit the entirety of the remainder that is left in a 401(k) plan after their spouse’s death. This applies even if there is another named beneficiary. However, the spouse can waive this right if they choose to do so. In the case of divorce, the beneficiary designation cannot be changed during the pending divorce. The plan is often divided through the use of a Qualified Domestic Relations Order (QDRO). Companies with significant numbers of employees are very familiar with this process. However, a smaller company may not be equipped to navigate this complicated legal territory. In all cases, your estate planning attorney will be able to help you take the right steps.
Do I need to change my Will or Trust before or after my divorce?
While some planning might have to wait until the divorce decree is final, wills generally can and should be updated while the divorce is pending to avoid the death of a spouse and the risk of a soon-to-be ex-spouse inheriting the under the terms of the will executed during the marriage which in many cases is the entire estate. To avoid this risk the spouses should execute a new will to leave their soon-to-be-ex-spouse a reduced amount equal to the amount that the statutory elective share would require under their state's law. For example, under New York state law, while your will or trust will remain legally binding after the divorce, the provisions in favor of your former spouse are automatically revoked as well as their right to act as your fiduciary. This means that your former spouse cannot serve as your trustee, executor, health care agent, or agent under a power of attorney unless you desire to reappoint them under a new will, power of attorney, or health care proxy.
Does New York law revoke a bequest made in a will or revocable trust in favor of relatives of the former spouse?
No, but this may change over time. However, currently, provisions made in favor of a former spouse’s relatives are not automatically revoked, under New York state law. This is an important distinction from other states and can be problematic in some cases. For example, let’s say you fail to change your will assuming it wasn’t necessary because the law automatically revokes the rights of your former spouse, but you overlook that the share allocated to your spouse shall be distributed to the contingent beneficiary, and if that happens to be a relative of your spouse, their rights are not revoked and they will have the right to ex-spouses share and will also have the right to ace as the executor of your Will if they were named your successor executor. For example, the husband executes a will and names his spouse 100% beneficiary of his estate and names her son from a previous marriage the contingent beneficiary. He also appoints his wife as the executor of his will and names his stepson (wife's son) as his successor executor. The couple divorced 10 years after the execution of the will and dies 2 years post the divorce and never executes a new will. Under New York law the will is valid but the provisions applicable to the ex-spouse are treated as if she predeceased the husband, therefore the ex-spouse's son will be entitled to 100% of the decedent's estate and the right to act as the executor of his estate. To avoid the risk of this outcome, changes need to be effectuated by executing a new will or by amending or restating a revocable trust.
Why is an irrevocable life insurance trust a practical solution for divorcing couples?
If you have a life insurance policy to provide for your children, you need assurances. You want to make sure that they will benefit from the resources under all circumstances. An irrevocable life insurance trust can provide a solution in divorce situations. The policy will be held by the trust, and the children will be the beneficiaries. You can name a trustee other than your spouse that will have a sole fiduciary duty to make sure the premiums are paid; the beneficiary is not changed; and that the best interests of your children are served. When the insured spouse dies, the death benefit will be distributed to the trust. The trustee will subsequently administer the trust on behalf of the children under the terms that have been established. There is also a significant estate tax benefit. Proceeds from life insurance policies that are held by an irrevocable life insurance trust will pass to the beneficiaries free of taxation. On the other hand, if the policy is owned by the insured, state and federal estate taxes would be applicable. The impact can be considerable, because the federal estate tax carries a 40 percent rate, and the maximum New York state estate tax rate is 16 percent.
How should you navigate your divorce when your child has special needs?
First, you should proceed with the understanding that specific provisions must be made for the child with special needs. You will handle the details regarding the other children in a different manner. Child support that is earmarked for the child with special needs can impact eligibility for Medicaid and SSI. With this in mind, the assets should be conveyed into a supplemental needs or special needs trust to preserve the benefits. There are estate planning ramifications as well, so the plan should be constructed with the long-term future in mind. When you establish and fund a supplemental needs trust, you name a trustee to administer the trust. They can use the resources to provide a wide range of goods and services to the beneficiary without impacting benefit eligibility. They can provide anything other than direct payments for food and shelter. Medicaid is required by law to seek reimbursement from the estates of deceased beneficiaries. Since it is a need-based program, you cannot qualify if you have significant assets. As a result, there is usually nothing for them to attach during the estate recovery phase. However, the dynamic is different when a supplemental needs trust has been established. When you fund the trust for the benefit of someone else, it is a third party trust. After the death of the beneficiary, the trust will be the owners of the assets that remain. As a result, they would be protected during the Medicaid estate recovery phase. You dictate the way that the remainder will be distributed after the death of the initial beneficiary when you draw up the trust agreement.
How do you protect your children’s inheritances when you are getting remarried?
Trust planning that includes a "credit shelter" trust is considered the backbone of estate planning for blended families. When you establish this type of trust your spouse would be the initial beneficiary, and your children or anyone that you wish to name would be the successor beneficiaries. You can designate a co-trustee to act as a co-trustee with your surviving spouse that will have the authority to manage and distribute the assets held in the credit shelter trust upon your passing. In addition, the trust reduces estate tax liability and preserves inheritance for loved ones. The way that it works is that upon the death of the first-to-die spouse, the amount of the decedent's spouse's unused federal exemption ($12,920,000 for 2023) or the amount equal to the state exemption (for states like NY that have estate tax) is used to fund the trust. The surviving spouse will have a lifetime right to all of the income generated from the trust and the right to access the principal. Upon the passing of the surviving spouse, the value of the credit shelter trust is not included in surviving spouse's estate thus reducing estate tax liability for their estate. And remaining assets in the trust will pass to the children or beneficiaries of the first-to-die free of estate tax liability, regardless of the value of the remaining assets. Without this type of planning if a spouse leaves all of his or her assets to the surviving spouse, then his or her spouse is not legally obligated to leave any of the remaining assets to the children or beneficiaries of the first-to-die spouse. Making it possible to disinherit beneficiaries or leave all of the assets to a new spouse or children from a previous marriage. To avoid this risk, you should create an estate plan that includes "credit shelter" trust planning.
Are there any tax issues that are easy to overlook?
Yes, the below highlights some important tax implications that should be taken into consideration during and post the divorce process.
- For estate tax purposes, after divorce the federal gift, estate, and generation-skipping transfer tax exemption decreases to $12,920,000 (for 2023) because of the change of marital status. While a married couple is offered a combined exclusion amount of $25,840,000 (for 2023). As a result, an individual with a large estate should consult with an estate planning attorney to address the estate tax liability issue and options that can be implemented to help reduce the estate tax burden.
- Your marital status on December 31st will determine your income tax filing status. For example, the IRS will allow either the Single or Head of Household filing status if the divorce is finalized on or before December 31st.
- If you are not legally divorced or separated on December 31st you will have the option to file your tax returns as Married Filing Jointly, Married Filing Separately, or Head of Household.
- The IRS rules allow an individual to file s Head of Household if:
- they are not married, or are legally separated at the end of the tax year, or did not live with their spouse for the last six months of the year;
- they paid for more than one-half of the costs to maintain the household; and
- the individual's children qualify as dependents and live with the taxpayer for more than one-half of the year.
- The IRS only allows a child to be claimed as a dependent by only one spouse, generally, the custodial parent. For the purpose of defining the custodial parent the amount of time the child(ren) spend with the ex-spouse for the calendar year - more than one-half of the year.
- The passing of the 2018 Tax Cuts and Jobs Act ("TCJA") legislation changed the tax treatment for alimony and alimony. For divorces and separation agreements completed by December 31, 208 they are grandfathered under the old law which means the payment of alimony continues to be deductible by the payor.
- For prenuptial agreements signed before 2019 but negotiated before 2019 if they divorce after December 31, 2018, they are likely to be subject to the new tax laws eliminating the tax advantages available before the enactment of the TCJA- an important consideration to determine if the prenuptial agreement may need to be reopened and renegotiated on this issue.
Can a gift made to a beneficiary subject to the terms of the separation agreement be defeated?
Yes, in New York, a court is likely to rule that a specific gift made in a will subject to terms negotiated in a divorce separation agreement is not enforceable if enforcing the gift will conflict with the available assets needed to satisfy the surviving spouse's statutory elective share of deceased spouse's estate. Courts try to honor a will-maker's intent as much as possible, but they will not enforce a conditional gift that goes against public policy. For example, Bob and Carol married 20 years ago and plan to divorce but neither spouse can afford to purchase the 50% interest of the other spouse's interest associated with their primary home as a result they negotiate the terms of their separation agreement and agree to bequeath their respective 50% real estate interest to their daughter and each spouse is obligated to execute a new will naming their daughter a specific beneficiary of their respective real estate interest. the intent is to prevent the gifting of their interest to a future spouse if either spouse remarries. The divorce decree is issued in 2018, Bob marries Jane in 2019 and dies 2 years later in 2021. The gross value of Bob's estate includes his 50% ownership of the home with a date of death value of $1,000,000 and an IRA with a date of death value of $75,000. Jane is not named in Bob's will and she files a claim against the estate for her right of election. In New York, the surviving spouse's right of election is the greater of the first $50,000 or 1/3 of the estate. Bob's daughter argues her specific gift of Bob's real estate interest is enforceable because it was contractually agreed upon in the separation agreement and subsequently named in Bob's will. While Jane argues that the gift is unenforceable because it is needed to satisfy her statutory right to 1/3 of Bob's estate. Under similar set of facts, the courts have consistently ruled favor of surviving spouse for public policy reasons. To avoid the cost and delays imposed by litigation avoid conditional and future contractual gifts that may run afoul of the statutory rights of the surviving spouse.
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