Divorce is rarely an easy process. When there are children and significant assets involved, the financial aspect of a divorce can be overwhelming. That can lead to overlooking the need to consider how your divorce impacts your estate plan. At Amato Law PLLC, our attorney can review your estate plan and discuss what updates or additions are necessary to protect you and your assets during and after your divorce.
Prenups – What Are They and Why Should You Have One?
A prenuptial agreement is a contract entered into between two parties in contemplation of marriage and that takes effect when the couple is legally married. A prenuptial agreement can be narrowly tailored to cover a single issue or expansive to cover a multitude of potential issues such as property division upon divorce, financial responsibilities during marriage, spousal support, and estate rights upon the death of a spouse. A valid prenuptial agreement allows the parties to effectively opt out of statutory provisions that would otherwise apply if the couple divorces or one party dies.
Estate Planning and Prenups
A prenuptial agreement can be an important estate planning tool because the New York statutory laws grant specific inheritance rights to a spouse. Those laws govern the distribution of an estate if the decedent failed to leave behind a valid Will or a Trust and when the decedent dies with a Will or a Trust but fails to leave their spouse an amount that is equal to their statutory rights referred to as the “elective share” of the estate.
The intestate laws and the statutory right of the surviving spouse’s election share vary from state to state. For example, in New York, if the decedent died without a Will and they do not have children, the surviving spouse has a right to receive the entire estate but if there are children then the surviving spouse has a right to receive 50% of the estate and the children receive the remaining 50%.
However, if the decedent died with a Will or a Trust but failed to bequest at least 1/3 of the estate assets to their spouse then the surviving spouse has a statutory right to elective against the estate to ensure that they receive their 1/3 share of the decedent’s estate.
By entering into a prenuptial agreement, the spouses can decide if they want to waive their estate statutory rights or negotiate the terms of the estate distribution and whether the surviving spouse shall have the right to represent the estate.
A postnuptial agreement can accomplish the same goals as a prenuptial agreement; however, it is entered into after the couple is married. Do not confuse a postnuptial agreement with a separation agreement. A separation agreement is entered into in contemplation of divorce whereas a postnuptial agreement is entered into by spouses after entering a marriage. In contrast, a postnuptial agreement outlines the ownership of financial assets in the event of divorce and whether they want to waive their statutory rights in case of death.
Because your postnuptial agreement is a contract, be sure to keep the terms of this contract in mind when you create your estate plan so that the terms of your Will or Trust do not run afoul of your postnuptial agreement. To avoid any conflicts, update your estate planning documents when you create a postnuptial agreement.
Impact of Divorce on Estate Planning
Because divorce is emotional by nature, it can be easy to overlook some of the practical ramifications of a divorce. Your estate plan should be reviewed and likely revised during your divorce and again when your divorce is finalized.
The laws vary from state to state regarding what is automatically revoked once the divorce is finalized. For example, pursuant to New York law a final divorce decree will automatically revoke provisions in favor of a former spouse under a Will or Revocable Living Trust and any fiduciary appointments (executor or Trustee). However, the Will or Trust is not automatically terminated. Thus, the remaining bequests or appointments are enforceable – highlighting the need to review and revise your estate plan as soon as possible.
- Health Care Documents and Power of Attorney Documents. Along with changing bequests in a Will or provisions in a Trust, you may also need to make changes to other estate planning documents. For example, you may need to amend your Will to remove your spouse as Executor or amend a Trust to appoint a new Trustee. Likewise, if your spouse is your healthcare proxy and power of attorney you may want to change these documents during the pendency of the divorce if you do not want your spouse to have the legal authority to make such important decisions. Keep in mind that such fiduciary appointments remain in effect until the divorce is finalized.
- Beneficiary Designations. While you were married you probably listed your spouse as the beneficiary of your retirement accounts, life insurance, and financial accounts. These designations may also need to be updated when you decide to divorce.
- During Divorce Process. Note that state and/or federal law may prohibit you from removing your spouse as the beneficiary while a divorce is pending so always check with your attorney before making changes.
- In-Laws. Although New York law automatically revokes certain provisions in favor of a former spouse when a divorce is finalized, that law does not apply to in-laws. If you designated an in-law as a beneficiary or appointed him/her to a fiduciary position within your estate plan you should revisit those designations when you commence the divorce.
- Gaps in Designations. Once the divorce is final, the law will treat your former spouse as having died before you. If you failed to update your estate plan, this could leave gaps in beneficiary designations.
- Special Needs Trust (SNT): Special-needs children frequently require assistance beyond the age of majority as well beyond their parents’ lives. If the divorce involves planning for a special needs child a Special Needs Trust may be needed, especially if the child is receiving government, for example, SSI and Medicaid. This type of Trust can be created so that the child support and inheritance do not interfere with the child’s Medicaid or SSI eligibility.
- Irrevocable Life Insurance Trust (ILIT): A life insurance policy is commonly used to secure child support payments after the dissolution of the marriage. To avoid concerns regarding whether the insured spouse will change the beneficiary and whether they will maintain the premiums, the policy is owned by the ILIT, and a Trustee is responsible for paying the premiums, making sure the designated beneficiary is the Trust and that the death benefit is held in Trust for the benefit of the child and not the former spouse.
- Equitable Distribution. Distributed Trust assets that are co-mingled during the marriage will be subject to the equitable division of property in a divorce. Moreover, Trust assets may be subject to the division of assets under the laws of another state if the beneficiaries of the Trust are residents of that state.
- Changes Required by Divorce Decree. As part of the final decree of divorce, a spouse may be legally required to make changes to an existing estate plan. For example, you may be required to be obligated to establish a Trust for the benefit of your children that comply with the terms of your settlement agreement, and you may want to name someone other than your spouse to act as the trustee of the Trust to manage child’s inheritance.
- Retirement Accounts and Pensions. Generally, the portion of retirement and pension accounts accumulated during the marriage is subject to the division of assets in a divorce. When these assets are involved in a divorce, it often leads to a complex negotiation process given the potential tax consequences and early withdrawal penalties that must be considered.
When Prenups or Postnups or Divorce Agreements and Estate Plans Don’t Match Up
The terms of a prenuptial agreement, a postnuptial agreement, or a divorce settlement agreement are contractual obligations that should be considered when you create your Will or Trust. If the terms of your Will or Trust conflict with the contractual obligations included in your prenuptial agreement, your postnuptial agreement, or your divorce settlement agreement, then your estate may require litigation to resolve the conflict. An estate planning attorney can help you avoid this.
Importance of Having an Estate Planning Attorney
The need to work with an experienced estate planning attorney during and after a divorce is crucial to ensuring that your estate plan continues to function as intended and to avoid unintended conflicts or consequences because of the divorce. Your divorce settlement agreement should be disclosed and reviewed by your estate planning attorney before creating your estate planning documents.
An experienced estate planning attorney can help you find practical solutions to achieve your estate planning objectives without running afoul of your contractual obligations that may exist in your prenup, postnup, or divorce decree. If this step is overlooked the administration of your estate may require court intervention to resolve the conflict.
Our attorney at Amato Law PLLC is committed to working with you throughout the divorce process to make any necessary changes to your existing estate plan. Contact my office today by calling 212-355-5255 or filling out the online contact form on my website.