Clients Divorcing? Be Sure to Handle These Estate Planning Details

Review all documents to ensure the right people inherit.

In my 30 years of practice, I have come to the conclusion that while a client may not want to be married to the person he or she is married to, that does not mean he or she wants to be divorced. Therefore, as the divorce progresses, emotions swirl, and anger and angst set in. The CPA, who has ongoing, in-depth knowledge of the client’scracked egg shell image, estate planning financial situation, can be instrumental in making sure that all details are attended to during this turbulent time.

Here are some issues CPAs and their clients must take into account during a divorce:

  1. Restraining orders. In many states, when a divorce petition is filed, what is known as an “automatic temporary restraining order” is put in place. Under a restraining order, most estate planning (such as changing estate planning documents or the designation of beneficiaries) cannot occur without a court order. In essence, all planning comes to a halt (unless a court rules otherwise) until the divorce is over. However, some documents may be revised while the divorce is pending. These may include a financial durable power of attorney and health care proxy documents, and documents that pertain to the disposition of the client’s remains. Ensure that your clients review such documents, especially if they put the client’s spouse in charge.
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  3. State law, particularly as it applies to wills. In many states, a divorce, once completed, revokes the provisions in a client’s will that name a spouse as a beneficiary. However, you should still encourage divorcing clients to review and revise all estate planning documents, especially wills. Otherwise, they may unintentionally leave portions of their estate to an ex-spouse or former in-laws, as happened in a recent case in New York (In re Estate of Lewis, 978 N.Y.S.2d 527 (N.Y. App. Div. 1/3/14)). New York resident Robyn Lewis left everything to her husband, including her home, in her will. She got divorced, but did not change her will before she died at age 43. Though, under New York law, her ex-husband was now not allowed to inherit, Lewis had left her home to her father-in-law as a default provision—a provision not automatically revoked under New York law. Lewis’s family of origin contested the will, but the New York appellate court upheld the decision that the home now belongs to her ex-father-in-law.
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  5. Beneficiary designations. When a client gets divorced, you should review all primary and secondary designations of beneficiaries for his or her life insurance policies, IRAs, and annuities, as getting a divorce does not automatically revoke those contract beneficiaries. In Hillman v. Maretta, 133 S. Ct. 1943 (U.S. 2013), for example, the U.S. Supreme Court ruled that a man’s ex-wife was still the beneficiary of a $124,558 life insurance policy, even though he had remarried before his death, as he had not changed his beneficiary designation after they divorced.
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  7. Life insurance. Life insurance policies need be carefully reviewed to determine how the divorce will affect them. For example, if a couple purchased a second-to-die life insurance policy because they thought the marital deduction would defer the estate taxes until they both died, that policy must be reviewed to see what happens in the event of a divorce.
     
    Sometimes, after a divorce, one party does rightfully remain the beneficiary of a life insurance policy on his or her ex-spouse’s life. In these situations, the named beneficiary should, during divorce proceedings, mandate that the policy remain in force and that duplicate statements be mailed to his or her ex-spouse to ensure that payments are made on time.
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  9. Estate tax. After they divorce, clients will lose the estate tax marital deduction—and therefore incur higher estate taxes if their spouse dies before they do. Prepare clients for these extra taxes by discussing topics such as what assets will cover the estate tax and whether they should obtain additional insurance.
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  11. Embedded income taxes. In a divorce, many clients view the assets at their current values. The reality is that an asset may have a significant embedded gain because of a very low cost basis, depreciation, or recapture or because it is a non-Roth retirement planning asset. CPAs can call a client’s attention to embedded taxes and make sure they are taken into account in determining how the assets are to be divided.

 
If you are representing both spouses, be aware of potential conflicts of interest when providing advice to either of them that may be perceived as being adverse to the other spouse. In addition, ensure that both spouses have formally agreed to have the CPA represent both parties during the divorce. CPAs should consider the guidance on conflicts of interest in the AICPA Code of Professional Conduct (1.110.010 Conflicts of Interest for Members in Public Practice).


Patricia Annino
is a sought after speaker and nationally recognized authority on women and estate planning. She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about. Annino recently released her new book, “It’s More Than Money, Protect Your Legacy” available at Amazon.com. To download Annino’s FREE eBook, Estate Planning 101 visit, http://www.patriciaannino.com.

Women And Money: 4 Strategies For The Divorced Woman

For most women divorce is one of the most stressful and unpleasant experiences in life. Emotions run high. Solutions are scarce. Money is tight. Legal bills are exorbitant. It is not the best time to make well thought out decisions.

  1. Understand the terms of your divorce agreement, what your ex-husband is obligated to pay for alimony and child support and whether or not his obligation to pay is ordered to be backed up by a life insurance policy on his life.
  2. If the divorce agreement is backed up by a life insurance policy, check each year to make sure the premiums are paid and that the policy remains in force.
  3. Revise your estate planning documents in light of your divorce to reflect the appropriate parties to serve as attorney under your power of attorney, agent under your health care proxy, executor under your will and trustee under any trust.
  4. Make sure your ex-husband is not still the beneficiary of your estate plan and revise the primary and secondary beneficiaries of your life insurance, IRA, annuities, retirement planning assets, etc. to remove your ex-husband from those designations.

Jill, a woman of 54, made an appointment to come see me with her husband, Brian, to discuss their estate plan. As a beginning part of the process I send out a questionnaire and ask potential new clients to pull together their financial information and to bring that information, along with copies of their current estate planning documents, to the initial meeting. Jill and Brian came in and had an in-depth two hour session.

Five minutes after leaving my office Jill called me from her cell phone in the lobby and told me they would not be proceeding. She set up the appointment to obtain a complete picture of their finances before commencing a divorce action, and she figured that starting the estate planning process was cheaper than years of document production and discovery.

I do not recommend Jill’s course of action. It underscores, in fact, how important it is to understand what your finances are and how your estate planning works long before the marriage falls apart.

Patricia Annino is a nationally recognized authority on women and estate planning.  She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about.  For more visit:  www.patriciaannino.com



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