Estate Planning Newsletter
Effect of Separation and Divorce on Estates and Trusts
Most people are aware that a surviving spouse is usually entitled to inherit all or a large portion of the estate of a deceased spouse. Fewer understand the effect on estates if one spouse dies during a legal separation or after a divorce. After a divorce, many neglect to change wills that specify bequests to a former spouse or their beneficiary designations for life insurance and retirement accounts. State law may dictate what will happen in such situations. However, provisions and procedures can vary substantially from state to state. Additionally, federal law may be implicated, especially when pension and retirement accounts are involved.
Intestate Succession and Divorce
When a person dies without a will (“interstate”), state law determines how and among whom the estate will be divided. Based on a perception that estates passing under wills generally name the surviving spouse as the primary beneficiary, intestate succession laws reflect this and allocate all or a large portion of the estate to the surviving spouse. In most states, however, after and sometimes even during a divorce, spousal status is lost. Under New York law, the husband or wife is not considered a surviving spouse for purposes of intestate succession where a final divorce decree exists; the marriage was void as being incestuous; there is a decree or judgment of separation; or the spouse abandoned or failed in a duty to support the decedent.
In California, “surviving spouse” does not include those whose marriage has been annulled or dissolved; who have obtained or consented to a divorce then married another; or who were parties to a proceeding terminating marital property rights. Couples who, after a divorce, remarry their former spouse may still be considered spouses in California and other states, if they are still married at the time one spouse dies. In 1969, a Uniform Probate Code (UPC) was promulgated, and has since been adopted by approximately one-third of the states. The provisions of the UPC similarly eliminate as spouses for intestacy purposes those whose marriage has been annulled or terminated, unless they have remarried their former spouse.
In some states, while a divorce is pending, couples remain spouses for the purposes of intestate succession. As a result, if one spouse dies without a will before the divorce is final, the surviving spouse may inherit. Court cases have affirmed this, but also affirm that, after the final divorce decree, the former spouse may no longer inherit under intestacy laws.
Effect of Divorce on Wills and Other Death Benefits
In some states, a divorce or annulment automatically invalidates will provisions leaving property to the former spouse and/or designating the former spouse to act as executor, trustee, or in other capacities. Divorce may also deprive the divorced spouse of the right to a statutory, elective share of the decedent’s estate (under state laws, a spouse may be entitled to a portion of a spouse’s estate regardless of being omitted from a will).
In a New Jersey Supreme Court case, a husband died during the pendency of a divorce. The court ruled that the wife was no longer entitled to a division of property by the divorce court, because of the death, but also could not claim an elective share, because of the separation; the husband left his entire estate to children from a prior marriage. The lower court was, however, allowed to make an equitable distribution of marital property.
Under the UPC, all provisions in a will favoring a divorced spouse are revoked “as though the divorced spouse had died at the time of the divorce.” The UPC also revokes all “revocable” designations, such as those described above as executor, etc., and may sever joint tenancy and community property interests. Some state laws further automatically invalidate bequests to and designations of any relative of the divorced spouse (except for children with the decedent). For example, bequests to children of the divorced spouse from a former marriage might automatically be eliminated or invalidated, as might designation of the divorced person’s brother as executor or trustee.
This automatic revocation has further been applied in some states to beneficiary designations in certain retirement accounts and/or insurance policies and to bequests and appointments made in trusts. In other states, however, the trust must be amended to change or eliminate the bequests and appointments. However, if the decedent amended the will or other document after the divorce or otherwise reaffirmed an intent to continue to benefit the divorced spouse, that may counteract the automatic revocation.
The Egelhoff Case
As noted above, state laws sometimes void beneficiary designations of divorced spouses for life insurance and/or retirement accounts. A 2001 decision by the U.S. Supreme Court in Egelhoff v. Egelhoff considered the validity of such a Washington state law. While they were married, David Egelhoff designated his wife, Donna Rae, as beneficiary of the life insurance and retirement account he held through Boeing Company. The Egelhoffs subsequently divorced and David was allocated the retirement plan and life insurance in the property division. David died just two months later in a car accident, never having changed the beneficiary designations. Two of David’s children by a former marriage sued to recover these assets for David’s estate.
The trial court held that the insurance and retirement account were controlled by the 1974 federal “Employment Retirement Income Security Act” (ERISA), which preempted (took precedence over) state law on the subject. ERISA mandates distributions according to the plan rules, which, in this case had to be made only to properly designated beneficiaries under the plan. As a result, Donna was awarded the account and insurance. A court of appeals and the Washington Supreme Court reversed, holding ERISA did not preempt the state law that invalidated beneficiary designations after the divorce. The U.S. Supreme Court disagreed, finding that ERISA specifically preempted Washington and other similar state laws. The Court stated that the preemption was necessary for, among other things, uniformity in the treatment of retirement accounts throughout the U.S. The Court reasoned that administrators could not be forced to make decisions based on inconsistent state laws.