Estate planning: death soon after divorce.
Less instinctive to clients is whether a review and revision to their estate planning documents is necessary immediately following the divorce. It is a common occurrence for estate planning attorneys to receive frantic calls from clients the day before or after their divorce is finalized seeking the immediate removal of their ex-spouse from their estate planning documents. In actuality, Florida law has generally protected a divorced decedent from unintended consequences at death regarding his or her ex-spouse as to the disposition of separately owned assets that are controlled by the terms of a will or revocable trust agreement executed prior to the entry of the final judgment of dissolution of marriage. As a corollary to the protection provided to wills and revocable trusts, Florida law also protects a divorced spouse in the context of certain nondispositive estate planning documents, including advanced directives, health care powers, and powers of attorney.
Until recently, Florida statutes did not address the significant class of assets that are disposed of outside the context of a will or revocable trust. Those assets include beneficiary designated assets, such as life insurance, annuities, and retirement plans (individual retirement accounts, profit-sharing plans, 401(k) accounts, nonqualified deferred compensation rights, and other similar assets). The divorce decree or property settlement agreement typically addresses post-divorce ownership of beneficiary-designated assets. An untimely death prior to revising the account ownership or beneficiary forms generally resulted in the surviving ex-spouse inheriting this type of asset. In 2012, Florida enacted F.S. [section]732.703 to address this class of "beneficiary form designated" asset, and attempts to avoid the unintended disposition of such assets to a divorced spouse.
This article provides an overview of Florida law on the effect of divorce on estate planning, including the protections automatically provided by a patchwork of historical statutes and the 2012 statute. It also covers the topic of irrevocable trusts that are generally not covered by Florida statutory law. Irrevocable trusts should be addressed during the divorce.
Wills and Revocable Trusts
Florida law has long provided protection to a divorced decedent when it comes to dispositions made to an ex-spouse in the decedent's will and revocable trusts. (1) As to wills, F.S. [section]732.507(2) provides that any provision of a will executed by a married person that affects the spouse is void upon divorce. (2) It follows that, upon divorce, a will shall be administered and construed as if the former spouse had died at the time of the divorce, unless the will or divorce judgment expressly provides otherwise. (3)
F.S. [section]736.1105 has the same effect on revocable trusts as the statute governing wills. It provides that any provision of a revocable trust (which is executed by a husband or wife prior to divorce) that affects the settlor's spouse becomes void upon divorce. Unless the revocable trust expressly provides otherwise, the trust shall then be administered and construed as if the settlor's spouse died on the date of the divorce. (4)
Thus, there is no immediate need to revise a client's will and revocable trust upon entry of the final judgment of dissolution of marriage. The above-cited statutes also have the same effect on fiduciary positions, such as personal representative and trustee. Of course, if circumstances change, such as remarriage, then revisions to the will and revocable trusts become necessary if the client wishes to provide for his or her new spouse in their estate planning documents. (5)
Health Care Documents and Power of Attorney
Another category addressed by Florida law upon divorce is in the area of health care and powers of attorney. If a husband or wife names his or her spouse as their health care surrogate or as the agent under their advance directive (living will), a subsequent divorce automatically revokes the designation, unless otherwise provided for in the advance directive/health care surrogate form, or final judgment of dissolution. (6)
The law governing powers of attorney is slightly different than the advance directive/health care surrogate statute in that a power of attorney vested in a spouse terminates upon the mere filing of a divorce action or upon filing for legal separation (rather than upon the entry of a final judgment of dissolution of marriage). (7) Because of this distinction, if the divorce never becomes final and the action is withdrawn, it is not clear how Florida law would treat the original power of attorney executed before the petition for dissolution was filed. Thus, in an abundance of caution, it is in the client's best interest to execute another power of attorney after the action is withdrawn redesignating their spouse as their agent.
Until July 1, 2012, beneficiary designations were not automatically changed upon divorce. Section 732.703 expands the automatic elimination of ex-spouses from their existing estate plans by affecting beneficiary designations. It applies to all designations made by or on behalf of decedents dying on or after July 1,2012, regardless of the date of the execution of the designation form. (8)
Prior to 2012, the appellate courts and the Florida Supreme Court addressed beneficiary designations for assets, such as life insurance policies, individual retirement accounts (IRAs), deferred compensation funds, and other beneficiary-designated assets. (9) Thus, prior to the enactment of [section]732.703, absent a marital settlement agreement providing who is to receive the death benefits, or specifying who is to be the beneficiary, courts were required to look no further than the named beneficiary in the policy, plan, or account itself. (10) Divorce did not automatically revoke the beneficiary designation of a former spouse. Life insurance companies and custodians of retirement plan assets do not tend to address divorce in their beneficiary designation forms notwithstanding the probable intent of the owner.
In 2012, the Florida Legislature extended the automatic protections associated with divorce to beneficiary-designated assets. The new law provides:
A designation made by or on behalf of the decedent providing for the payment or transfer at death of an interest in an asset to or for the benefit of the decedent's former spouse is void as of the time the decedent's marriage is judicially dissolved or declared invalid by court order prior to the decedent's death, if the designation was made prior to the dissolution or court order. (11)
Bringing the treatment of these types of assets into conformity with wills and revocable trusts for Florida residents, "[t]he decedent's interest in the asset shall pass as if the decedent's former spouse predeceased the decedent." (12) This law applies to a life insurance policy, qualified annuity, or other similar tax-deferred contracts held within employee benefit plans or outside such plans; employee benefit plans; IRAs; payable-on-death accounts; and security or other accounts registered in transfer-on-death form. (13)
One important caveat to the effectiveness of the statute involves employer-sponsored, tax-qualified employee benefit plans, such as 401(k) s and other defined contribution plans. While the statute expressly applies to a funded or unfunded plan established by an employer for an employee with benefits that may be payable upon the employee's death, the statute expressly does not apply to the extent that federal law provides otherwise. (14) Employer-sponsored accounts are governed by the Employee Retirement Income Security Act of 1974 (ERISA), which supersedes any state statute or law that may relate to employee benefit plans. (15)
The Supreme Court has been quite clear about the scope of the "preemption" provision of ERISA in the context of state laws' attempts to achieve results more consistent with a decedent's intent with regard to exspouses. (16) Thus, employer-sponsored plan documents and beneficiary designations for an ex-spouse will govern the disposition of the assets, notwithstanding the general rule of [section]732.703. (17)
Conversely, individual retirement accounts are not governed by ERISA; state law controls. Thus, the new statute will effectively void a beneficiary form designating the former spouse as the primary beneficiary at the time of the IRA account holder's death.
Bank Accounts and Investment Accounts with Survivorship Features
Titling of bank accounts and investment accounts does not tend to be overlooked in the dissolution of marriage documents or by the clients. But, in the unlikely event the divorce documents are silent or vague as to survivorship rights, the new Florida statute voids the survivorship feature of a decedent's payable-on-death-accounts as if the former spouse had predeceased the decedent. (18) However, the statute does not void the survivorship aspect of a tenants by the entireties or joint tenants with rights of survivorship account that is awarded to the decedent in the divorce, but not retitled prior to death of the account owner. (19) There is no apparent rationale for such different results to similar accounts. (20)
Compare the foregoing result with real estate jointly owned by a husband and wife. Jointly owned real estate that is owned (or deemed to be owned) tenants by the entireties during the marriage automatically becomes tenants in common upon divorce. (21) Thus, Florida statutory law removes any spousal survivorship feature as to most individually owned real estate situations. (22)
Administrative Aspects to F.S. [section]732.703
There are certain other caveats to the statute that make it less effective and more difficult to administer than may appear at first glance. (23) Most glaringly problematic is the fact that the payor (e.g., an insurance company) is not liable for making any payment to the named beneficiary regardless of whether the payor had notice or knowledge of the divorce and the automatic revocation in the decedent's designated beneficiary form. (24) Thus, any "teeth" that the statute appears to contain is seemingly cancelled out by the fact that the payor--regardless of notice--can make payments to an incorrect beneficiary with no consequences or liability (perhaps leaving decedent's estate in the potentially delicate position of seeking redress from the ex-spouse of the decedent).
Also problematic, and not yet worked out in the law, is the situation wherein the order of dissolution requires that the decedent acquire or maintain the beneficiary-designated asset for the benefit of a former spouse or children of the marriage. In that case, under a strict reading of the statute, the operative provision does not apply to automatically revoke the ex-spouse as the designated beneficiary. (25) It is not clear whether this exception applies to the extent that the asset will fulfill the court order or whether a minimal amount required for maintenance in the final divorce judgment operates to take the asset entirely out of the automatic protection of the statute. For example, if the decedent owned a $1 million life insurance policy insuring his or her life, and the divorce decree required the decedent to maintain a $100,000 life insurance policy for his or her children, the statute appears to remove the entire policy from the automatic protections of the law (rather than protecting the remaining $900,000 of the policy and exempting the required $100,000 to be held for the children's benefit). Thus, the previously designated former spouse has a colorable argument that he or she is entitled to the remaining $900,000 of the policy as the named beneficiary on the policy. That result frustrates the spirit of the statute. A simple statutory fix would be to limit the exclusion to the extent that the divorce decree requires an amount payable to an ex-spouse or children.
Comparison to the Uniform Probate Code
Upon enacting [section]732.703, Florida now more closely follows the Uniform Probate Code (UPC) as it applies to the revocation of probate and nonprobate transfers by divorce. (26) Under the UPC, a divorce (except as provided by the terms of an instrument, court order, or marital contract) revokes any revocable 1) disposition or appointment of property in a governing instrument to the former spouse or in a governing instrument to a relative of the divorced individual's former spouse; 2) provision conferring a general or nongeneral power of appointment on the former spouse or relative of the former spouse; and 3) nomination in an instrument nominating the former spouse or relative of the former spouse to serve in any fiduciary or representative capacity. (27) This section covers all will substitutes, such as revocable trusts, life insurance, and retirement plan beneficiary designations, and other revocable dispositions to the former spouse that the divorced individual established before the divorce. (28) It was specifically amended in 1997 to unify the law of probate and nonprobate transfers, thus, expanding the section to include "will substitutes." (29) As amended, the UPC is the most comprehensive provision of its kind, but many states, such as Florida, have adopted piecemeal legislation in the same unifying direction.
There are some notable differences between the UPC and Florida's treatment of beneficiary-designated assets. Unlike Florida's treatment of payor liability, the UPC restricts nonliability to a payor that did not have knowledge of the divorce and made the payment in good faith reliance on the plan or policy. (30) Under the UPC, a payor is liable for a payment made or other action taken after the payor received written notice of a beneficiary revocation. (31) The method for such written notice is particularly described in the UPC. (32) The UPC gives the payor the option of paying the disputed amount into the court having jurisdiction of the probate proceedings, which also operates to relieve the payor of liability. (33) It is not clear why the Florida statute did not more closely follow the UPC in this regard. The UPC seems well thought out and fair to payors.
It is also interesting to note that the UPC specifically revokes probate and nonprobate dispositions and bequests to family members of the former spouse. In Florida, if a bequest or beneficiary designation names the family member of a former spouse, the law does nothing to change that bequest or designation upon divorce. This could occur when a spouse is named as the primary beneficiary and the spouse's family member, perhaps the spouse's child from a previous marriage, is designated as the secondary beneficiary. Florida's new law would void the disposition to the spouse, but would not alter the secondary designation. The comments to the UPC explain the policy behind the removal of family members from such probate and nonprobate governing instruments. Given the fact that during the divorce process, or in the aftermath of the divorce, the former spouse's relatives are likely to side with the former spouse, breaking down or weakening any former ties that may have previously developed between the transferor and the former spouse's relatives, the decedent would likely have favored the removal of such former spouse's family members. Thus, the UPC revisions in 1997 attempt to satisfy more fully a decedent's likely intentions. (34)
State law can only go so far with regard to a decedent's probable intentions regarding former spouses. There is the whole world of irrevocable estate planning devices that involve spouses as vested beneficiaries. Irrevocable funded trusts present the most common situation. State laws are not going to extend into eliminating or modifying vested, irrevocable benefits. Thus, it is paramount that family law attorneys address or take into account spousal rights in irrevocable trusts as part of the divorce process.
There are several types of irrevocable trust in which spousal vested interests commonly appear in many clients' estate plans. The most prevalent type of irrevocable spousal trusts involves life insurance planning. (35) They are occasionally overlooked in the divorce process, especially in instances when the insurance policy is a term life insurance policy that has no cash value.
Irrevocable life insurance trusts are generally planned around the type of life insurance policy involved. Life insurance contracts insuring a single life are oftentimes owned by an irrevocable trust created by the insured for the benefit of the insured's spouse and children to receive the insurance proceeds upon the insured's death. A typical irrevocable trust owning such a policy would provide the insured's surviving spouse with income and principal distributions during the spouse's lifetime and upon his or her death, would continue to provide economic benefits to their children for a period of time. The insured is the creator of the trust (the settlor) and the insured usually funds the policy by making annual gifts of cash to the trust.
A pending divorce presents a dilemma. The insured spouse is not motivated to continue funding the life insurance trust if the initial primary beneficiary will be the surviving former spouse. (36)
One solution is for the insured to stop funding the trust and, perhaps, the insurance policy will terminate. After the divorce, the insured could acquire a new policy and create an irrevocable trust for the benefit of only the children. But there are many types of insurance policies that do not immediately terminate upon the failure to make a premium payment. Moreover, the insured might have health issues that make termination of the policy undesirable.
A potential solution to the issue during the divorce is for the insured and the spouse of the insured to agree to seek modification of the irrevocable trust to eliminate the interest of the noninsured spouse. There are several ways to accomplish this under Florida law and the family law attorneys should consult with estate planning attorneys as to the most appropriate method. (37)
A second type of life insurance policy encountered in irrevocable life insurance trusts is known as a survivorship life insurance policy. Such policies jointly insure the husband and wife and are payable upon the death of the survivor of them. The primary beneficiaries of the insurance proceeds of the trust are the children. In a divorce setting, both spouses might be motivated to continue contributing to the trust to maintain the policy for the benefit of the children. The simplest solution would be for the spouses to agree to jointly fund the trust on an annual basis. Alternatively, the spouses might agree to make a substantial gift to the trust at the time of the divorce in order for the trust to continue to fund the policy.
A second category of irrevocable trusts involving vested spousal interests are charitable remainder trusts (CRT), grantor retained annuity trusts (GRAT), and qualified personal residence trusts (QPRT). (38) These trusts have charitable planning or wealth transfer planning at their core, but all have a common element. The settlor of the trust irrevocably transfers an asset to the trust, possibly a valuable marital asset, and the settlor retains an interest in the trust for a term of years or his or her lifetime. Upon the expiration of the term, the remaining trust assets usually pass to charity (CRTs) or to the settlor's children (QPRTs and GRATs).
Generally for these trusts, especially QPRTs and GRATs, there are not a myriad of options in the divorce process other than the consideration of the settlor's retained beneficial interest in such a trust in determining an equitable distribution of the marital assets. As to CRTs, there might be a few other alternatives. You might be able to commute (i.e., terminate) a CRT in order to divide the trust assets between the settlor/beneficiary and the charitable remaindermen. There are other situations in which the CRT can be equally divided into two separate CRTs, one for each spouse. (39)
A third general category of irrevocable trusts involves vested spousal interests that exclude the settlor. The settlor has created and funded an irrevocable trust in which the settlor's spouse has an immediate beneficial interest in the trust. These types of trusts are referred to as spousal access trusts or spousal limited-access trusts (SLAT). SLATs have been popularly used in estate planning in recent years with the advent of the increased federal gift tax exemption. (40) In considering large, tax-free gifts of property to trusts for a donor's children, the donor might include the donor's spouse as a permissible beneficiary just in case an unexpected economic occurrence causes the settlor's spouse (and indirectly the settlor) to need access to part of the trust assets. Similar to the CRTs, QPRTs and GRATs, spousal interests in a SLAT should be reviewed in the context of the property settlement or alimony aspects of a divorce.
The primary focus of this article is to address estate and trust aspects of a sudden unexpected death immediately after a divorce. It illustrates the law's attempt to eliminate unintended dispositive and fiduciary provisions. But, it also illustrates that, in certain cases, prudence dictates that each spouse review his or her estate planning documents, beneficiary designations, asset titling, and healthcare powers during and immediately after the divorce process.
1 See FLA. STAT. [section]689.15 (Real estate is protected from passing to a former spouse. Jointly owned realty that would be deemed tenants by the entireties or joint tenants with the right of survivorship during marriage automatically becomes tenants in common upon divorce.); see Babb v. Babb, 771 So. 2d 1215,1217 (Fla. 5th DCA 2000) (Although not automatically subject to sale as part of dissolution of marriage, if the marital home is designated for sale, as tenants in common, the parties are equally responsible for all payments necessary to maintain their ownership of the marital property until its sale, including mortgage payments, taxes, insurance and repairs.); see additional discussion on Fla. Stat. [section]689.15.
2 All references throughout this article to "divorce" are interchangeable with annulment and dissolution of marriage.
3 FLA. STAT. [section]732.507(2).
4 FLA. STAT. [section]736.1105.
5 See In re Estate of Guess, 213 So. 2d 638 (Fla. 3d DCA 1968); In re Estate of Bauer, 161 So. 2d 678 (Fla. 1st DCA 1964) (If the spouses divorce and then remarry, the dispositions to the former ex-spouse are still void, i.e., they are not "revived" by the couple's remarriage.); FLA. STAT. [section]732.703(4)(i) (The will and revocable trusts will need to be revised in order to (again) effectively dispose of assets to a spouse. However, this is not the case under the new statute with regard to beneficiarydesignated assets. Remarriage (to the same former spouse) revives designations made in such assets.); see U.P.C. [section]2-804(e). The U.P.C. is consistent in its treatment of remarriage--all dispositions and designations to a former spouse are revived, whether made via will, revocable trust, or beneficiary designated asset.
6 FLA. STAT. [section]765.104(2).
7 FLA. STAT. [section]709.2109(2)(b).
8 FLA. STAT. [section]732.703(9).
9 See, e.g., Cooper v. Muccitelli (Cooper II), 682 So. 2d 77 (Fla. 1996) (holding that the general language in a marital settlement agreement, which did not mention the disputed life insurance policy, could not trump that specific language in the policy, which clearly designated the ex-wife as the beneficiary); Crawford v. Barker, 64 So. 3d 1246 (Fla. 2011) (reaffirming Cooper II and applying it to a deferred compensation fund); Smith v. Smith, 919 So. 2d 525 (Fla. 5th DCA 2005) (extending Cooper II to IRA and annuity accounts).
10 Crawford, 64 So. 3d at 1248.
11 FLA. STAT. [section]732.703(2).
13 FLA. STAT. [section][section]732.703(3)(a)-(f).
14 FLA. STAT. [section]732.703(4)(a).
16 29 U.S.C. [section]1144(a) (2006).
16 Egelhoff v. Egelhoff, 532 U.S. 141 (2001).
17 In the absence of federal legislation amending ERISA to parallel state laws or the UPC, with regard to former spouses, employers should certainly provide for divorce in their plan documents and beneficiary designation forms by conditioning the testamentary spousal designation to being married to the employee participant on the date of his or her death.
18 FLA. STAT. [section][section]732.703(2), (3)(d).
19 FLA. STAT. [section]732.703(4)(h).
20 See U.P.C. [section]2-804(b)(2). Compare the UPC provision that severs the interests of a former spouse in survivorship joint property, transforming the property interests into equal tenancies in common without a survivorship feature.
21 See FLA. STAT. [section]689.15.
22 See FLA. CONST, art. X, [section]4. Homestead realty can cause additional complexity. If the decedent's minor children are residing on the property that became owned as tenants in common, the decedent's interest would still be entitled to homestead protection from devise even if the decedent were not living there at the time of death; Bayview Loan Servicing, LLC v. Giblin, 9 So. 3d 1276 (Fla. 4th DCA 2009); see Friscia v. Friscia, 39 Fla. L. Weekly D1810, 2014 WL 4212689 (Fla. 2d DCA 2014). To make matters more complex, if the decedent has remarried prior to his or her death and was survived by minor children living in the homestead, the decedent's one-half interest in the property would conceivably vest a life estate in the second spouse, with a remainder interest to the minor children from the first marriage.
23 These two caveats are not contained in the UPC's revocation of probate and nonprobate transfers by divorce, which will be discussed later in this article.
24 FLA. STAT. [section]732.703(7).
25 FLA. STAT. [section]732.703(4)(d).
26 See U.P.C. [section]2-804.
27 U.P.C. [section][section]2-804(b)(l)(A)-(C).
28 Comment to U.P.C. [section]2-804.
30 U.P.C. [section]2-804(g)(l).
32 See U.P.C. [section]2-804(g)(2).
34 Comment to U.P.C. [section]2-804.
36 The purpose of the trust is usually to avoid estate taxation of the life insurance proceeds upon the insured's death and/or the death of the insured's spouse.
36 The trust document itself might present a solution. The trust agreement might condition the surviving spouse's interest upon being married to the insured at the time of the insured's death.
37 See, e.g., FLA. STAT. [section]736.04311 (authorizing Florida courts to modify irrevocable trusts in situations when a material purpose of the trust no longer exists).
38 CRTs, GRATs, and QPRTs are statutorily sanctioned trusts under the I.R.C. See I.R.C. [section]664 (CRTs); I.R.C. [section]2702(b) (excluding a trust such as a GRAT from the general rules of [section]2702); I.R.C. [section]2702(a) (3)(A)(ii) and Income Tax Regulations [section]25.2702-5 (QPRTs).
39 Here again, the trust document might present a solution. Oftentimes, a CRT provides an annual payment to the settlor for the settlor's lifetime followed by payments to the settlor's spouse for his or her lifetime. The trust document might have a provision authorizing the settlor to terminate the possible life interest of the settlor's spouse in the event of divorce.
40 The federal lifetime gift tax exemption was increased from $1 million to $5 million in 2011. The $5 million exemption is indexed for inflation and is presently $5.34 million.
Peter T. Kirkwood, a partner of the Tampa law firm of Barnett, Bolt, Kirkwood, Long & McBride, practices in the area of estates and trust law, taxation, and nonprofit organizations.
Allison L. Kirkwood is a federal judicial law clerk in the Middle District of Florida.
This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Michael Allen Dribin, chair, and Kristen Lynch and David Brittain, editors.
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|Author:||Kirkwood, Peter T.; Kirkwood, Allison L.|
|Publication:||Florida Bar Journal|
|Date:||Jan 1, 2015|
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