So much for "Till death do us part." Sadly, 46% of marriages and civil unions in the United States end in divorce. However, most people do not consider the effect that divorce can have on their assets, estate and family until it is too late.
It's important to have one's legal affairs in order before divorce is even discussed. Without proper planning, a divorce can have devastating financial consequences for you and your family — in addition to the emotional havoc. Pre-marital, pre-civil union and other pre-divorce estate planning, such as prenuptial or postnuptial agreements and trusts, are essential to avoiding such consequences.
Merely filing for divorce does not end a marriage or civil union, and more importantly does not sever a couple's financial entanglements.
Without proper estate planning, even after physical separation, your estranged spouse or partner may continue to have legal control over important decisions affecting you, your assets and your estate in the event you were to die or become disabled prior to the entry of a final judgment or decree of divorce. That spouse may be entitled to most — if not all — of your estate assets should you die before your divorce is final. Many people wish to disinherit their spouse/partner upon the couple's separation in order to ensure that their assets pass to their children (whether from the current marriage or civil union or a prior relationship) or to other family members rather than the other spouse/partner.
While one can create a will that excludes the other spouse/partner, the law typically provides certain protections to disinherited spouses or partners. Those protections limit the effectiveness of such a will. For instance, in many states, including New York, New Jersey and Connecticut, the primary protection is the "elective share" statute. This entitles a surviving spouse/partner to elect to receive a specific amount of the decedent's estate (typically one-third), notwithstanding any effort to disinherit him/her.
Likewise, prior to the entry of a divorce decree, federal law prohibits the naming of anyone other than the spouse as beneficiary of qualified pension plans, without the spouse's consent. But, that protection does not apply to non-qualified plans or IRAs. Also, it is common for spouses/partners to own assets jointly, many of which pass automatically to the other co-owner by right of survivorship upon death. As a result, absent pre-divorce estate planning or an agreement to divide jointly-owned assets prior to divorce, most jointly-owned assets will pass to the surviving spouse/partner in the event of death before the relationship is legally terminated.
Fortunately, many of these problems can be avoided by a well-designed estate plan which: (a) controls to whom, when and how assets will be divided in the event of a divorce, and how they will be distributed upon the death of the first spouse/partner should the couple remain married or in a civil union; (b) utilizes all available state and federal tax savings techniques that are consistent with one's goals for the disposition of assets; (c) names beneficiaries of assets that do not necessarily pass under a will, such as life insurance and retirement accounts; (d) allows assets to be used for the benefit of one or more beneficiaries during their lives while ultimately leaving the assets to other beneficiaries, utilizing trust instruments, and; (e) ensures that assets are managed as you wish or by whom you wish in the event of your incapacity.
Get it in Writing
One of the most effective pre-divorce planning tools is a well-drafted prenuptial or pre-civil union agreement, which is entered into before a couple exchanges their vows (preferably well before). It is a contract by which the parties can elect to override the rights and obligations that would otherwise apply, under state and/or federal laws, upon their marriage or civil union — particularly in event of divorce or death. The contents of such agreements can vary greatly but commonly address the division of property and spousal support.
Custody and child support generally are not addressed — such provisions are often unenforceable pursuant to public policy and state law.
Although a prenuptial/pre-civil union agreement may not be appropriate for everyone, it should be considered by the following: individuals with significant personal assets; heirs anticipating significant gifts or inheritance (parents wishing to pass their wealth on to their children may wish to address the need for such an agreement with them); and those entering into a second marriage/civil union who want to leave assets to children from a first marriage/civil union.
A prenuptial/pre-civil union agreement allows a couple to determine in advance the financial rights and obligations that will arise upon marriage/civil union and what will happen to their assets in the event of a divorce or death. For example, the parties can agree in advance on what assets — if any — will be eligible for distribution or bequest, how those assets will be valued and what division of assets is fair and reasonable; what level of spousal support is appropriate, for what duration of time and what means will be used to secure support payments (such as life and disability insurance); and the allocation of tax benefits and obligations during the marriage or upon divorce.
A postnuptial/post-civil union agreement is similar, but is signed during a marriage/civil union rather than before — sometimes because the couple did not think of it or simply did not have a chance to take care of it before their union. Such an agreement should also be considered if there has been a significant change in the financial condition of one spouse/partner, perhaps because of a promotion, career change, inheritance or the sale of a business. It can be used to protect assets earned solely by one party's efforts, while also addressing the desire for financial security of the other person.
Although postnuptial/post-civil union agreements serve many of the same purposes as prenuptial/pre-civil union agreements, courts tend to scrutinize them more carefully, holding them to higher standards of fairness, when they have been entered into well into the marriage/civil union rather than simply right afterward. This is to ensure that the agreement was not the result of coercion or duress (for instance, if a party felt compelled to sign the agreement in order to save the marriage/civil union, particularly if there were children involved). But, such an agreement can be an effective pre-divorce planning tool in the right circumstances and if done correctly.
A trust can also help to achieve an individual's pre-divorce planning objectives. For instance, irrevocable trusts, including irrevocable life insurance trusts, can be used to ensure that assets are preserved for the parties' children or one's children of a prior relationship. However, care must be taken in establishing such trusts because they will be scrutinized by a court if challenged by the other spouse/partner. This is to ensure that the trust was not established with marital/union assets or, if it was, that both parties had consented or that there were sufficient other bona fides to overcome a claim that the trust was established solely to avoid distribution upon divorce. An irrevocable life insurance trust, where the trust becomes the owner and beneficiary of a life insurance policy on your life, has the added benefit of providing life insurance proceeds to your beneficiaries without inclusion in your estate.
A Child's Failed Marriage
If it is your child's marriage that you are worried about rather than your own, a revocable living trust, irrevocable trust or trust under your will can protect your assets from ultimately falling into the hands of your child's spouse/partner, whether upon divorce or your child's death. Your trustee will manage and distribute the assets you have placed into the trust and will follow the directions you have provided in your trust document. Such a trust can allow your child to reap certain benefits from your assets, either under express terms that you direct in the trust document, or at the discretion of your trustee, without giving your child ownership and control over the assets. This can protect the assets from your child's creditors, as well as an ex-spouse/partner.
Several other estate planning tools, including qualified personal residence trusts and family limited partnerships, can help ensure that assets pass according to your wishes regardless of your (or your child's) marital/civil union situation.
Any of these solutions, or a combination of them, may help to achieve your goals. You will have peace of mind knowing that, whatever the future may hold, your heirs and family members will be provided for in the way that you desire.
Myrna L. Wigod, Esq. is a partner at McCarter & English, LLP,
with offices in New York, New Jersey, Connecticut, Massachusetts,
Pennsylvania and Delaware. Her practice areas focus on
family law and trusts and estates.