New Probate Code Affects Estate Planning At Divorce

By Barbara S. Hughes

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As divorce settlement or trial approaches, estate planning may be the farthest thing from the divorcing client's mind. Does the divorce attorney have an obligation to see that the client prepares and executes a new will? Does the attorney have any further obligations? What if the client is balking at additional "unnecessary" fees?

This article discusses estate planning that the divorce attorney should cover with the client during the pendency and, in particular, at the time of the final divorce hearing. It also summarizes current law concerning the effects of the divorce judgment on existing estate planning instruments, including the impact of the new probate code which became effective Jan. 1, 1999. ¹

Clients can reasonably expect that divorce-related legal advice should encompass, at a minimum, basic estate replanning for the changed family situation and the client's financial condition. In today's litigious cultural setting, the wise course is to make sure the client executes a new will and powers of attorney, and understands exactly how to name beneficiaries on nontestamentary instruments of transfer. If the attorney lacks recent estate planning experience, he or she should work with competent cocounsel to see that estate planning documents are ready for the client to execute at the time of divorce.

It is important that the client realize the cost of an attorney preparing a new will and assisting the client to set up valid dispositive directions for nontestamentary transfers is minimal compared to the amount of time and the cost required to negotiate and draft a final stipulation or to take a case to trial.

Estate planning as part of the divorce process

One way to ensure that the client views estate planning as a necessary part of the divorce process is to plan and draft a will during the pendency, or even prior to filing the petition. During the pendency there are some limitations on what can be accomplished. The spousal elective and marital property and rights to a selection of personalty continue until the judgment is granted. The surviving spouse cannot elect specifically bequeathed items of personalty unless the items are normal household furnishings, furniture, and appliances necessary to maintain the home.²

Upon filing of the divorce petition, section 767.087(1)(b) of the Wisconsin Statutes restricts the transfer or disposition of property without consent of the other spouse or a court order, "except in the usual course of business, in order to secure necessities or in order to pay reasonable costs and expenses of the action, including attorney fees." Some attorneys would argue that this statute prevents changing beneficiary designations after filing. Even if this is not the case, temporary orders routinely contain prohibitions against changing life insurance and other beneficiary designations. Nonetheless, if a spouse dies during the pendency, the divorce action abates, leaving the divorce court without jurisdiction to address violation of a temporary order.³ Chapter 766, relevant portions of the recently revised probate code, and the dispositive documents will govern disposition of assets. While a surviving spouse might bring an action requesting imposition of a constructive trust upon assets transferred in violation of a temporary order, the success of such an action is uncertain.

The cost of preparing two wills may weigh against clients having a pendency document. Clients should be informed that they generally have the right to direct the disposition of their gifted and inherited assets, as well as their one-half interest in marital property that is titled or held solely in their names. If the client finds it important enough that the spouse not receive any more than the spouse is legally entitled to have, the expense of a prefiling or pendency will can be justified. Moreover, the additional cost of revising the will after the judgment may be quite modest.

If a will is executed during the pendency or prior to filing the divorce, the will should be reviewed at the time of the final hearing for necessary changes and re-executed promptly after the hearing. As the divorce process continues, clients may have changed their views about an appropriate disposition scheme and the individuals who would be the most effective personal representative, trustee, and guardian. Furthermore, the pool of property controlled by the client's estate planning documents will almost always be different once the divorce is over. Estate planning documents must conform to any requirement of the judgment, especially any requirements for life insurance and/or retirement plan or account beneficiary designations.

New probate code effects on estate planning

What effects does the divorce judgment have upon the client's existing estate planning documents and beneficiary designations under current law, particularly as affected by the new probate code and related provisions?

1) The judgment revokes will and revocable trust provisions, and any dispositions created by law, to the former spouse and to relatives of the former spouse.⁴ Previously, the judgment affected neither the dispositive provisions of revocable trusts nor will provisions benefitting the relatives of a former spouse.

2) Likewise, the judgment now revokes any revocable provisions made by the client in a "governing instrument"⁵ granting a power of appointment to the former spouse or relative of the former spouse.⁶

3) Further, the judgment now revokes beneficiary designations naming the former spouse and relatives of the former spouse.⁷

4) In addition, the judgment severs the interests of the client and former spouse in property held by them as joint tenants with right of survivorship or as survivorship marital property and transforms these interests into tenancies in common.⁸

5) If the client and former spouse's marital property agreement contains a "Washington Will" provision⁹ or other agreement to make a particular disposition in a will or other governing instrument, generally this too is revoked by the judgment.¹⁰

6) If the client's existing estate planning documents have nominated the former spouse or relative as trustee or personal representative, the judgment now revokes these nominations.¹¹

Section 854.15(5) provides for exceptions in which the section 854.15 revocations will be inapplicable. These exceptions are: if the express terms of a governing instrument or court order provide otherwise; if the express terms of a contract relating to the division of the client's and former spouse's property made by them before or after the marriage or the divorce, annulment, or similar event provide otherwise; if the divorce, annulment, or similar event is nullified; if the client and former spouse remarry each other; or if there is a finding of the decedent's contrary intent, which may be construed using extrinsic evidence.

New will after divorce still recommended

Even though the new probate code largely eliminates the possibility that the former spouse will inadvertently receive benefits under the client's beneficiary designations and estate planning documents, there remain pressing reasons for a client to execute a new will, or revocable trust and pourover will.

• If there are no children, the client may need to name entirely new primary beneficiaries under the instrument.
  
  
• If there is a minor child, the client should give careful thought to nominating a third party as guardian of the child's estate.

Absent trust provisions or a guardianship nomination to the contrary, the former spouse as surviving parent will become the de facto guardian of a minor child's estate and will control all assets passing to the child. Moreover, if the client intends that distribution of assets passing to a minor child or young adult be delayed past age 18, either a testamentary or revocable trust will be necessary. This presents the opportunity to select a trustee to manage the children's inherited assets until they reach an age of responsibility. If the client prefers to have court supervision of the management of the child's estate, a testamentary trust is indicated. If the client does not want to have continuing court supervision until trust termination, a revocable trust and pourover will are appropriate.

• If there is a minor child, the client should update the nomination of guardian of the person.

The client should reevaluate the appropriateness of the alternate guardian nominated in the existing will, particularly if the previous nomination was for a relative of the former spouse. Can that individual be depended upon to see that the child has ample time with the client's own family members? Likewise, is there any issue of unfitness of the former spouse to be the child's guardian? If the client strongly believes that the former spouse is unfit to be the child's guardian, the client can express this belief in the article nominating the guardian. However, the client should express the reasons for this belief in a separate affidavit. If the reasons are expressed in the will itself, this may expose the estate to a lawsuit over potentially libelous statements. The accompanying sidebar contains sample will language that may be useful in an appropriate case.

Other document modifications

In addition to executing a new will, at the time of divorce the client may have regained the ability to change beneficiary designations on the nontestamentary instruments of transfer. ¹² Typically, there will be several instruments in which the former spouse was the named primary beneficiary. The client must obtain and execute change of beneficiary designation forms for life insurance policies, annuities, trusts, employment death benefits, ¹³ IRA, Keogh, and other retirement accounts.

The client also may have regained the ability to modify documents indicating the manner of holding assets that were held jointly during the marriage. The client should obtain new deeds, titles, or registration for jointly held assets that the divorce judgment has assigned to the client (for example, real estate, vehicles, stocks and bonds, and joint bank and brokerage accounts).

Beyond the will and documents providing for nontestamentary transfers, the attorney also should urge the client to execute a durable power of attorney for managing financial affairs, effective either immediately or upon the client's incapacity, and a health care power of attorney, effective upon activation by two examining physicians after incapacity occurs. The use of powers of attorney should not be limited to the elderly, since accidents can incapacitate individuals of any age. An unmarried adult with multiple financial responsibilities is in a much riskier position than a married adult for whom the spouse often can handle many financial matters. In the health care power of attorney, the client will name the person who should make the health-care decisions. This is especially important if the chosen agent is not a family member.

Estate tax consequences of divorce

In the large majority of divorce cases, estate tax consequences of divorce property division need not be considered. However, if a larger estate is involved, the disposition scheme must be reviewed from a death tax planning perspective. The larger the marital estate, the greater the potential importance of careful tax planning at the time of negotiating the final stipulation. If a federally taxable estate is involved, significant opportunities may exist for minimizing taxes, along with some pitfalls.

Although interspousal transfers of property pursuant to divorce incur no income tax consequences, there are potential estate tax consequences that divorce attorneys may neglect to consider. Transfer of life insurance policy ownership is one example of a nontestamentary transfer with a potential estate tax problem. If the transferor insured should die within three years of the transfer, all life insurance proceeds on transferred policies will be included in the transferor's gross estate. Likewise, if the marital estate was substantial, the parties may have relied upon the use of a marital deduction trust in their wills to minimize or avoid federal estate taxation at the first spouse's death. This option will no longer be available upon divorce.

If the parties are grantors of funded or unfunded revocable or irrevocable trusts, the trust instruments must be reviewed and revised as appropriate. If irrevocable, the funding method can be changed to avoid the terms of the trust.

In dealing with larger estates, the divorce attorney must either maintain an up-to-date knowledge of estate tax planning or involve estate planning cocounsel in reviewing a proposed property division.

Conclusion

Estate planning is both an appropriate and a necessary part of closing the divorce client's file. The planning should occur during negotiations and be completed before the final hearing to ensure that the client will actually execute a new will, make appropriate changes of beneficiary designation for certain nontestamentary transfers, retitle jointly held assets, and sign a durable power of attorney for finances and a health care power of attorney. While the new probate code provides protection against inadvertent transfers on death to the former spouse and his or her family members, the attorney should impress upon the client the need for taking the next steps to update the estate plan, even if the only assets of value are life insurance and retirement accounts.

Endnotes

¹ For an excellent summary of the new probate code, 1997 Wis. Act 188, which is based upon the Uniform Probate Code, see H. Erlanger, Wisconsin's New Probate Code, 71 Wis. Law. 6 (Oct. 1998). Section 233 of the Act provides that it first applies to deaths occurring on Jan. 1, 1999, except with respect to irrevocable governing instruments executed before that date.

² Wis. Stat. § 861.33(1)(b).

³See Socha v. Socha, 204 Wis. 2d 474, 555 N.W.2d 152 (Ct. App. 1996); see also Pettygrove by Scholl v. Pettygrove, 132 Wis. 2d 456, 393 N.W.2d 116 (Ct. App. 1986).

⁴ Wis. Stat. §§ 854.15(3)(a), (b). Pursuant to Wis. Stat. section 854.15(1)(d), relatives of the decedent's former spouse are individuals who are related to the former spouse by blood, adoption, or marriage and who, after the divorce, annulment, or similar event, are not related to the decedent by blood, adoption, or marriage.

⁵ Wis. Stat. section 854.01 defines "governing instrument" as any of the following: will; deed; trust instrument; insurance or annuity policy; contract; pension, profit-sharing, retirement, or similar benefit plan; marital property agreement under section 766.58(3)(f); beneficiary designation under section 40.02(8)(a); instrument under chapter 705; instrument creating or exercising a power of appointment or any other dispositive, appointive, or nominative instrument that transfers property at death.

⁶ Wis. Stat. § 854.15(3)(c).

⁷ Wis. Stat. § 854.15(3)(a).

⁸ Wis. Stat. § 854.15(3)(e).

⁹ The term "Washington Will" provision refers to a marital property agreement provision, authorized by Wis. Stat. section 766.58(3)(f), that upon the death of either spouse, any of either or both spouses' property is to pass without probate by nontestamentary disposition to a designated person, trust or other entity. A petition and certificate procedure is used to confirm the transfer. See Wis. Stat. § 867.046. Washington State permits a similar procedure.

¹⁰ Wis. Stat. § 767.266(1). Under prior law, "Washington Will" provisions were revoked by a divorce judgment, unless the judgment specifically provided otherwise.

¹¹ Wis. Stat. § 854.15(3)(d).

¹² In some cases the final stipulation and judgment may restrict the client's freedom somewhat, requiring the client to set up a family trust and to name a trustee for the minor children, or to name the former spouse as beneficiary on a particular life insurance policy.

¹³ Surviorship provisions in a qualified domestic relations order must be reviewed before trial.

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