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Vol. 72, No.
3, March 1999
 Previous Page
New Probate Code Affects Estate Planning
At Divorce
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.
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Barbara S. Hughes,
U.W. 1986, is a partner in the Madison law firm of Hill, Glowacki,
Jaeger, Reiley, Zimmer & Hughes. Her practice emphasis is
marital property, estate planning, probate and trust administration,
and elder law; until 1997, her caseload also included family
law. She is a past chair of the State Bar's Elder
Law Section and author of a chapter entitled "Special
Ethical Considerations" in Advising
Older Clients and Their Families, Vol. 1 (State Bar of Wisconsin
CLE Books). The author's family law partners, Thomas R. Glowacki
and Kathleen Reiley, contributed to this article. |
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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