What is the impact of divorce on estate planning?
New York has a “revocation on death” statute (New York Estates Powers & Trusts Law §5-1.4 ) which states that except as provided by the express terms of a governing instrument, (for example, a Last Will and Testament, Trust, Durable Power of Attorney, Health Care Proxy, Security Registration, or Beneficiary Designation), a divorce, judicial separation, or annulment of a marriage revokes any revocable “disposition or appointment of property made by a divorced individual to, or for the benefit of, the former spouse.”
This includes, but is not limited to, a “disposition or appointment by will, by security registration in beneficiary form (TOD-Transfer on Death), by beneficiary designation in a life insurance policy or (to the extent permitted by law) in a pension or retirement benefits plan, or by revocable trust, including a bank account in trust form, provision conferring a power of appointment or power of disposition on the former spouse, and nomination of the former spouse to serve in any fiduciary or representative capacity, including as a personal representative, executor, trustee, conservator, guardian, agent, or attorney-in-fact.”
“Revocation on Death” Statute
The statute provides that the provisions of the governing instrument are given effect as if the former spouse had predeceased the divorced individual as of the time of the revocation. Furthermore, the statute severs the interests of the divorced individual and the former spouse in property held by them at the time of the divorce, judicial separation, or annulment as joint tenants with the right of survivorship, transforming their interests into interests as tenants in common. This provision does not modify New York case law which holds that a divorce converts tenancy by the entirety to tenants in common.
What Does All of This Mean?
Your estate plan and beneficiary designations must be reviewed and updated upon a divorce, judicial separation, or annulment. You cannot rely solely on the provisions of New York’s “revocation on death” statute to revise your estate plan. Doing so could lead to unintended and unwanted results.
Here are several reasons why it is crucial to revisit your estate plan and beneficiary designations upon a divorce, judicial separation, or annulment:
- There may be language in the governing instrument which saves the disposition to the former spouse.
- Your estate may be designated as the default beneficiary as a result of the automatic revocation. This could result in adverse income tax consequences for tax-deferred retirement assets.
- Without beneficiary designations, assets intended to pass by operation of law will not avoid probate.
- It is especially important for the divorced individual to review the beneficiary designations on retirement accounts post-divorce. With regard to retirement plans governed by the federal Employee Retirement Income Security Act of 1974 (“ERISA”), including most defined contribution and defined benefit plans such as 401(k) plans, ERISA preempts a “revocation on death” statute. Such a preemption is significant because the former spouse will not be automatically revoked as the beneficiary.
- Construction proceedings for the governing instruments may be necessary in order to address beneficiary and fiduciary appointment issues resulting from the automatic revocations.
- Although dispositions to the former spouse and fiduciary nominations of the former spouse are automatically revoked (and therefore, the former spouse is considered to have predeceased the divorced individual), this revocation does not extend to the relatives of the former spouse. For example, the Last Will and Testament, Trust, or beneficiary designations of the divorced individual may provide for the children or siblings of the former spouse, or their nominations as fiduciaries.
- There may be some circumstances where the former spouse is still intended to remain as the beneficiary of a life insurance policy (for example, pursuant to a court decision or settlement agreement) and, in such cases, the automatic application of a revocation on death statute must be addressed. The automatic revocation can be overridden by completing a new or updated beneficiary designation, post-divorce, to name the former spouse as the beneficiary.
- A court decision or settlement agreement may contain a provision requiring the divorced individual’s estate plan to provide for the former spouse in some way (for example, it is not uncommon for the former spouse to receive a lump sum payment upon the passing of the divorced individual to account for the loss of maintenance or other support). If the divorced individual’s estate plan is not updated to reflect such a payment, the court decision or settlement agreement will have been violated and the divorced individual’s estate may be subject to litigation by the former spouse.
Important to Note
It is important to note that New York’s “revocation on death” statute only applies upon a divorce, judicial separation, or annulment of a marriage. Therefore, if a spouse, the “soon to be” divorced individual, dies during the pendency of the divorce, judicial separation, or annulment, the provisions of the estate planning documents providing for the “soon to be” former spouse or appointing the “soon to be” former spouse as fiduciary will still be effective. Also, as a surviving spouse, the “soon to be” former spouse, retains the statutory Right of Election to claim the elective share, as well as the right to inherit via intestacy in the event there is no Last Will and Testament.
For the foregoing reasons, it is imperative that you revisit your estate plan after a divorce, judicial separation, or annulment not only to update your wishes and ensure that you estate plan meets with your testamentary desires, but also to implement an estate plan that is in compliance with the terms and provisions of your court decision or settlement agreement. Russo Law Group, P.C., has knowledgeable attorneys who can provide professional services and advise you regarding your overall estate plan.
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