A Careful Separation
A Careful Separation
Published on: Mar 4, 2016
Transcripts - A Careful Separation
A CAREFUL SEPARATION
Certain estate-planning strategies can make the road to divorce
less stressful for everyone involved. BY JUDITH L. POLLER
into or there is a divorce judgment.
2. Once a divorce action is com-
menced, most states prohibit a spouse
from shedding assets, including tax-de-
ferred funds, stocks or assets in retirement
accounts such as 401(k)s. Most states also
forbid changes in life insurance beneficia-
ries, and some prohibit revisions in a will
once a divorce action has begun.
spouses. When one spouse dies, these assets
automatically pass to the survivor. For
he road to divorce can
be daunting. There is emo-
tional turmoil. There is
extra anxiety if children are
involved. And the financial
unknowns can be overwhelming. But some
element of control can be maintained if
there is foresight and planning.
Some of that planning means tak-
ing precautionary steps before a divorce
action starts. Couples can open sepa-
rate bank accounts. They can maintain
separate credit cards. They can gather
financial documents, catalog their tangi-
ble personal property and set up separate
e-mail and post office addresses that allow
them to correspond with their counsel
and receive financial documents.
Divorcing couples often forget, howev-
er, to review and revise their estate plan-
ning documents. And the plans people
create when they are married are usually
not appropriate when they are parting
ways, for obvious reasons. For instance,
a plan might still require an individual’s
entire estate to be passed to his or her
(divorced) spouse upon death.
Those plans should not change with
a divorce filing. They should be changed
before. And it’s not just the will (or
testamentary substitute) that should be
reviewed. It’s all the beneficiary designa-
tions on a person’s retirement plans, life
insurance and other assets, along with
the form of title on all assets. All these
should be reviewed before somebody
goes down the divorce path.
As advisors assist their clients with
a divorce, they should be aware of
some key facts:
1. Most states say a person is entitled
to a share in his or her deceased spouse’s
estate—often referred to as the “elective
share.” It typically amounts to about one-
third of the decedent’s estate. Unless the
spouse waives the right, he or she retains
the right to the spouse’s share until a sep-
aration or settlement agreement is entered
WEALTH MANAGEMENT ESTATE PLANNING
NOVEMBER / DECEMBER 2014 | PRIVATE WEALTH MAGAZINE | 43
assets in his own name. Short of taking full
ownership of an account, he could have
withdrawn a certain amount and created
an account in his name. Both spouses
would have had a certain amount of money
in each of their names to take advantage of
the estate tax exemption amount.
3. If Steven had revised his will and
created trusts for his children, he could
have then made the trusts, not his wife, the
beneficiaries of his IRA.
4. Steven could have transferred the life
insurance policy to a trust, naming his chil-
dren as beneficiaries. The creation of the
life insurance trust is a good estate-plan-
ning tool, regardless, because it keeps the
asset out of the estate tax system. If he was
not inclined to create a trust, he could have
designated the trust under his will for the
benefit of his children as the beneficiary of
the life insurance proceeds.
5. Steven could have changed his will to
either exclude Susan, forcing her to “elect”
against his will, or provide that she merely
receive her “elective share” of his assets.
Since the couple jointly owned most of their
assets, the passage of joint assets to Susan
automatically would be factored into the
calculation of the elective share amount.
6. Steven could have created custodial
accounts or trusts for the children and con-
tributed the annual exclusion amount (cur-
rently $14,000). The exclusion would have
had the added benefit of taking money out
of the marital pot used for the divorce settle-
ment. Steven could have gifted a larger sum
to a trust for the benefit of the children using
his lifetime exemption amount (currently $5
million), but he would have to have done
that well before the divorce filing to avoid
any claim of a fraudulent conveyance.
Once the divorce process began, Steven
could do none of these things. Before he
died, he had been a successful businessman
who managed to make good investments
throughout his marriage. Had he applied
some thoughtful planning to his divorce, he
would have ensured that his finances were
passed on and managed in a way that he
would have wanted.
example, it is common for residences to
be owned as a “tenancy by the entirety” (a
term specific to spouses) or jointly with rights
of survivorship. Financial accounts are often
held jointly with rights of survivorship as
well. While these arrangements may make
sense if your marriage is intact, they may not
if you’re divorcing. But until the assets are
disposed of as part of the divorce process,
the assets remain jointly owned.
4. In addition to a will, many people
have a health-care proxy that names one
spouse as the agent in situations where the
other can’t make medical decisions for him-
self. A durable power of attorney is another
common document that gives someone the
authority to deal with finances in the event
of his or her spouse’s medical problem or
absence. Again, it is typical to name the
healthy spouse as the “financial” agent.
5. Wills or testamentary substitutes
leave assets to spouses or create trusts
for the spouses’ benefit. People who die
intestate (without a will) have their assets
pass entirely to their spouses if there are no
children. If there are children, the estate is
split in half between the children and the
spouse. This is certainly not the result one
would want during a divorce.
6. Under federal law, you can bequeath
an IRA to anyone, but spouses are entitled
to inherit non-IRA retirement benefits
such as 401(k)s and other pension plans
unless they waive their rights in writing.
Steven, an investment banker, decided
Susan had grown apart, and while he cared
for her, he did not want to grow old with her.
They have two children—ages 16 and 18.
Steven filed for divorce, evoking a bitter
response from his wife. Susan disparaged
him to their friends and children. She
increased her spending and decided that
she was going to drag out the legal process
so that Steven would have to continue to
support her. She also believed that Steven
was involved with another woman. She was
determined to not leave the marriage easily.
The environment grew so hostile that
the children moved in with Steven because
they couldn’t tolerate their mother’s rage.
The couple jointly owned a primary
residence, a vacation home and various
brokerage and financial accounts. Other
than a small checking account, Steven had
no account solely in his name. He also had
several retirement assets that named Susan
as the beneficiary, including a 401(k) and
an IRA worth several million dollars. He
had a life insurance policy with a $2 million
death benefit payable to Susan.
During the divorce proceeding, he suf-
fered a heart attack and died.
Susan, who went from being a divorcee
to a widow, inherited all of her husband’s
assets. Steven lost the ability to provide sep-
arately for his children and to have control
over how the money would be managed.
This was not what he wanted or intended.
Moreover, had he done careful estate plan-
ning before commencing a divorce action,
the result would have been very different.
No one wants to contemplate the idea
he or she could die, but it can always hap-
pen. Before filing for divorce, Steven should
have reviewed all of his assets. He should
have gathered beneficiary designations and
been clear about how each asset was titled.
And he should have revised his will. Here
is how his results could have been different:
1. The house would have remained
2. The financial accounts could have
been separated so that Steven had separate
44 | PRIVATE WEALTH MAGAZINE | NOVEMBER / DECEMBER 2014 WWW.PW-MAG.COM
WEALTH MANAGEMENT ESTATE PLANNING
JUDITH L. POLLER is a partner and co-chair of the
family law group at Pryor Cashman LLP.
Spouses are entitled to inherit non-IRA
retirement benefits such as 401(k)s and
other pension plans unless they waive
their rights in writing.