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 Estate planning lawyers pride themselves on the
long-standing ties they maintain with their clients. Often they
represent both spouses, becoming counselors for families regarding
decisions that range far beyond the routine of tax planning and
disposing of wealth on death.
Families, however, are fragile. Statistically,
half of all marriages now end in divorce. When the estate planner's
clients begin divorce proceedings, the estate planning attorney may
experience a severing of the professional ties that bound him or her
to the family. Questions of conflict of interest arise. This article
deals with what the estate planning attorney should do on learning of
a pending divorce involving his or her client or clients.
Avoiding conflicts of interest
If you are an estate planning attorney with a
divorcing client, your future role depends on whether you have
previously represented one spouse or both. If you have represented
only one spouse you are of course free to continue to assist the
client during the divorce. The lawyer who has previously represented
both spouses in their estate planning, however, may well have to
recuse him or herself from advising or representing either spouse as
to estate planning issues once the divorce proceeding has started
because of the conflicts involved.
When the estate planning attorney has represented
both spouses, the attorney-client relationship runs to both. The
attorney owes professional duties under the Rules of Profession-al
Conduct to avoid (a) representing parties with conflicting interests
and (b) accepting employment adverse to a client. Rules of
Professional Conduct §§3-300; 3-310.
If an estate planning client files for divorce
and asks you for advice, any advice given is likely to have an adverse
impact on the other spouse, who is also a client. For that reason, the
spouse should be advised in that while you are sympathetic with the
client's situation and would like to help, you must refrain because
of the conflict of interests.
Clients often misunderstand this and may feel
abandoned. You may explain that you do not want to do anything adverse
to the other spouse, just as the client with whom you are speaking
would not want you to represent her spouse in a way that might have an
adverse impact on her.
It may be possible to represent one of the former
clients during the divorce, but only if the other party consents in
writing to the representation and waives (a) any harm that might arise
out of the use of information gained while the attorney was
representing both spouses, (b) any conflict of interest that might
follow, and (c) the rule prohibiting representation adverse to a
client or former client.
To be effective, the written waiver must clearly
warn of all possible consequences that might follow from representing
the other spouse. To effectively waive a legal right, the waiver must
fully disclose that the waiving party understands and knowingly waives
the right. Drafting a letter that raises all possible consequences is
extremely difficult. In most cases, it is preferable to refer both
clients to other counsel.
Death issues
For the client, unless there are unusual
circumstances of age or health, either spouse's death while the case
is pending may seem a remote contingency indeed. Nevertheless, because
death is an ever-present possibility, the estate planning lawyer must
consider the possibility of both the client's and the other
party's death in every divorce proceeding. This section outlines
several estate planning issues that arise on divorce which for brevity
are referred to as the "death issues:"
 Terminating joint tenancies and
IRA beneficiary designations.
The need for a new will while
divorce is pending.
Revocation
of living trusts and retransfer of the property to the parties.
Life
insurance and estate taxes.
Joint tenancies: To sever or not?
Early in the divorce proceedings the estate
planning lawyer should identify any assets held in joint tenancy and
discuss with the client (a) the effect of the right of survivorship,
i.e., that the entire asset passes to the other spouse on death, (b)
the likelihood of the death of either party prior to the conclusion of
the case, and (c) whether the joint tenancies should be severed. The
client should not be routinely advised to sever joint tenancies in
every case. If your client is age 25 and in good health and the other
spouse is 85 and in poor health, the client may well decide to take
his or her chances in the joint tenancy lottery.
It is important that the issue be discussed with
the client, the client participate in an informed decision, and the
decision be confirmed in writing. If the facts change, the decision
can be reconsidered. The client's decision and the reason for it
should be documented to protect against later claims by disappointed
heirs should an untimely death occur.
The need for a new will
Often a divorcing client will tell the lawyer,
"As soon as this case is over, I want you to do a new will for
me." The client should be advised that the time to prepare the new
will is now, and that waiting until the divorce proceeding is over
could cause the wrong result.
While a judgment dissolving the marriage revokes
an existing will as to the former spouse's rights, separating or
filing a divorce petition does not. Probate Code §6122.
During the divorce, the parties remain married
and have all the benefits provided to a spouse by law in the event of
death. Probate Code §78.
Usually a married person's will provides that
virtually all the assets pass to the surviving spouse. If there is no
will, the decedent's share of the community property passes to the
surviving spouse, and part or all of the decedent's separate
property passes to the surviving spouse, depending on whether there
are surviving issue. Probate Code §6401.
In most cases the existing estate plan, whether
produced by will, trust or intestacy, is no longer suitable.
Typically, if there are children, the client will want his or her
share of the estate to pass to the children on death.
If there are young children and the net value of
the client's share of the estate is of sufficient value, the client
may want to hold the assets in trust for the children until they have
reached an appropriate age for distribution, with the assets available
to pay for the children's support, medical expenses, education and
other needs.
Again, the need for a new will should be
addressed early and in writing, and the client's decision should be
documented. No single solution is correct for every situation. The
important point is that the issues be discussed and the client helped
to make an informed decision.
If a living trust is created, it cannot be funded
without the other party's permission or the court's approval until
the divorce judgment is entered because to do so would violate the
automatic family law restraining orders.
If property is held in a living trust
If the parties hold their assets in a revocable
trust, the client should be advised to revoke the trust and transfer
title to the assets back to the parties' names. If title remains in
the trust until the end of the dissolution proceeding, the judgment
will not affect record title to the trust property, and that can cause
title problems, confusion, delay and unnecessary expense in dividing
the assets at the end of the case.
Second, if the client should die during the
divorce, the trust will probably leave virtually all of the assets,
both separate and community, to the surviving spouse, a result which
almost certainly will be viewed with hostility by the client's
children, who may direct their anger at the attorney who allowed it to
happen.
To revoke the trust, a document of revocation
must be signed by the settlor, acknowledged by a notary public, and
delivered to the trustees. Probate Code §15401(a)(2)
Following revocation, the trust property should
be retransferred to the parties. Probate Code §15410(a). This
requires deeds or other instruments to be executed by the trustees,
transferring the assets back to the spouses.
Retirement account death benefits
Typically, a married retirement plan participant
designates his or her spouse as the sole primary beneficiary of the
plan proceeds in case of the participant's death.
If the plan proceeds are community property, this
may produce an inappropriate result if the participant should die
before the divorce judgment is entered.
Whether retirement plan beneficiary designations
may be revoked before the divorce is final depends on whether the
account is a qualified plan covered by ERISA or an individual
retirement account (IRA).
Qualified retirement plans, such as profit
sharing and 401(k) plans, are governed by ERISA, the federal statute
which overrides California community property law.
The participant will be prohibited by federal law
and the rules of the retirement plan from removing the participant's
spouse as the beneficiary of the death benefits until either the
marriage has been terminated and the plan has been awarded to the
participant, or until a qualified domestic relations order (QDRO) has
been entered by the court and approved by the plan administrator. 29
U.S.C.§1055.
If warranted by the character of the plan as
separate or community property, the age and health of the parties, and
the value of the plan interest in relation to other property, it may
be necessary to obtain the consent of the nonparticipant spouse to a
change of beneficiary pending the final resolution of the case or, if
such consent cannot be obtained, to move the court for a QDRO
regarding the beneficiary designation on death before the final
resolution of the case in order to protect the interests of the
participant spouse.
If the plan is an IRA, the beneficiary
designation may be revoked by the participant, which will subject the
proceeds to probate administration in the participant's estate. The
participant must be advised not to designate a new beneficiary,
however, because to do so would violate the automatic restraining
orders against transferring property.
Life insurance and estate taxes
THE PROBLEM: A divorce settlement may
require one party to maintain a life insurance for the benefit of the
other party or the children.
If the client continues to own the policy and
designates the spouse and children as beneficiaries as mandated, on
the decedent's death: (1) the former spouse or children will
receive the policy proceeds, (2) the decedent's
executor must include the policy proceeds in the decedent's taxable
estate on the estate tax
return, (3) the decedent's estate must pay the
tax, at rates of up to 55 percent, and (4) the executor must try to
collect a pro rata share of the estate tax from the recipient of the
proceeds.
If the recipient is in another jurisdiction, has
other creditors, dissipates the money or invests it in a way that
renders it immune from creditors such as in a residence covered by the
homestead exemption, the executor may face a lengthy and expensive
civil action, possibly in another state or even offshore, and confront
bankruptcy or debtor's rights obstacles to recovering the taxes the
estate has paid.
In addition, if the will requires the executor to
pay death taxes out of the residue without proration, the executor may
have no claim at all for recovery of the estate tax from the former
spouse or children, leaving the policy proceeds in the hands of the
former spouse or children, with the full tax burden falling on the
decedent's estate.
A SOLUTION: If your client is required to
maintain life insurance for the benefit of a former spouse or
children, consider having the client irrevocably assign to the spouse
or children all incidents of ownership of the policy, including the
right to designate the beneficiaries, cancel or surrender the policy
and borrow against the policy.
Since normally the judgment will not permit the
insured party to do these things anyway, nothing is lost by the
assignment. The policy proceeds will now flow entirely estate-tax
free, and the beneficiaries will receive the full value of the policy
without payment of federal estate tax on the decedent's death.
This way, both the tax itself and the problem of
recovering it from the beneficiaries may be eliminated.
In conclusion, the estate planning lawyer should
consider the death issues at each stage of the client's divorce
proceeding, and the possible consequences should be reviewed and
discussed with the client and his or her family lawyer. The client
should participate in the decisions and the decisions should be
documented.
In a particular case, because of the age and
health of the parties, the size of the estate, the nature of the
assets, the relative incomes of the parties and the likelihood that
the underlying family law case will be resolved quickly, the client
may choose to ignore the risk of the other party's untimely death.
On the other hand, where the other spouse is old
or ill, or there are substantial assets, potential claims by
creditors, assets not subject to the jurisdiction of the probate court
at death, or where the family law litigation is likely to be
protracted, the death issues may well assume primary importance and
care should be taken to raise the issues with the client, and if
necessary, the other party or the court. The best result is always
reached through an informed decision by the client.
Practical do's and don'ts
DON'T get
caught in dual representation or conflicts of interest after the
divorce begins.
DO advise
the client to address estate planning issues at the beginning of the
dissolution process.
DO discuss
severing joint tenancies with the client.
DO document
in writing all decisions regarding severance of joint tenancies and
other estate planning issues.
DO find out
at the first meeting if family assets are held in a living trust.
DO discuss
with the client the need to revoke an existing living trust.
DO advise
the client to have a new interim will prepared now, rather than when
the case is concluded.
DO consider
revoking IRA beneficiaries early.
Christopher
Moore, a certified specialist in family and estate planning, trust and
probate law, practices in Torrance. He is a fellow of the American
Academy of Matrimonial Lawyers and the American College of Trust and
Estate Counsel and a member of the State Bar Estate Planning, Trust
& Probate Law Section executive committee. |
