California Bar Journal
OFFICIAL PUBLICATION OF THE STATE BAR OF CALIFORNIA - MAY 2001
spacer.gif (810 bytes)

SELF-ASSESSMENT TEST

spacer.gif (810 bytes)

Read this article and take the accompanying test to earn one hour of MCLE credit.
Follow instructions on test form

This month’s article and test provided by the State Bar's
Estate Planning, Trust & Probate Law Section
West Group

spacer.gif (810 bytes)

MCLE SELF-STUDY

spacer.gif (810 bytes)

Your Client is Getting a Divorce

Estate planning lawyers may face unfamiliar family law issues when their clients go their separate ways   

spacer.gif (810 bytes)
By CHRISTOPHER M. MOORE
spacer.gif (810 bytes)

Christopher M. MooreEstate 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.