Brown & Associates - Attorneys & Counselors at Law, P.L.L.C.

ESTATE PLANNING AFTER DIVORCE--MORE IMPORTANT THAN EVER
(12/01/02)

For years we have been advising our clients that a divorce decree doesn't solve all their problems. This is true in all areas of the law. There is always additional paperwork which needs to be completed, whether it's you transferring the deed to the family home, getting your name off credit cards and accounts for which you are no longer liable, notifying the Social Security Administration of your change of name, or any of a myriad of other details that need to be resolved.

U.S. Supreme Court Adds Estate Planning To The List

Last year, the United States Supreme Court decided a case which could have severe repercussions for those who fail to revise their estate plans after they are divorced. In the case of Egelhof v. Egelhof, ex. rel. Breiner, the Supreme Court delved into a very sensitive issue--what happens if you're divorced and die without a Will?

The husband in this case died a few months after his divorce became final. He was a participant in a qualified employee benefit and insurance plan and had designated his former wife as his beneficiary. The plan in question was governed by the Employee Retirement Income Security Act ("ERISA") and at the time of his death, the husband was a resident of the State of Washington. Washington state law says if you divorce and then die without changing your estate planning documents, all beneficiary designations in your will, trust, insurance policy, investment account, payable-on-death accounts, employment benefit plans, and the like, are invalid and your former spouse will be treated as having predeceased you. The broad language of the statute was intended to encompass all probate and non-probate assets and to treat the ex-spouse as if he or she had died on the day the divorce was granted.

The question before the Supreme Court was whether the Washington statute should be applied to the ERISA plan so that the proceeds, instead of passing to the decedent's ex-wife, would be distributed to his children from his first marriage.

ERISA Trumps State Law

As a general rule, ERISA rules regarding distributions from ERISA plans will preempt state laws. Over the years, however, many courts had held that state laws, especially those regarding probate and family law matters, will take precedence over the ERISA rules. The United States Supreme Court was asked to bring order to these different decisions from different courts.

In Egelhof, the Supreme Court was not swayed by the weight of prior rulings favoring State supremacy and held that ERISA preempted state law. In doing so, it ruled that the employee benefit plan and insurance proceeds were to be paid to Egelhof's former wife, not to his children.

The Lesson To Be Learned

The Supreme Court has taught us a very important lesson. If you are divorced or in the process of dissolving your marriage, you need to redo your Will or Trust and redo the beneficiary designations on your insurance policies, investment accounts, bank accounts, annuities, and so forth. If you presently own your property in joint tenancy with your soon-to-be former spouse, be sure to get a quit claim deed contemporaneous with the granting of the final decree of divorce. If you don't, you may find it extremely difficult to get any cooperation afterwards. This holds true for automobiles, vacation homes, farms, businesses and anything else which you hold in joint ownership with him or her.

The decision in the Egelhof case is limited to ERISA plans, so it may not affect other non-probate assets, such as IRAs and bank accounts. The problem is that we don't know what the Supreme Court will do the next time around.

The court's ruling was not unanimous. Justice Breyer dissented vigorously, arguing the benefit of being able to rely on state law to resolve ambiguities in the administration and distribution of such ERISA plans. He asked rhetorically, "Why would Congress want the courts to create an ERISA-related federal property law to deal with such problems?"

The simple answer is to avoid the problem in the first place. Make sure you update all your beneficiary designations on a regular basis. Even if you aren't contemplating divorce, it never hurts to review your financial affairs at least annually. I remember an initial interview with a new client in which the importance of such annual reviews was driven home to me. The client wasn't sure whether his home and farms were owned by him, his spouse, or both of them jointly. He also had little if any idea who was named as beneficiary of his various insurance policies and investment accounts.

If you can't answer these questions either, you might want to prepare a net worth summary and list all your assets, the approximate value of each, how and by whom the asset is owned, and who (if anyone) has been named as beneficiary.

There May Still Be A Way Out

Even in a situation such as the Egelhofs where the husband has died without changing beneficiary designations, all may not be lost. Instead of contesting the former wife's right to receive the proceeds from the ERISA plan, you might concede she is entitled to the money as the named beneficiary, but file suit to impose a constructive trust on the proceeds. What you are doing is arguing that the former spouse should receive the money, but that she can only use it for the benefit of the decedent's children. There's no guarantee this approach will work, but at least it's another arrow in your quiver and might put you in a better bargaining position to try to reach a settlement with the ex-wife.

Conclusion

The purpose of this article is to point out the relationship between family law and estate planning. If you get married, divorced, or welcome a new child to the family, consider the ramifications on your estate plan. If you aren't sure what needs to be done to protect your beneficiaries, confer with an estate planner who can advise you how to proceed.

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