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How Divorce Affects Estate Planning – Part 2: Issues and Problems from a Divorce
Posted by Martin Heller Potempa & Sheppard, PLLC on August 26, 2021
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This is the second of a three-part topic – The Effect of a Divorce on an Estate Plan. In a previous blog, we discussed the difference between marital property in a divorce and joint property in an estate. Another question that often comes up is how a divorce affects a client’s estate plan. As in so many of these issues, much of it goes back to the four ways assets pass at death.
At the end of the divorce, part of the Marital Dissolution Agreement (“MDA”) sets out how the client’s and ex-spouse’s assets are to be divided between them. Because of the divorce, one of the four ways that assets pass, joint ownership with right of survivorship, is no longer an issue, as the assets are split with the client owning some assets and ex-spouse owning others. There are no longer any jointly owned assets.
How Does Divorce Affect a Client’s Will?
Under Tennessee law, when the client is divorced, the ex-spouse is no longer a beneficiary of the client’s will. The statute states that “a person who is divorced from the decedent or whose marriage to the decedent has been annulled is not a surviving spouse…” For the purposes of following the provisions of the will, this has the effect of deeming the client’s ex-spouse to have died before the client. As such, if the ex-spouse is considered to already be dead, then the ex-spouse will not be a beneficiary of the will, and cannot be appointed as the estate’s Personal Representative.
Therefore, if the client does not update his/her will before death to take out the ex-spouse, this law does the job. For this law to apply, the divorce must be final. A separation by the client and the future ex-spouse, or even a decree of separation, does not cause the ex-spouse to be taken out of the will. Any active non-final divorce still contains the spouse in the will.
How Does Divorce Affect Client’s Beneficiary Designated Assets?
The law described above only affects the provisions of a will. It does not apply to assets that pass by a beneficiary designation. Life insurance is usually the big problem. If the client does not change the beneficiary of the life insurance policy away from the ex-spouse, the ex-spouse will probably receive the money. This often causes costly litigation in court between the ex-spouse and the beneficiaries that otherwise would have received the life insurance money.
Retirement accounts, both IRA and 401K, are sometimes treated differently. There is some case law that suggests that a divorce does eliminate the spouse as a beneficiary. This argument is based on the interpretation of certain federal statutes that control retirement accounts. These statutes do not apply to life insurance.
What About Real Property?
It is not uncommon to have real property titling issues when someone dies after a divorce. Even though the MDA may award the client a certain piece of real estate, a new deed still needs to be executed and filed to formally take the spouse’s name off the property’s title. If no new deed is filed, the family will have some hoops to jump through to transfer the real property at the client’s death. They will have to go to court to have MDA enforced and a new deed filed in the name of the deceased client.
There is no concern about the ex-spouse getting the property as with the life insurance. This is an issue of the divorce process not being fully completed so that the client’s assets pass as desired. The client will have a similar problem during his/her lifetime if the property is being sold or refinanced. An extra process will need to occur to have the provision of the MDA granting the real property to the client enforced before he/she can do anything with the property.
Another note of caution, even though the law removes the ex-spouse from the will, it does not automatically remove the ex-spouse as a power of attorney for financial and health care decisions. And it does not remove the spouse from a trust.
Get Help Planning Your Estate Today
If you’ve been divorced, it’s important that you understand what implications it can have on your estate planning. At Martin Heller Potempa & Sheppard, PLLC, we can assist you with estate planning after a divorce so that you can ensure everything is taken care of. This will not only help you know that your wishes will be followed but also help prevent future problems with the estate for your loved ones.