Many people employ wills and trusts as part of their estate plan. Unfortunately, the statistics on divorce also ensure that many people who have established estate plans will also be involved in a divorce at some point in their lives – either their own divorce or their child’s.
What happens to the rights of persons named in an estate plan when a divorce occurs?
This area of the law is evolving – there are some traps of which to be wary.
A Simple Estate Plan
Let’s say you set up a very simple plan consisting of a will naming your spouse as executor and primary beneficiary. Under prior Vermont law, if you divorced, your ex-spouse would remain a beneficiary (and executor) of your estate unless and until you revised or revoked your will. Given that most divorcees do not intend their ex-spouse to benefit from their deaths, this law resulted in unintended and inequitable results (most states have a rule to the contrary).
The Vermont Legislature eventually came to the rescue in 2009 by passing a statute that provides: “[a] final divorce . . . shall nullify a gift by will to an individual who was the decedent's spouse at the time the will was executed and any nomination of the spouse as executor, executrix, trustee, guardian, or other fiduciary as named in the will . . .” This means that, unless your will expressly permits an ex-spouse to inherit, any gift to that ex-spouse is nullified.
So far, so good. But, as will be seen, the problem with this statute is that it did not go far enough . . .
A Typical Estate Plan Involving Revocable (Living) Trusts
Many estate plans employ the use of revocable trusts (also known as “living trusts”). There are many reasons for using such trusts -- including the protection of minor children, probate avoidance, children with special needs, tax planning, etc. (for more on this topic, visit the Living (Revocable) Trusts page here). For married persons, the spouse is normally named as the primary beneficiary and as a trustee.
Vermont law does not provide for the nullification of the rights of an ex-spouse named in trust agreement. If you get divorced and die prior to revising your trust agreement, your ex-spouse will retain the same rights under the trust as if you were still married (!). This is not the law in all states and, in fact, the Uniform Probate Code (not adopted by Vermont) contains provisions which address the effect of divorce on revocable documents (such as a living trust). Vermont has yet to modernize its statutes.
The best solution is, obviously, to revise your estate plan at the same time you are divorcing. As a back-up, and a short term (imperfect) alternative, your divorce decree (and any underlying settlement agreement) should expressly nullify your spouse’s rights under current estate planning documents. In any event, you should see to the revision of your plan as soon as possible after your divorce (if not during).
A Parent’s Estate Plan
What if you are divorcing and you are a beneficiary of one or both of your parent’s estate plans (or your child is getting divorced)? Prior to 2013, the expectancy of an inheritance was allowed to be considered when dividing marital assets in a divorce. This was true even where the expectancy was the product of a revocable estate plan.
In 2013 this rule was changed. Currently a family court: (1) “may consider the parties' lifestyle and decisions made during the marriage and any other competent evidence as related to their expectations of gifts or an inheritance,” and (2) “shall not speculate as to the value of an inheritance or make a finding as to its value unless there is competent evidence of such value.” More important: “an inheritance that has not yet vested and is capable of modification or divestment shall not be included in the marital estate.” As a result, if you are divorcing and your parent(s) have created a revocable trust or other similar type of estate planning vehicle, the benefits you might receive under that plan are not counted as part of the marital estate. Your parents would not need to revise their plan – likewise if you created this type of plan for a child who is divorcing.
But what about irrevocable trusts?
The law in Vermont is clear – irrevocable trusts can create an interest that is not subject to “modification or divestment” and therefore the benefits of such a trust can be considered when determining an equitable property division in a divorce.
This is one reason why irrevocable trusts should be used judiciously and cautiously. Once created and funded, they cannot be changed. They can create a permanent “expectancy” in a trust beneficiary that can affect the way in which that beneficiary’s marital assets are divided in a divorce.
Future Planning
If you, or a child, are divorcing, the estate plans that are in place should be reviewed and modified to ensure that, post-divorce, those plans will mirror the intent of the plan’s creator. You should use an irrevocable trust as part of your plan only when the benefits of such a trust outweigh its inflexible nature. If the divorce of a beneficiary is a possibility during the trust’s term, consider language that permits the trustee to alter the trust’s terms to minimize the divorce’s effect.