Estate Planning During a Pending Divorce
To protect the rights of each spouse during a dissolution or legal separation, and to preserve the financial status quo, Family Code § 2040 imposes Automatic Temporary Restraining Orders (known as ATROs) on both parties which come into effect the moment a Petition for Dissolution or Separation is filed with the court. The ATROs remain in effect until a final judgment is entered or until the Petition is dismissed. The ATROs appear on the back side of the Family Law Summons, where they are referred to as Standard Family Law Restraining Orders, therefore it is impossible to assert that “you didn’t know about them.” Does that mean that if divorce proceedings last for months, or sometimes years, a party is prevented from changing his or her estate plan?
After all, if a party dies during these proceedings, the spouse does remain the “surviving spouse” and as such, would be a beneficiary of the deceased.
If you should die before Entry of Judgment (during a pending divorce), the Family Law Court loses jurisdiction over all issues, except those already adjudicated. As such, your share of the community property and all of your separate property would pass as if the Petition for Dissolution had not been filed. Your assets would pass to the beneficiaries of your current estate plan, usually – to your spouse. If you do not have an estate plan, your estate would pass through probate, and your spouse would receive all of your community property assets and a certain share of your separate property. Any non-probate assets, such as retirement assets and life insurance plans, would pass to your designated beneficiaries (likely, to your spouse). And, this may not be the desired result.
This is why it is important to know what type of “estate planning” can be done during a pending divorce of separation. There are four types of estate planning actions that can be legally accomplished under the ATROs:
1. actions that are prohibited unless a court order is obtained;
2. actions that are prohibited unless a written consent of the other party is obtained;
3. actions that are prohibited unless a Notice is filed with the Court and given to the other party; and
4. Permissible actions without any restrictions.
Estate Planning which a spouse can unilaterally conduct without any restrictions:
- Create, modify or revoke a Will;
- Create, BUT NOT FUND, a new single settlor revocable or irrevocable trust;
- Execute and file a Disclaimer
Actions that a spouse can perform only with Notice to his or her Spouse. The notice must be filed in the Dissolution case and served on the other party before the change takes effect. As such, this needs to be carefully coordinated with the respective spouse’s Family Law Attorney to ensure proper timing, form and content of actions taken.
- Revoke a revocable Trust.
- Revoke a transfer to the beneficiary of a non-probate transfer, such as a primary individual retirement.
- Eliminate the right of survivorship for property such as joint tenancy or community property with right of survivorship.
Actions that a spouse can take only with the other spouse’s consent, or with a Court Order. Those types of actions need to only be contemplated with the guidance of a spouse’s Family Law Attorney, to ensure proper procedure is followed.
- Transfer, encumber, conceal or in any way dispose of any property, real or personal, whether community or separate.
- FUND a revocable or irrevocable trust.
Actions that can only be made by a court order include funding, creating or modifying a non-probate transfer if the other spouse does not consent.
What Happens to your Estate Plan when the Divorce is final?
A divorce revokes all beneficiary and fiduciary designations in a family trust with regard to each of the former spouses by operation of law. What this means is that where spouses had named each other as Trustees, beneficiaries, or Agents under Powers of Attorney for each other, such nominations are automatically nil and void after the divorce.
At a minimum, each spouse would be wise to execute a new Power of Attorney for Financial Management, and a new Health Care Directive. Of course, the Decree for Distribution redistributes the couple’s assets and determines what is his and what is hers. Following the divorce, each former spouse will need to address his and her own estate planning and protect his or her estate from probate by setting up an individual, separate property trust. Furthermore, to comply with the Marital Settlement Agreement and Divorce Decree signed by the Family Court Judge, assets from the family trust will need to be retitled into the individual trusts of the former spouses. Each former spouse would now be able to name his or her own beneficiaries to his or her own Separate Property Trust. It is important to inventory all the assets, and change the beneficiary designations to any Life Insurance Policies and IRA accounts as well.
What if the former spouses after the divorce still want to be each other’s fiduciaries?
Then, they may restate their family trust, reference their intent notwithstanding the divorce, and reaffirm the beneficiary and fiduciary designations expressly, referencing that this is their specific intent following the dissolution of marriage.