Divorce Consequences in Estate Planning

One’s spouse is often the biggest factor in setting up one’s estate plan. Generally, most of these decisions are seen as “team” decisions by the family and, by and large, that can be a good thing. It’s not at all uncommon for someone to name their spouse as their primary beneficiary, the executor of their estate, the trustee of their trust, and so on. Often your spouse is your partner, your best friend, and the person you trust most to handle these issues. Unfortunately, not all marriages end happily ever after and while the divorce process is trying on its own, it also creates some estate planning consequences that everyone should be aware of.

During the Divorce is Treated the Same as if You are Happily Married

            For better or for worse isn’t just a marriage vow, Illinois’s trust and estates law feels very similarly about the importance of a marriage. The law often gives no consideration to your relationship with your spouse until after the ink is dry on your divorce certificate. Many people draft their estate plans when their marriage is strong but as time goes on the marriage becomes strained and they may not trust their spouse as much as they once did. As long as you’re married your spouse has all of the power over your will, trust, or powers of attorney that they had during happier days. It’s imperative that if you no longer trust your spouse you get your estate planning documents updated to reflect this immediately. It’s also worth noting that spouses are entitled to take an elective share of your estate regardless of whether your will is drafted to include them or not. If your spouse is disinherited from your will they have the option to renounce the will and take one-half of your estate (or one-third if you have children) pursuant to Illinois law. They also still have the power to act as trustee if they were trustee of your private trust. Perhaps more frightening, your spouse can remain your agent under a power of attorney for property or health care should something happen to you while estranged or during the actual divorce proceeding.

-Trust Property can be Marital Property

            With regards to trust drafting, the devil is in the details, a good estate planning lawyer will discuss with his or her clients the benefits and potential consequences of most trusts. If you are the creator of a revocable trust and your spouse is the beneficiary only, they often cannot receive the trust property as a beneficiary does not own the assets in a revocable trust, and there is little issue. However, as with the rest of their estate plans, most married couples like to do a “marital trust” where they are each the trust creators, co-trustees, and two beneficiaries of the marital trust, each depositing items in to the trust or retitling their assets in the name of the trust to keep their estate plan effective and up to date. While this is a common practice, one should be aware that this can transmute property in to marital property as it’s defined by the Illinois Marriage and Dissolution of Marriage Act. For example, if property titled in your name only from before the marriage is deeded into the trust created by both you and your spouse, it could be considered marital property during the divorce. If you fear that a separation is imminent you should draft a separate trust to keep your estate plan intact and avoid further comingling of assets. When the divorce is finalized, Illinois law states that any appointments or provisions pertaining to your spouse will be revoked as if he/she had died. This provision of the law only applies if the trust allows for you to revoke those provisions so making sure a qualified estate planning attorney drafted your trust is key.

Even If Not a Marital Trust Your Trust Income Can Affect Your Divorce

            As mentioned previously, if someone is only a beneficiary of a trust asset they don’t own the principle assets in the trust. This is true for people who receive income from a family trust or have a trust created for their benefit but that they have no control over. Illinois law considers property only yours to the extent that you can control it, so if you only receive X amount of dollars a month from your trust, that’s how much money you control from the trust each month. Your spouse likely would not be able to claim the trust property in a divorce, but can alternatively have your beneficial interest payouts redirected to pay spousal or child support if the court orders it and can potentially have support calculations include the benefits of your trust income so she gets a larger portion of the marital assets. Equitable doesn’t always mean equal when dividing marital property and your spouse could argue your trust income puts you in a better position financially.

-Benefit Plans have Separate Rules

The old saying you’re “worth more dead than alive” applies to many people today. Many assets such as life insurance policies, 401(k) plans, pensions, IRA’s and annuities have directed beneficiaries meaning that they are transferred right to the designated individual immediately upon your passing without adherence to the terms of a will or trust. Typically one either forgets to remove their spouses as beneficiaries and they still inherit even if the will/trust was revoked by the divorce, or they immediately try to remove their spouse off of those accounts. Both of these approaches are not ideal. Obviously you want to be on top of your estate planning and change the beneficiaries, but often times the law may prevent you from doing so immediately. Your spouse could have an interest in your life insurance or other accounts that the court may want to see divided or transferred, or have your spouse bought out of it. Prior to making any changes to these accounts talk to your divorce attorney and your estate planning attorney to make sure there won’t be any problems.

Our office specializes in estate planning and navigating these complex and unpleasant scenarios. Don’t wait until it’s too late so call us at 815-239-0200 or email attorney Cameron Lythberg at cameron@lythberglaw.com for a FREE consultation so you can get ahead of your estate issues.