Most people in the uncomfortable throes of a divorce want to ensure that upon the conclusion of the process, their property salvaged through difficult proceedings will not go, in the event of their subsequent death, to their former spouse. Both estate planning attorneys and divorce lawyers are aware of this and typically take steps to ensure it won’t happen. From another practice angle, revocable trusts are generally considered the “smart” or “best practice” alternative for estate planning – but in divorce cases can become a trap for the unwary, of which both clients and lawyers need to be aware. Our experience in a recent case shows that the intersection of divorce and estate planning law and circumstances can result in a divorced spouse receiving the ex’s entire estate.
To the extent the settlement agreement or divorce decree doesn’t specifically resolve all property interests, Arkansas law provides a backstop for the presumed intent of the parties. Arkansas Code Annotated Section 9-12-317 (see End Note), provides that upon divorce, any property owned by the divorced parties with rights of survivorship is automatically converted to property held as “tenants in common” where each is deemed to own one-half, with no survivorship rights. And Arkansas Code Annotated Section 28-25-109 provides that a will or any part thereof is revoked by a divorce as to all provisions in the will in favor of the divorced spouse. One would think (and probably many divorce lawyers presume) that this provision, without further action, takes care of any estate planning done during the marriage by writing the divorced spouse out of it. Wrong.
It has become very popular in recent years to avoid probate proceedings by setting up a revocable trust, which holds all of the clients’ property, is managed by the clients as trustees for their benefit as beneficiaries and has terms identical to what would be typically found in a will for disposing of their property at death. If, indeed, all of the clients’ property is owned by the trust at death, the successor trustee assumes duties and administers and distributes the trust assets informally, completely avoiding probate, and any related costs, hassle and delay. An adjunct will is also drawn, to catch any property that may not have been titled to the trust at death and directs it to the revocable trust so that all of the property will be held in a single “pot” and distributed according to the comprehensive directions in the trust. Such wills are referred to as “pourover wills.” Revocable trusts are unquestionably a valuable estate planning tool; a complete discussion of them is beyond the scope of this brief post. However, in a divorce situation, they become a trap for the unwary.
Arkansas statutes do not address any effect that a divorce may have on a revocable trust. Thus, if the parties’ house or investment accounts are owned in a trust, which leaves everything to a surviving spouse, unless the divorce settlement or decree specifically addresses those assets, post-divorce, they will still be owned by the trust, and upon the death of the first ex-spouse, will all pass to the survivor.
Most attorneys would catch this, and make sure the trust properties were specifically addressed and resolved in the divorce. Here’s the trap for the unwary: The couple has a revocable trust which holds all of their property, leaving it all upon the first death to the surviving spouse; divorce occurs; the attorneys and court very carefully define and distribute the trust-held property equally between the parties. Ex-husband later dies, holding separately in his own name half of the formal marital property. Ex-husband (and apparently his attorney), relying on Arkansas law to void any will provisions for a surviving spouse, has not amended his will. However, his will, drawn during marriage, leaves nothing to the surviving spouse, but being a pourover will, leaves it all to their (still existing though empty) revocable trust – which has as its primary beneficiary the now divorced wife. Because the will itself has no “provisions . . . in favor of the testator’s spouse so divorced,” it is not revoked; under applicable law, the revocable trust is a separate legal entity, as distinguished from the ex-wife, and thus receives all of the ex-husband’s estate for the benefit of his ex-wife – though undoubtedly this is contrary to the deceased ex-husband’s final wishes. The conclusion: Any divorce proceedings should be accompanied by concurrent, focused and careful estate planning.
Arkansas Code Annotated is an indexed organization of all of Arkansas’ written laws, available on the internet; search for “Arkansas Code” or go to http://www.lexisnexis.com/hottopics/arcode)