This is what happens if you get divorced and don’t bother to change the title or beneficiary designations of your investments and don’t revise your estate planning documents.
Dr. Howard Davis recently divorced for the second time. While in Medical School, he met and married his first wife. They had one son, Sam, now age 35. They were divorced 30 years ago. The following year, Howard married Wilma. Wilma had a daughter from a prior marriage, Dora, now also age 35.
The second marriage went well for many years. Howard loved his new daughter and Wilma loved her new son.
The couple met with their estate planning attorney around 3 years ago. They decided their estate plans would have the same dispositive provisions and that the children would be treated equally. Their estate plans left half of their assets to the surviving spouse and the other half was split equally to the two children.
Soon thereafter, Wilma started acting strangely. She seldom left the house. She wanted a divorce. She got her wish two years later.
Howard meant to meet with his estate planning attorney to redo his estate plan and change various titles and beneficiary designations. Unfortunately, this never happened because he was killed in an accident.
After much effort, Sam managed to compile a list of Howard’s assets and a copy of the Marital Settlement Agreement (‘MSA”) between Howard and Wilma. Here is the list of Howard’s assets and estate planning designations with notations from the MSA. Answers as to what happens are at the end.
1. IRA – $1,200,000. Wilma is shown as the primary beneficiary with Sam and Dora each shown as a 50 percent contingent beneficiary. The MSA allocated this asset to Howard.
2. Bank account with $40,000 in the name of Howard and Wilma. The MSA allocated this asset to Howard.
3. Checking account with $60,000 in the name of Howard, Payable upon Death, to Wilma. Again, this asset was allocated to Howard under the MSA.
4. Residence worth $1,000,000 in the name of Howard and Wilma. The residence was allocated to Howard under the MSA.
5. Life Insurance Policy insuring Howard’s life for $1,000,000 owned by Howard. The primary beneficiary is shown as Wilma and the contingent beneficiaries are Sam and Dora- 50 percent each. This asset was allocated to Howard under the MSA.
6. $150,000 brokerage account owned by Howard’s Revocable Trust, which was allocated to him by the MSA. Howard was the original Trustee of his Revocable Trust, with Wilma shown as the Successor Trustee, followed by Sam.
7. Finally, Howard named Wilma as his Personal Representative under his Last Will and Testament with Sam named as alternate.
Here is what the estate planning attorney told Sam:
Florida law does a good job protecting a divorced spouse (the “decedent”) who leaves his ex-wife as beneficiary of his Will or Revocable Trust. As to probateable assets (i.e., assets owned by the decedent in his own name that do not have a beneficiary designation) or held in his Revocable Trust, Florida law provides that the ex-spouse is deemed to predecease the decedent.
However, this rule does not apply if the MSA, etc. provides otherwise. It also does not apply, if the Will or Revocable Trust is executed after the divorce and makes the ex-spouse a beneficiary.
Until 2012, beneficiary designations were not subject to the general rule that ex-spouses were deemed to predecease the decedent.
For decedents dying on or after July 1, 2012, Florida law now provides that the ex-spouse is deemed to predecease the decedent as to beneficiary designations and “payable upon death” or ‘transfer on death” accounts and securities. This applies to life insurance policies, annuity contracts, IRAs, and securities and other type of accounts that are “payable upon death” or “transfer on death.” Again this rule does not apply if the MSA or similar document requires another result, or if the designation, etc. is made subsequent to divorce. As to life insurance policies, even if the insurance company has notice of the prior divorce, there is no liability to them if they pay the benefit to the ex-spouse.
Jointly owned real estate between spouses is deemed to be held as tenants by the entireties unless a contrary intention is stated. This type of property automatically becomes a tenancy-in-common which is a form of joint ownership in which the survivor does not have any survivor rights in the other’s tenancy.
One problem with the law is that bank accounts that are jointly held with another (including spouses and non-spouses) are deemed to contain survivorship rights unless a contrary intention is stated on the account documents.
As to bank account and life insurance benefits that are misdirected, the person who is the rightful beneficiary must look to the recipient for recovery. The Institutions are off the hook!
Finally, if a person names his or her spouse as health care surrogate, a subsequent divorce revokes the designation by operation of law. A spousal designation in a Durable Power of Attorney is also revoked by operation of law, as of the filing for a divorce and not when the divorce is final. The potential for abuse by the Agent (spouse) is too great to wait.
Here are the answers to the 7 items described above:
1. Sam and Dora share the IRA equally.
2. Wilma becomes the owner. The Estate may have a right of recovery against Wilma.
3. Asset belongs to Howard’s Estate. The Estate may have an action against Wilma.
4. Howard’s Estate (or his heirs) and Wilma are tenants in common. Wilma should execute a Quitclaim Deed or MSA should be recorded to show that Wilma is no longer an owner.
5. Sam and Dora are the rightful beneficiaries. If the Insurance Company pays Wilma, Sam and Dora have a cause of action against Wilma.
6. Brokerage Account continues to be owned by Howard’s Revocable Trust. Sam is the Successor Trustee, not Wilma. Wilma is deemed to have predeceased Howard.
7. Sam is now the person nominated under Howard’s Will to serve as Personal Representative as Wilma is deemed to predecease Howard.