Taxation & Estate Planning

Divorce and Estate Planning, Part 1

By Joel A. Schoenmeyer

(Warning: This is the first in a two-part series on the estate planning ramifications of divorce. So, if you are a believer in the sanctity of traditional marriage -- like Newt Gingrich and Rush Limbaugh -- you might want to skip this part. After all, you'll obviously never need this type of advice! Finally, thanks to my friend and former colleague Lauren J. Wolven and to Ashley E. Crettol for this article, which spurred me to write about this subject and provided a good overview of the law.)

You get married and build a life together. Maybe you do some estate planning and/or financial planning. And then the marriage ends. Maybe your spouse decides to leave you for a younger woman with whom he's having an affair. Or, maybe your spouse decides to leave you for another younger woman with whom he's having an affair. Or maybe something else happens.

What do you do from an estate planning perspective after your divorce is finalized? The wisest thing to do is to change everything: update your documents (Will, Trust, Powers of Attorney) with new beneficiaries and/or fiduciaries, and do the same for the rest of your property (life insurance and retirement benefits). (Perhaps it goes without saying, but in taking these steps, you'll also want to make sure you abide by the terms of the judgment terminating the marriage.)

Unfortunately, not everyone takes the above steps. What does Illinois law say about the failure of a person to change his or her beneficiaries after divorce? In Part 1 (today), I'll discuss how Illinois deals with estate planning documents:

INTESTACY. Note that if you die intestate (without a valid Will), then your ex would automatically be out of the picture, since he or she is not your heir.

WILLS. If you die with a valid Will and an ex-spouse named in that Will, then "every legacy or interest or power of appointment given to or nomination to fiduciary office of the testator's former spouse" is revoked under Sec. 4-7 of the Illinois Probate Act (755 ILCS 5/4-7). The Will takes effect as if your ex-spouse predeceased you.

TRUST. Illinois has a "Trusts and Dissolutions of Marriage Act." (See 760 ILCS 35.) This Act states that "judicial termination of the marriage of the settlor of a trust revokes every provision which is revocable by the settlor pertaining to the settlor's former spouse in a trust instrument or amendment." The Act goes on to say that the trust "shall be administered and construed as if the settlor's former spouse had died" when the judgment terminating the marriage was entered.

Two notes:

1. The Act only applies to trust documents executor before the judgment was entered. (The same is true for Wills.)

2. The Act doesn't apply to irrevocable trusts. So if you've established an irrevocable trust with your ex as a beneficiary or trustee, you are out of luck unless that trust (a) has provisions relating to a divorce or (b) was dealt with during the marriage termination proceedings.

POWERS OF ATTORNEY. Under Section 2-6 of the Illinois Power of Attorney Act (755 ILCS 45/2-6), if a court enters a judgment for the dissolution of a marriage or for legal separation after the power is signed, "the [principal's] spouse shall be deemed to have died at the time of the judgment for all purposes of the agency."

Coming soon: Part 1 (insurance and retirement benefits).

Full post as published by Death and Taxes Blog on September 21, 2010 (boomark / email).