Like many of you, I was at the Heckerling Institute on Estate Planning in Orlando, Fla. last month.
Two statements were made relating to divorce that inspire me to comment. The first was that a trust should be drafted to remove a spouse automatically in all capacities upon divorce. The second suggested that the spouse should be removed not just upon divorce, but upon the filing of a divorce action.
In recent years, I’ve spoken a bit on the topic of planning for divorce and have had the opportunity to reflect on some of the realities of marriage and divorce and my own view of best practices. I’ve personally seen and heard stories about situations in which a machete approach of treating a spouse as immediately deceased upon the filing of a divorce action has backfired and ultimately frustrated the settlor’s true wishes.
The reality is that marriage can be wonderful, but it can be hard. Some couples go through tough times in their relationship, from which they may not recover.
Approximately 50 percent of couples in America divorce, but the rates are lower for a couple when the wife has completed college. Only about 20 percent of women who complete college end up divorcing. Using education as a proxy for wealth, this can mean that rates for divorce for our affluent couples probably are much lower than national averages in most parts of the country.
Moreover, not all divorces are acrimonious. People divorce for many reasons. Divorced couples sometimes remain close and continue to raise their children together. Sometimes they want to provide for each other above and beyond what’s required by the divorce order. Sometimes they’re divorced for some years and then remarry each other.
Even when there is acrimony, leaving the trust assets on the table during negotiations can enable the parties to make beneficial deals that can protect family business interests or other assets from division. If a spouse is immediately deemed predeceased and cut out of an instrument upon the filing of a divorce action, this limits flexibility.
Along the same lines, not all divorce filings lead to divorce. A number of filed divorce petitions are withdrawn each year. So if the instrument removes a spouse upon the filing of the action, there needs to be a method for restoring the spouse if the action is withdrawn and the couple decides to remain married.
Planning Suggestions
These realities and the desire for flexibility, lead me to the following planning suggestions:
The goal should be to: (1) plan for divorce with flexibility and precision to maximize a divorcing couple’s options, while (2) protecting what most divorcing settlors would want, and (3) recognizing that often the attorney represents and has duties to both spouses at the drafting stage.
Practitioners generally aren’t concerned about joint representation when drafting to contemplate a future divorce between a descendant of the settlor and such descendant’s spouse. So, when defining a descendant’s spouse in an instrument, one potential solution is to include only the person to whom the descendant is married or was married at death, as long as no divorce action is currently pending and the couple isn’t legally separated.
In the past, my suggested definition would have further indicated that the couple wasn’t living separate and apart other than for medical or business reasons. But with more couples choosing to reside in different states often for tax reasons, it has become increasingly difficult to determine and prove why a particular couple may be living apart. Thus, the requirement for a pending divorce action or legal separation should suffice to remove a descendant’s spouse as the potential recipient for property.
As for the settlor’s own spouse being named in an instrument as a beneficiary and/or trustee, the approach can be less harsh and build in more flexibility. The biggest concern is that if the divorce action is acrimonious, the settlor likely won’t want that spouse (or usually the spouse's family members) to automatically continue to be trustee, trustee appointer, trustee remover and beneficiary with no safeguards.
Accordingly, a more refined solution involves two provisions. First, upon the filing of a divorce action, the trust instrument default should automatically remove the spouse (and the spouse's kin) as trustee appointer and trustee remover only. That way, a successor in line (such as the settlor, or the settlor's sibling or friend) can remove the spouse as trustee if that’s desired. Or the spouse can remain as fiduciary if appropriate. Second, someone should be empowered in the instrument to exercise a power to add or remove beneficiaries like a divorced spouse (which power shouldn’t be granted to the trustee, the settlor or a related or subordinate party) and/or a party should be given a power of appointment to pour the existing trust assets into a new similar trust that excludes the ex-spouse as beneficiary. This combined approach can achieve all that most divorcing clients would want without limiting flexibility for the minority of clients whose divorce wishes may be atypical.
Do you have any stories to share where a machete approach to killing off a divorcing spouse backfired? I would appreciate hearing them, so please share.