The repeal of EPTL §5-1.4 and its replacement with a new EPTL §5-1.4 in August of 2008 addressed the long-overlooked area on the effect of divorce on previous estate planning. However, estate planners understand that changes in the law yield benefits only if their clients understand they must affirmatively act to take advantage of the opportunity.
It was standard good practice until last year for a matrimonial attorney to advise his or her client that the last will and testament he might have previously executed might be changed as a result of the entry of the Judgment of Divorce. As provided by the previous EPTL §5-1.4(a), if the testator was divorced, his marriage annulled or its nullity declared or such marriage is dissolved on the ground of absence, the divorce or other such dissolution revokes any disposition or appointment of property made by the will to the former spouse and any provision therein naming the former spouse as executor or trustee. The provision was added to New York law in 1966 and last amended in 1979. Since then, many ideas about estate planning have changed.
In 1992, the Family Rights Article of the EPTL was overhauled by the legislature to provide in EPTL §5-1.1-A for inclusion of “testamentary substitutes” in the calculation of the estate of a testator for purposes of determining a spousal right of election against the testator’s estate. However, EPTL 5-1.4 was not updated at that time, leaving a disparity in the way the law treated non-probate property.
Furthermore, New York law treated seemingly similar situations differently. For example, under EPTL §5-1.4, a divorce revoked a will provision nominating a former spouse as executor or trustee; and under provisions of the Public Health Law, divorce revokes a Health Care Proxy given to a former spouse (NY Public Health Law §2985) or, under recently enacted Public Health Law §4201, a former spouse’s power to dispose of a decedent’s “remains” was revoked on divorce On the other hand, a divorce did not revoke lifetime revocable trusts (including Totten Trusts), life insurance policy beneficiary designations, joint tenancies, or a power of attorney given to a former spouse under provisions of the General Obligations Law. In light of the widespread use of these instruments, the failure to treat them the same as the testamentary substitutes of Section 5-1.1-A presented a major variance to what appeared to be clear public policy.
New Section 5-1.4 corrects the different treatment noted above. Under its provisions, a divorce or annulment revokes any revocable disposition or appointment of property to a former spouse, including a disposition or appointment by will, by beneficiary designation, or by revocable trust (including a bank account in trust form). It also revokes any revocable provision conferring a power of appointment on the former spouse and any revocable nomination of the former spouse to serve in a fiduciary or representative capacity, such as nomination of the former spouse as an executor, trustee, guardian, agent, or attorney-in-fact. Furthermore, a divorce severs joint tenancies between former spouses (including joint bank accounts) and transforms them into tenancies in common. The measure does not change the New York case law concerning the effect of divorce on tenancies by the entirety applicable to real property (see Kahn v. Kahn, 43 NY2d 203 (1977); Anello v. Anello, 22 AD2d 694 (1964)), but those cases hold that, similarly, divorce converts the tenancy by the entirety to a tenancy in common.
In at least one way, however, the new measure goes beyond adopting the EPTL §5-1.1-A testamentary substitutes. That is in the area of life insurance. While not included as a testamentary substitute under EPTL §5-1.1-A, a designation of a former spouse as a beneficiary of an insurance policy is now revoked by divorce. However, the new provision does not apply to an irrevocable beneficiary designation, as would be the case if an irrevocable life insurance trust named the former spouse as the beneficiary of the trust.
The new section also provides for the revocation of a beneficiary designation (to the extent permitted by law) in a pension or retirement-benefits plan, including but not limited to, a stock bonus or profit sharing plan, account arrangement, brokerage firm or investment company account. Finally, new EPTL §5-1.4 continues the rule contained in former EPTL § 5-1.4 that the provisions of the governing instrument are given effect as if the former spouse predeceased the divorced testator, grantor, etc..
Not included in the new statutory scheme is the extension of the new rules to the relatives of the former spouse. Therefore, any beneficiary designation in favor of a former spouse that provides for property to pass to the former spouse’s issue or siblings, for example, needs to be reviewed and possibly revised.
An important addition of this measure is that it would protect a payor, such as a bank, in connection with a joint account, or a life insurance company in connection with a life insurance policy, where the payor has made a payment to a beneficiary designated in the governing instrument after the divorce, unless and until the payor has received written notice of the divorce. So, there is an affirmative obligation to send adequate notice to preserve a client’s property. In fact, even after such written notice is received, the payor can still receive protection and a complete discharge of liability by making the payment to the court.
Opportunities and Needed Action
A divorced client should now be advised that most dispositions and designations to a former spouse will be automatically revoked unless specifically “saved” by language in the governing instrument. These automatic revocations may result in ineffective beneficiary designations in a variety of documents. Therefore, divorced clients should now take the opportunity to review all of their estate planning documents and revise provisions that are now left without beneficiary designation because of the application of new EPTL §5-1.4. Failure of divorced clients to name new beneficiaries in certain instruments could lead to the client’s “estate” being designated the default beneficiary. In some cases, such as tax-deferred retirement plans, the failure to name an “individual beneficiary” could result in severe tax consequences by accelerating the recognition of income to the estate. In addition, assets that were once non-probate property, because they passed by operation of law to the former spouse as the designated beneficiary, may now require a probate proceeding. It also means that estate plans that were once designed to avoid probate, such as by the use of revocable trusts may now instead require a construction proceeding to cope with missing fiduciary appointments and beneficiaries as a result of the revocations under EPTL Section 5-1.4. With the revocatory effect of divorce on estate planning now greatly expanded, the importance of preemptive planning is even more important than before the changes. The divorce process, especially one initiated with a written separation agreement which requires a year before the actual action can be commenced, can take two or more years to conclude in a Judgment of Divorce. During this period, should the client die, the law treats her as still married and the “adverse party” is entitled to all of the rights and benefits of a surviving spouse, regardless of the deteriorated relationship between the spouses. The same risk is present, of course, when a couple has separated without a written agreement. The separation could last for years with no changed in the “married” status of the couple.If divorce is determined to be inevitable, there is little reason not to start on the process of revising the client’s estate plan at the beginning of the divorce action. A client’s will should be reviewed and revised, where appropriate, to take into account the need for a new executor and trustee, A disposition for the spouse can be drafted, which would take into account the possibility of a spousal right of election against the will. Children of the spouse by a previous marriage might be eliminated as contingent beneficiaries. Relatives of the spouse might be eliminated as possible fiduciaries, including the designation as guardian of any minor children. Life insurance beneficiaries might be changed. Revocable trusts might be revised. In sum, all of the elements of the client’s estate plan need review. Of course, any estate tax or income tax consequences of any potential change must be evaluated as well.
How much responsibility does the matrimonial attorney have as a result of the change in the law? Clearly, estate planning has become inextricably woven into matrimonial law practice. Certainly, where the ownership of a marital asset will be affected by the divorce, the financial effect that a severance of title would have on the Property Settlement needs to be addressed However, as is discussed herein, this is just the beginning of the involvement of the matrimonial attorney in the estate planning affairs of her client. If a matrimonial firm’s practice does not include the estate planning expertise needed to deal with the necessary reevaluation of the client’s existing plan, engaging an experienced estate planning attorney to work with the matrimonial attorney should be considered.
Stephen C. Silverberg, J.D., LLM is the principal of STEPHEN C. SILVERBERG, PLLC located in Uniondale, N.Y. The firm’s practice includes estates, trusts, estate planning, tax planning, real estate and bankruptcy. Stephen is a graduate of City College of New York (BA), Brooklyn Law School (JD) and the New York University School of Law (LLM in Taxation). He can be reached at (516) 522-2575, or you may e-mail any questions or comments to ssilverberg@silverlaw.us. Readers are also invited to visit the firm’s website at http://www.silverlaw.us/ for continuing coverage of this and other estate and trust topics.
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