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Protecting Your Client After a
 Final Judgment of Divorce is Entered

By: Candace Brannen Peeples

Candace B. Peeples is a member of the Birmingham law firm of Shaw Anderson, LLC and practices exclusively in the area of Family Law. Ms. Peeples is a member of the executive board of the Family Law Section of the Alabama State Bar. The following article is an edited version of Ms. Peeples' 2006 AIM CLE lecture on this subject.

Need for a New Will

Even though a divorce decree operates as a revocation of a will, insofar as it benefits the former spouse, executing a new will is important for many reasons: First, it is necessary to provide an alternate disposition of property now that the spouse (who is generally the primary beneficiary under a prior will) has been removed. Second, a divorce eliminates the largest estate tax relief available to an individual, thus making it necessary to find new ways to minimize estate taxes. Third, if the ex-spouse was named as personal representative, a new one needs to be designated. Lastly, it is desirable to name a trustee for minor children to prevent the necessity of a conservatorship in which the ex-spouse might be named.

Revise all Beneficiary Designations

Certain assets do not pass pursuant to the terms of a last will and testament (e.g., life insurance, retirement plans, IRAs). Thus simply changing a will to provide that these benefits go to someone other than your surviving spouse, without also changing the beneficiary designation, will not work. It is imperative that a newly divorced spouse revise all of the beneficiary designation forms to remove the ex-spouse as beneficiary. Family law attorneys should consider advising their clients after a final judgment of divorce is issued, to revise all beneficiary designations and consider consulting with a estate and trust attorney. Also consider adding specific language to property settlement agreements to provide that each party intends to remove the other as beneficiary of all life insurance policies, IRAs, retirement plans, etc. Property awarded to one spouse but held in joint tenancy with right of survivorship with the ex-spouse should be re-titled (deeded) in the receiving spouse= s sole name.

Provisions related to Life Insurance

If minor children are named as beneficiaries of life insurance, beware that if the insured dies while the children are still minors, a conservatorship will be necessary requiring a bond, limitations on investments, accountings to the court, court-required permission for expenditures (with possibility that court may not allow them if parent is able to support the children otherwise) and outright distribution at age 19 regardless of the child=s maturity. A solution may be to require the establishment of a trust for the minor children, possibly with someone other than a parent as trustee. The trust document can allow a broad range of investments, describe permissible distributions, and dictate final distribution at a later age than 19. Generally the trust will be irrevocable.

Another issue to be considered is whether a policy will be owned by the trustee or simply name the trustee as beneficiary. Who should be the trustee: Spouse, spouse's parent, third party, third party and spouse, or even a corporate trustee? If a spouse (or third party) is named as the trustee of insurance for the minor child and no written trust agreement is created, you may run into the same issues described above. Simply put, you must have an accompanying trust document or you may be looking at a possible conservatorship. Disputes may also arise as to the intended provisions of the "trust," such as when and for what purposes distributions are made to the child.

Provisions related to Qualified Retirement Plans

If the decree requires that a spouse be named as the beneficiary of retirement plan benefits, a Qualified Domestic Relations Order (QDRO) must be entered. Federal Law supercedes state law in this area. If the participant spouse remarries and there is no QDRO, the surviving spouse must be the beneficiary unless he or she waives the right. The former spouse cannot enforce the divorce decree against the plan. It is very important when drafting a settlement agreement to make the preparation of a QDRO a standard part of any agreement where an ERISA qualified plan benefits are being divided.

Existing Trust Agreements

Modify existing trust agreements which are not required to provide for the spouse. Although Ala. Code 1975, ' 43-8-137, provides that a divorce decree is deemed to delete provisions for the spouse in a will, there is no corresponding statute related to trusts. If a client's primary estate planning document is a revocable trust which provides for the spouse, and the client fails to revise the agreement after the divorce, the client= s estate may be faced with the same problems described in above where a new will is not executed.

Other Documents

Following the entry of the Final Judgment of Divorce, your client may need to complete new deeds, stock or partnership agreements, obtain a Qualified Domestic Relations Order to divide certain ERISA qualified retirement plans, etc. If these are not done at the time of the divorce and the intended transferor spouse disappears, dies, or becomes incompetent, it may be very difficult and expensive to correct the problem.

Remarriage & Prenuptial Agreements

In order to cancel the statutory rights to which a spouse is entitled, and to eliminate the elective share (Ala. Code 1975, ' 43-8-70) and omitted spouse (Ala. Code 1975, ' 43-8-90) claims of a potential spouse, the execution of a prenuptial agreement may be advised. These agreements are valid in Alabama so long as the party seeking to enforce it can prove either: One, that the consideration was adequate and that the entire transaction was fair, just and equitable from the standpoint of either party; or, Two, that the agreement was freely and voluntarily entered into by the other party with competent, independent advice and full knowledge of his or her interest in the estate and its approximate value. Barnhill v. Barnhill, 386 So. 2d 749 (Ala. Civ. App. 1980).

In addition to the case law on this subject, know there is also a statute which concerns the waiver of estate rights. Ala. Code 1975, ' 43-8-72. See: Ruzic v. Ruzic, 549 So. 2d 72 (Ala. 1989).

Even if you have a valid prenuptial agreement, it still may be advisable to voluntarily make provisions for the new spouse so as to qualify for the marital deduction. A prenuptial agreement does not constitute consent to designate a non-spouse to an ERISA qualified plan. To effectuate a payment to a non-spouse, the following steps should be taken:

1. The prenuptial agreement should specifically identify the plan and provide that it shall remain the separate property of the participant;

2. The spouse must expressly agree that he or she will consent to the designation of another person as beneficiary;

3. After the marriage, the spouse must execute the requisite consent documents with the plan administrator permitting the designation of the non-spouse; and,

4. The participant must then affirmatively name the non-spouse beneficiary.

Conclusion

Stop and think about creative approaches to a client's matrimonial situation. Look beyond the obvious issues during those first meetings with a potential client. It is important never to under estimate the impact, and benefit, of estate planning even while contemplating a divorce.