Divorce is a hot topic lately. As couples emerged from quarantine in China in March, divorce rates spiked – and there no reason to assume the results will be any different here in California.
Assisting a divorcing client means assembling the right team of professionals. It is critical to assist a divorcing client in risk mitigation. They need individual umbrella insurance. They likely need a CDFA, a new financial advisor, or a money coach. They may need a realtor who specializes in divorcing clients. They absolutely and without a doubt need an estate planning attorney.
Generally speaking, before a divorce is filed, the parties can revoke their marital trust – following the rules and procedures set out in that particular trust. But once a divorce petition is filed with the court, the parties cannot revoke or amend that trust, they cannot take any assets out of a marital trust still in existence without a court order.
None of this means that a new estate plan cannot be created. A client must create a new durable power of attorney, advance health care directive, and guardianship nomination form. They can also create a new will and an individual trust for the distribution of their assets and the protection of their loved ones, specifically excluding their soon-to-be ex from control and inheritance.
How can we, as professionals, assist a divorcing client? By helping them spot the issues and act on them.
Considerations for a Successful Transition to Single Life for a Client
1. Incapacity planning is critical. All of my clients know the story of Khloe Kardashian and Lamar Odom. Their divorce had not yet been finalized when he was temporarily incapacitated and in a coma. It appears that Khloe was still his health care proxy, and likely his agent under a durable power of attorney and the co-trustee of their marital trust. Would your client want their soon-to-be ex-spouse in charge of deciding whether they live or die and contemplating which outcome benefits them most? It is critical to create a new advance health care directive and durable power of attorney that gives someone they trust authority and instructions and specifically excludes their spouse from acting on their behalf in any matter.
2. Create a new revocable trust. There is nothing stopping a divorcing client from creating a new revocable trust, and this is urgent if the client has young children or others who rely on the client for support. While one cannot transfer marital assets to an individual trust without a court order, this does not mean a client is helpless. A client might be able to use their separate property assets, such as post-separation wages, to purchase a life insurance policy to fund their individual trust for the benefit of their children. The individual trust should also list all of the assets a client believes they will obtain in the divorce on the schedules of the trust. Should the client pass away before or after the divorce is final but before they are able to transfer those assets to the trust, then a good estate planning attorney can petition the court on their behalf.
3. The Importance of Independent Counsel. The attorney preparing an individual trust should NOT be the same attorney preparing the soon-to-be ex-spouse’s individual trust. I am aware that some attorneys do this (typically when they drafted the original marital trust). They ask their clients to sign conflict waivers. However, an estate planning attorney should not simply draft a document. An estate planning attorney is a counselor and an advocate for their client and must be wholly loyal to their client. If divorcing clients have the same estate planning lawyer, then how could that lawyer possibly be completely loyal to either client when. by definition, the clients are in conflict? For example, how could an estate planning attorney, considering the risk to their client should their ex pass away while support payments were still due, recommend to spouse A to have their family law attorney demand control over a substantial life insurance policy over spouse B (and have B pay for it) if that attorney also represents spouse B?
4. Real Estate: Severing Joint Tenancies, Working with Realtors, Mortgage Considerations:
- If a client holds title to real estate as joint tenants, if they die before the divorce is finalized then their soon-to-be ex will inherit the client’s half of the property. A client should speak with their family law attorney about the possibility of “severing” a joint tenancy, and with an estate planning attorney about creating an estate plan that will keep their share of the property out of their ex-spouse’s hands.
- If the client anticipates that the real estate will be sold as part of the divorce decree, then it is also critical to ensure that they work with a realtor who understands the ethics and special circumstances of working with divorcing clients – such as restraining orders, sabotaging a sale, and wasting an asset.
- If the client thinks they will be in the market for a new home it is critical that they work with an experienced mortgage broker with a proven track record of working with divorcing clients. They can provide excellent insight to a divorce attorney and a CDFA on how to structure a settlement to best present a client to a lender.
5. Consider Insurance. Your client is about to be single, which means they will be living in a one salary home. If they were unable to work, how would they cope? It is critical to investigate whether disability insurance is affordable and practical. Also, it is likely that their auto, home/renters, and umbrella policies are held jointly with the spouse. It is time to call an agent and obtain policies on the client’s own behalf to mitigate risk and protect their assets.