CHAPTER
13

Marriage and Divorce

In This Chapter

• Property rights after “I do”
• Spousal election against a will
• Divorce planning and practice
• Prenuptial agreements in divorce court

It’s bliss. It’s a battlefield. It’s both—and occasionally at the same time. That’s marriage all right, or so it would seem from all one hears and reads on the subject.

The law has many occasions to intrude into the lives of married couples, from good times to bad. All the legal paper shuffling that goes along with marriage, and then perhaps with separation and divorce, can affect an estate plan. Here’s what can happen—and what you can do if distressing times hit you.

Before You Get Married

Before we get into the sturm und drang of much of this chapter, may I ask if you’re planning to be married soon or even just eventually? If so, good for you. My wish is that none of what follows in this chapter will apply to you.

Do me a favor, though. Here is a listing for you to refer to to ensure the estate paperwork for both of you is in order when you march down that aisle. It affects spousal rights. Keep it in mind, and read it again just before you marry.

Also, same-sex marriage is marriage according to the law.

Your wills If you do not each have one, it’s smart to have separate wills drawn up so you can provide for each other. Please, no joint wills, because a joint will may limit the right of the surviving spouse to change his or her will after the other spouse dies.

Employee benefits, life insurance policies, IRAs, and qualified retirement plans You probably will want to change the beneficiary for those investments to your spouse, or at least review the documents to be certain you still want the beneficiary you have named.

Forms of property ownership Will you be buying a home? Do you already have one in your name? You might want to review Chapters 2 and 3 about ownership forms. Perhaps you’ll want to hold real and personal property as “joint tenants with right of survivorship,” the most common ownership form for spouses.

Prenuptial agreement Will you be having one? There’s a discussion of prenups in Chapter 3 (with a sample agreement you can read over on the book’s website; see the “Prenuptial Agreement”) and further discussion in this chapter. Remember to use separate attorneys for drawing up an agreement.

Now You Are Married

Now let’s get back to the times in some marriages when problems can crop up.

After the marriage ceremony, each spouse has certain legal rights. In states like California and Texas, the husband and wife have community property rights. In non–community property states—New York and Illinois, to take two examples—the law also specifies certain marital rights upon divorce or death.

Marriage is a fragile institution in our modern life, for a number of reasons. To ignore that fact is to proceed at your own risk—and possibly at the risk of your financial future. Read on, and you’ll see what I mean.

Electing Against Your Spouse’s Will

It’s your will. You can completely cut your spouse out, or you can leave only a small portion of the probate estate to him or her. Of course, if you intend to make either of those moves, I would suggest not letting your husband or wife view your handiwork unless a divorce is already inevitable, or if you have a prenuptial agreement.

I once had a client who was the wife of a friend. In the will I drew up for her, she left one half of her estate to her parents, one quarter to her parochial high school, and one quarter to her husband. As far as I know, her husband was unaware of his relatively unimportant position in his wife’s testamentary scheme. And of course, I could not tell him. The couple eventually got divorced.

A spouse who is left out of his or her deceased spouse’s will or is given only a small share of the estate has the right to elect against the will. This is a strategy for married couples only, and it permits the party left out to go to court for a fairer shake. He or she is saying in effect, “Whatever he left me, it’s not enough. I’m electing against that will.”

This isn’t the same as a challenge to the will, which is open to any heir or beneficiary. An election is just for spouses, and it already assumes some rights for the survivor.

The spouse who elects against a will must file that election within the statutory period of time. That window varies from state to state, but it might be from 3 to 6 months after the estate is opened.

Most state laws allow a surviving spouse who elects against the deceased spouse’s will to receive from one third to one half of the probate estate. Usually that is the same share he or she would receive under intestate law.

If the election is untimely (presented beyond the accepted deadline) or improperly made, the surviving spouse receives only what the will provides. However, any property jointly owned by both spouses, and any life insurance or pension with the survivor as beneficiary, would go to the surviving spouse because those assets are not part of the probate estate.

Let me give you an example. Say that, for whatever reason, you don’t want your spouse to inherit the bulk of your estate, or maybe not even a penny of it. So you set up a trust and place all of your property in that trust, thinking your spouse will have no access to that money, even if he or she decides to elect against the will.

Not so, at least in certain states. The court will take that trust property and deposit it right back into your probate estate for spousal election purposes—just where you didn’t want it to be.

Let’s look at another example. Meet Ray, who lives in a non–community property state and has the following assets in his own name:

• Three expensive cars
• A condominium in Florida
• A substantial savings account
• A significant investment portfolio
• A large life insurance policy

All except the life insurance proceeds would be part of Ray’s probate estate.

But Ray intensely dislikes his wife Michelle, and the idea of her enjoying his property and money after he’s gone drives him nuts. So he creates a trust and transfers all his solely owned assets, except the cars, into the trust. The trust provides nothing for Michelle. Ray changes the life insurance beneficiary to his daughter, Eden. Shortly thereafter, Ray dies. His will leaves not a scrap to Michelle.

Michelle can elect against the will and receive her share of the probate assets, which now consist only of the automobiles. This is a fine kettle of fish, the fuming widow thinks. But wait. State law may allow her to elect against an augmented estate, which includes the property in trust. Whether life insurance proceeds are considered part of the augmented estate varies with each state. Most pensions are subject to federal law, which prevents a spouse from being cut out of benefits.

The laws in her state give Michelle the green light to elect against an augmented estate. She runs to a lawyer.

Actually, the election could bring a most satisfactory ending to this story for Michelle. She could get one third of everything. As for Ray … well, we’ll never know his response to Michelle’s good fortune, will we?

It’s important to note here that a surviving spouse may waive his or her rights to elect against a will by signing a prenuptial agreement. That’s our next topic for discussion.

The Prenuptial Agreement

They’re called prenuptial, premarital, and antenuptial agreements, but they all mean the same thing: a document in which prospective spouses settle certain property rights before the marriage, in the event of divorce or death of one party.

I discussed prenups in Chapter 3 as they apply to property ownership. Now I’ll tell you what happens when problems arise in a marriage.

Prenup Specifics

Prenups are not used only by millionaires and movie stars. Older couples—or indeed couples of any age—remarrying after the death of or divorce from a spouse often are concerned about keeping for their children the assets they bring into that new marriage.

A prenuptial agreement specifies that each spouse waives his or her right to any intestate share (if there is no will) and waives any right to elect against the other’s will.

The provisions of the prenup attempt to keep as separately owned any property brought into the marriage. Keep in mind, however, that spouses frequently convert each other’s solely owned property into jointly owned property with right of survivorship. That results in the surviving spouse receiving the property, thus reducing the assets going to the deceased spouse’s children and perhaps negating an important part of the prenuptial agreement.

Prenuptial agreements are not irrevocable. Spouses can agree to modify or revoke their prenuptial agreement, but those wishes must be in writing and signed by each partner.

A prenuptial agreement can also get into questions of alimony, wills and trusts, and, as you saw in Chapter 3 and in the sample prenup on the book’s website (see the “Prenuptial Agreement”), just about any area the couple wants.

If a married couple does not have a prenup, they can, if they choose, make a postnuptial agreement, which could contain the same terms as a document drawn up before the wedding.

Avoiding a Challenge to a Prenup

Joe is about to marry Angelina. It’s his second marriage, the first having ended in divorce. Joe’s concerned about a possible second divorce and its financial impact. He also wants to ensure that when he dies, the bulk of his estate goes to the children from his first marriage. Angelina understands, and she agrees to the pact.

Joe should take the following steps to be sure there are no loopholes in his agreement with Angelina:

• Hire an attorney to draft the agreement.
• Completely disclose all his assets and liabilities to Angelina. Courts will more readily enforce a prenuptial agreement if it is clear that the spouses knew what rights each would give up in the event of divorce or death. Hiding assets will almost always guarantee a challenge to the agreement, and perhaps a successful one.
• Recommend to Angelina that she hire her own lawyer to review the proposed agreement. If she does not want independent legal advice, the prenuptial agreement should clearly state she was told to engage a lawyer but chose not to.

A well-drafted prenup, which is executed with complete financial disclosures and legal advice, is difficult to challenge successfully.

When considering upsetting a prenuptial agreement, courts retain the right to alter the effect of a prenup if it would result in extreme hardship for either spouse. For example, if both parties assumed each would be self-supportive upon divorce or the death of the other, and injury or illness precluded that, the court could specify support payments to the disabled spouse.

The American Way of Divorce

We are the marrying kind in America, yet about half of us later end up in divorce court. According to a recent U.S. Census, 42 percent of marriages end in divorce.

Almost all states have a no-fault divorce (or dissolution of marriage) law. State laws usually have a residency requirement and a waiting period between the petition and the order granting the divorce. Several states require mandatory counseling before the decree is granted. But the marriage will be dissolved if one party desires it. For specific information on your state’s marriage and divorce law, check with your local library for its statutes, or go to your state’s website.

Let’s go into financial and tax consequences of divorce and how divorce can affect your estate in such matters. Those areas can include the following:

• Property settlement
• Child custody and support
• Alimony or separate maintenance
• The tax consequences of all of these

Remember that a prenuptial agreement may determine the terms of any property settlement, alimony, or separate maintenance for one party. Child custody and support will be set by the divorce court. What follows assumes there is no enforceable prenuptial agreement.

Property Division

Mark and Millie are splitting up. The couple has the following assets, with noted market values.

Property	Ownership	Value
House	co-owned	$100,000 [net, or less mortgage(s)]
Household goods	co-owned	$30,000
Cars	co-owned	$30,000 [net, or less auto loan(s)]
Savings	co-owned	$10,000
His pension		$200,000
Her pension		$50,000

Most divorce courts would add up the assets and divide by two. Perhaps you’ve gone through a divorce and are saying “That didn’t happen to me! I got the shaft and he (she) got the mine.” Be that as it may, most laws do require an equitable distribution of the marital assets.

Courts certainly can consider factors that may affect a distribution, such as …

• Who acquired the assets and how (gifts or inheritance).
• Income and property of spouses before marriage and at present.
• Duration of marriage and health of each spouse.
• Need for custodial parent to occupy the home.
• Spousal maintenance or alimony.
• Liquidity of assets.
• Financial future of each spouse.
• Spousal fault in wasting assets.
• Tax effects.

This list is illustrative and not exhaustive. Certainly each divorce is unique, and state laws vary. Remember, too, that community property states generally treat all assets acquired during marriage from either spouse’s income as community property. This means that each spouse has a one-half ownership in those marital assets, no matter how the property is titled. This form of property ownership will affect the divorce. (You might want to review Chapter 3, which also talks about community property.)

Child Custody and Support

Courts award custody of minor children based on what they determine is in the best interests of the child. Naturally, parents should try to work together to establish an amicable custody arrangement that benefits all concerned.

The noncustodial parent usually provides child support through minority, and often through age 21 if the child is attending postsecondary school (such as college or trade school). Many states have established child support guidelines to determine the amount of support to be paid.

Income and Some Other Tax Consequences

Let’s return to Mark and Millie’s divorce. Mark is an accountant making approximately $75,000 a year; Millie is a public school teacher earning $30,000. They have one child, Manny, age 5.

If one spouse pays the other alimony, the paying spouse gets a tax deduction and the recipient spouse reports the payment as gross income.

Mark, who is in the higher tax bracket, might be willing to pay alimony, perhaps as a form of property settlement, to get a welcome tax deduction. Millie, therefore, may receive more from the divorce financially because of the tax savings for Mark.

If the spouses split the property, they can determine which property each is to choose. Some choices have tax consequences if the property is subsequently sold. For example, if Millie keeps the house and eventually sells it, under the present tax law, the first $250,000 of profit from the sale (i.e., capital gains) is excluded from taxation.

If Mark relinquishes his share of the house in return for all his pension (half of which Millie would otherwise be entitled to), he will be taxed on all the benefits when he receives the pension payments. (Chapter 20 offers a more comprehensive discussion of income tax planning.)

If Millie is awarded custody of Manny, Mark will pay child support. Tax law gives the custodial parent the right to the dependency exemption unless the parent waives that right. Because Mark is in a higher tax bracket, Manny’s dependency exemption is worth more to him, and he may be willing to pay for that exemption with higher child support payments. Also, while Manny is living with Millie, she can file in the more advantageous tax status—head of household—while Mark will be relegated to filing as a single person.

Complicated, huh? Divorce isn’t as simple as marriage. You ignore the tax implications at your own financial peril!

Gift Taxes and Income Taxes

If Mark and Millie divide their assets during the process of divorce, the division will not result in any gift taxes or income taxes as long as they are still married at the time they make the transfers.

Similarly, if a married couple had a postnuptial agreement that transferred assets from one spouse to another while married, there would be no gift tax. However, there might be a gift tax on any transfer made under a prenuptial agreement if the transfer occurs before the marriage.

For a more comprehensive discussion of gift taxes, see Chapter 17.