Beware of the Pitfalls of Estate Planning During a Divorce

Los Angeles Daily Journal – by Aaron Dishon and Marc Garelick.  Individuals going through a divorce oftentimes do not consider the need to revisit their estate plan and take immediate steps to prevent their assets from being inherited by their estranged spouse during the pendency of a divorce case.

Furthermore, when individuals complete their divorce, they are not always immediately motivated to revisit their estate plan. It is important for both family law practitioners and estate planners to advise their clients who are involved in divorce as to potential pitfalls regarding the ramifications to their estate plan. They will need to understand what happens if they take no action, what the Standard (Automatic) Temporary Restraining Orders (“ATROs”) are and the effect on their estate plan, and if they should sever joint tenancies or modify/revoke their will, revocable trusts and irrevocable trusts.

If a divorce litigant bequeathed their estate to their estranged spouse that spouse will still inherit the estate upon your client’s death, even though there is a pending divorce. The family law court loses its jurisdiction over the matter upon death of either party. See [Bevelle v. Bank of America], 80 Cal. App. 2d 333 (1947). As such, if a matter has not been finalized with a Judgment and a spouse dies, then the parties are treated as if they are still married. Accordingly, it is imperative for them to take whatever action they can to protect their estate as soon as practically possible.

Pursuant to Family Code Section 2040, Standard (Automatic) Temporary Restraining Orders (“ATROs”) are placed into effect upon the filing of a dissolution. The ATROs are essentially financial restraining orders that prevent a party from transferring, encumbering, hypothecating, concealing or in any way disposing of any real or personal property, irrespective of characterization, without the written consent of the other party or court order. If violated, a party can face a contempt action with the aggrieved party entitled to potential restitution and attorney’s fees. Pursuant to Family Code Section 233, the ATROs remain in effect the final judgment of dissolution is entered.

The ATROs restrain a party from modifying or amending a non-probate transfer in a manner that effects the disposition of property, without the written consent of the other party. A non-probate transfer is defined by Family Code Section 2040(d)(1) as an instrument other than a will that transfers property on death, including revocable living trusts, payable on death accounts, Totten trusts and similar items.

Further, pursuant to Family Code Section 2040(3), a party is allowed to eliminate a right of survivorship to property, with written notice. This subdivision was enacted after the ruling in [Estate of Mitchell],76 Cal. App. 4th 1378 (1999). Here the court ruled “when one spouse severs a joint tenancy with the other spouse by executing and recording a declaration of severance, there is neither a transfer nor a disposition of any property. Such a severance therefore does not violate an injunction order entered pursuant to Family Code, Section 2040.” As such, people may involved in a divorce may change a joint tenancy with a right of survivorship to a tenancy in common, with notice only to the other party.

It is advisable to sever joint tenancy assets upon filing for divorce because prior to entry of Judgment, the right of survivorship is preserved and the family court will have no power to apply California community property law to the property. The property could then pass in full to the surviving spouse.  However, if death occurs after a Judgment is entered terminating your marriage (declaring a legal separation), but before the court adjudicates a division of your marital property, joint tenancy property held by the parties will be divided equally, if the court finds it is community property, meaning the surviving spouse will take only a fifty percent interest and the deceased spouse’s 50% share will pass through his or her estate to the spouse’s heirs. See [Marriage of Hilke], 4 Cal. 4th 215 (1992).

The ATROs also have some other exceptions that allow a party to take other actions during the pendency of their divorce. Specifically, they allow: 1) creation, modification, or revocation of a will; and 2) revocation of a non-probate transfer, pursuant to the instrument with notice filed and served on the other party. Accordingly, a party may be able to amend or revoke a trust, but is not able to change the disposition of the assets during the pendency of the matter, without the written consent of the other party.

[In the Estate of Khan], 168 Cal. App. 3d 270 (1985), the court found that the husband’s attempt to revoke a trust, without written consent, during the proceeding was an attempt to transmute property into his separate property. The court held that the husband could not act alone to revoke the trust because the revocation clauses in the trust utilized language requiring both parties. Consequently, it is important to look to the language of a revocable trust in determining whether it is advisable or possible to amend or revoke a trust. The trust language may state that both parties must consent to revocation or modification. As such, party may be forced to seek the court’s assistance if an unwilling litigation refuses to revoke a trust.

In addition, it is permissible for a party to a divorce to create a new revocable or irrevocable trust. This trust cannot be funded during the proceeding. Essentially, a party can revoke their old will and create a new “pour over” will during the proceeding. This will allow any assets to pour over into the unfunded trust upon death. However, if the party dies during the pendency of the proceeding, the assets will still need to go through the probate process. Although costly, at least the party will have his estate bequeathed to his desired beneficiaries, under the control of the party’s desired fiduciaries.

A party is also able to modify a durable power of attorney and a health cared directive, without notice or without written consent from the other party. This allows a party to change who can make their health care decisions and who can manage their financial estate, if they become incapacitated, but do not pass away during the pendency of the litigation. This also allows a party to choose who can represent their interests in the litigation, if they are not of sound mind to continue to do so. This step can avoid unnecessary motions for [guardians ad litem].

Under Family Code Section 721, the parties have fiduciary obligations to each other until the final judgment is entered. The statute provides that the parties have a confidential relationship which imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take an unfair advantage of the other. To avoid potential scrutiny, a party is able to seek a court order under Family Code Section 2040(a)(2) to modify the ATROs to fit the facts and circumstance of a particular divorce. ATROs are boilerplate provisions and if the facts in a matter do not fit these guidelines, it may be prudent to seek the ourt’s intervention or interpretation prior to taking action. The court has the inherent power to modify an injunction when “when the ends of justice would be served by modification.” See Code of Civil Procedure Section 533.

This article appeared in the Los Angeles Daily Journal, February 26, 2013
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