Home Shaping SuccessSM
June 13, 2012
By Jan P. Myskowski*
When a couple files for divorce, the court issues an automatic stay of transfers of assets during the pendency of the divorce action, which is known as an anti-hypothecation order. The primary purpose of that order is to preclude the spouses from transferring assets in order to shelter them from being divided upon divorce. However, estate planners have long been concerned about the full reach of an anti-hypothecation order, and whether various estate planning activities carried on during the pendency of a divorce action would violate the order.
For example, can a divorce litigant change his or her will to omit his or her spouse while the divorce is pending? No assets are re-titled when a will is changed, but if the litigant-testator dies prior to the finalization of the divorce, the disinherited surviving spouse will be deprived of assets that could have been awarded to that spouse as part of the property division upon divorce (we are ignoring for the moment whether the surviving spouse may be able to partially mitigate this by asserting statutory inheritance rights). Similar concerns arise with regard to the amendment of revocable trusts, and the changing of beneficiaries of assets such as life insurance policies and retirement accounts.
Divorce litigants have many incentives to amend their estate planning documents during the pendency of a divorce. Some are fairly routine, such as the desire to change the nominees to act under durable powers of attorney in the event that a litigant becomes incapacitated during the pendency of the divorce. Some are simply related to the understandable desire not to give a spouse a windfall should one of the litigants die before the property division has taken place. Some are tactical. There is a competitive advantage to be gained if a litigant dies while the divorce is pending having disinherited their spouse. Under some circumstances, a surviving spouse will be found to have forfeited his or her statutory inheritance rights based on his or her conduct during the marriage. If the divorce is not final, the executor of a deceased spouse’s will has an opportunity to defend the estate from claims of the surviving spouse, but only if the will omits the spouse as the beneficiary.
Some estate planning attorneys take the position that all changes to estate planning documents must be deferred once an anti-hypothecation order has been issued. Others venture tentatively into the waters by allowing durable powers of attorney to be amended, but not allowing wills or revocable trusts to be modified in terms of the scheme of distribution. A minority will allow clients to change the dispositive scheme of wills and revocable trusts, but recommend that assets not be re-titled into or out of trusts or in any other way (our firm has been in this camp). A very small minority will allow a client to change the beneficiary designations of assets such as life insurance and retirement accounts, on the theory that no ownership change is effected while the litigant-owner of those policies and accounts is alive (until now, our firm had not been willing to recommend such measures). On June 12, 2012, the New Hampshire Supreme Court decided that the latter bold approach is acceptable, arguably ratifying all of the less aggressive approaches by implication.
In Edeltraud Elter-Nodvin v. Leah C. Nodvin & a., (slip opinion No. 2011-454), the husband, during the pendency of his divorce, and after an anti-hypothecation order had issued, changed the beneficiaries of his life insurance and retirement accounts to name the couple’s daughters as beneficiaries (the types of retirement accounts are not specified). Before the divorce was finalized (and hence before the wife was awarded any part of the life insurance or retirement accounts), the husband died, and the couple’s daughters received all of the life insurance and retirement account proceeds. The surviving wife sued the daughters, claiming that the changing of the beneficiary designations violated the anti-hypothecation order. The New Hampshire Supreme Court, fairly summarily, concluded that while the husband was alive the wife’s interest in assets such as life insurance and retirement accounts amounted to a mere expectancy, and, as a result, did not constitute a property interest subject to the reach of the anti-hypothecation order. It is worth noting that the Superior Court had dismissed the wife’s claims, and the New Hampshire Supreme Court was affirming that decision (hence there was no split of opinion among the courts as to the reach of an anti-hypothecation order).
Given that this is such a recent decision, sweeping changes in the approach to estate planning in the context of a divorce may be premature. We may see a backlash, either in the form of litigants asking for more restrictive anti-hypothecation orders, or perhaps in the form of legislation to amend the statute that requires the issuance of anti-hypothecation orders to broaden their statutory scope. However, every divorce litigant’s attorney must now be sure to at least discuss the topic with his or her client, and recommend that the litigant consult with an estate planning attorney to review the available options. Our firm will certainly continue our existing practice, and will now at least discuss the possibility of changing beneficiary designations with clients. Even for those for whom such changes are too aggressive, the discussion will at least sensitize them to the importance of reviewing beneficiary designations after the divorce is final. One of the most costly mistakes is to leave a former spouse named as the beneficiary of a life insurance policy or retirement account after a divorce is final. Courts have consistently held that such beneficiary designations are enforceable.
As an aside, many of you will be wondering why the Retirement Equity Act of 1984 (“REA”) did not preclude the husband in Elter-Nodvin from changing the beneficiary of retirement accounts without his spouse’s consent. The Court did not describe what types of retirement accounts were in play. It is likely that they were accounts to which REA did not apply, such as IRAs, Roth IRAs, and 403(b) plans.
For more information, or to review your estate planning documents, please contact Jan Myskowski.
*Jan P. Myskowski is admitted in New Hampshire and Massachusetts.
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Jan Myskowski at 603-545-3654.