Publications > C & A News Alert - June 2011

Effect of Divorce on Estate Planning in Illinois

Divorce impacts almost every aspect of life. From finances to children, very little remains untouched when a couple makes the decision to divorce. One aspect that frequently is overlooked when a couple is going through the various stages of a divorce is their estate plan. Divorce is typically both very expensive and very stressful. As such, divorcing individuals often do not want to face the added expense and time required to change their estate planning documents. However, not doing so can have dire and unintended consequences.

Wills and Trusts

Executor/Trustee Appointment. Married individuals typically designate their spouse as the initial executor of their estate and the successor trustee of their trusts. If you are going through a divorce, or a legal separation, you should immediately decide whether you wish to make any changes in the appointment of these important fiduciary positions.

Beneficiaries. Likewise, most married individuals designate their spouses as the primary beneficiary of their estate and/or trust. Although under Illinois law the effect of a divorce is such that an ex-spouse is considered to have predeceased you for purposes of your Will and your revocable trust, you should discuss with your estate planning attorney what can be done to protect your assets in the event that you pass away before the divorce is final; recognize that legal separation is not the same as divorce and spousal rights continue until the divorce decree is entered. Illinois does have an “elective share” statute, which entitles your spouse (whether estranged or not) to contest your Will and receive a portion of your estate (assuming he or she is not the primary beneficiary). However, with proper planning, there are ways to limit the assets your spouse would otherwise be entitled to receive through such a Will contest.

Other Beneficiary Designations

Assets such as life insurance and retirement plans are typically distributed upon the insured or owner’s death via a written beneficiary designation. Married individuals typically designate their spouses as the primary beneficiary of such assets, and never give the beneficiary designation another thought. Therefore, it is extremely important that you keep your beneficiary designations in mind and make any changes necessary if you are contemplating divorce. Moreover, unlike a Will where once your divorce is final your ex-spouse is no longer considered a beneficiary, there is no statute in Illinois prohibiting your ex-spouse from receiving your retirement assets or life insurance proceeds if you do not change the beneficiary designations after the divorce is final. Even if your ex-spouse receives a portion of your retirement plan through a divorce, you still need to make sure that you change the beneficiary designation on that portion for which you maintain ownership.

It’s critical that you carefully review all of your beneficiary designations again after your divorce is final; otherwise, it will be left up to the courts to consider the terms of your Marital Settlement Agreement in deciding whether or not to uphold the beneficiary designation, and this can have an unintended negative result.

Powers of Attorney

If you currently have a durable Power of Attorney for Property designating your spouse as your initial agent, it is imperative that you consider revoking it; otherwise, your estranged spouse has unlimited access to your bank accounts or other financial assets. Financial institutions or other third parties are clearly not in a position to be aware of discordant marital issues, and as such they will lawfully rely upon a validly executed durable Power of Attorney for Property. Likewise, your Power of Attorney for Health Care should be revoked as well, as most individuals going through a divorce do not want their estranged spouse making health care decisions on their behalf.

In both cases, if you have provided any third parties with copies of old Powers of Attorney (financial institutions, health care providers, and so on), make sure that they are specifically advised that the old Powers of Attorney have been revoked since they may rely on the old ones in the absence of actual knowledge of their revocation.

Inheritances

Under the Illinois Dissolution of Marriage law, assets are categorized as “marital” or “non-marital.” The distinction is an important one since as a general rule only marital assets are subject to equitable division by the courts. Assets which are inherited are considered non-marital assets, unless they are “comingled.” Most spouses do not realize this when they receive an inheritance, whether it is from a parent or other relative, and when they deposit those assets into a joint account it constitutes a comingling of that inheritance, and later subjects those assets to equitable division in a divorce.

However, even if a married individual with some foresight deposits the inherited assets into his or her own individual account (as opposed to a trust account), that account is now part of his or her estate at death. If that individual passes away before his or her divorce is final, the surviving spouse can contest the estate to receive his or her spousal share of the inherited assets. As such, if you are considering a divorce, you should encourage your parents or anyone else from whom you anticipate inheriting assets to distribute any assets for your benefit to a trust, rather than outright to you. This strategy can protect you from other creditors as well.

Guardians of Minor Children

If you are either contemplating divorce, or are already divorced, and you have minor children, you should make sure that you have an alternate guardian designated under your Will. While the law customarily favors the surviving parent, the court must consider what is in the best interests of the child. Likewise, in the unlikely event that your ex-spouse passes away after you but while your children may still be minors, he or she may not have designated guardians to act for your children, in which case the court will be left to determine who should care for them.

In summary, if you are either considering a divorce, or you are already divorced, you should carefully review all of your existing estate planning documents in order to ensure that your assets will be distributed in the manner you intend and for the benefit of your family, rather than in some other unintended manner. If we can be of assistance in this endeavor, please contact any member of the Coman & Anderson, P.C. Wealth Transfer Group.

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