Planning For Death (of a Marriage) Using Estate Planning Tools: Removing Spousal Support as a Contested Issue in a DivorcePosted: August 15, 2011
One could say that we rarely live in the present. We are either preoccupied with demons in our past, or busy planning for and anticipating future events. Paraphrasing John Lennon, the present is what happens when we’re busy worrying about the future. Since there is not much we can do about the past, we utilize therapy to cope with it. But we can still affect the future, though, and all the uncertainties that come with it.
As a society, we have tried to calculate the probability of every occurrence. Actuaries work day and night trying to figure out which cars get in the most collisions in each region of our country. Life insurance companies try to determine how long we are all going to live. Floods, earthquakes, fires, theft, health—you name it, we have statistics about them. Our financial institutions attempt to speculate with our markets, resources, and commodities. Our political machine tries to anticipate what the electorate most desires in the coming election cycle. And our retailers try their best to learn consumers’ innermost desires.
As individuals, we have become more astute and sophisticated as it relates to personal planning. We plan to have children. We save money for their education. We plan for our retirement. A smaller percentage will plan for their deaths by way of an estate plan. The irony of it all is that the one certainty in all of this—death—is the one least anticipated.
After reading the preceding three paragraphs, you may notice one glaring omission. In modern society we have two “d” words: death… and divorce. Aside from death, divorce is probably the second most likely event in all those described above (single people excluded, obviously).
It is tough to determine an accurate divorce rate from state to state, no matter what any statistic says to the contrary. Not every married couple divorces in the same state in which they married. For example, Nevada (because of Reno and Las Vegas) probably has a disproportionate number of marriages performed there than divorces. One source states that in Las Vegas alone, almost 120,000 marriage ceremonies are performed each year. For a state of 2.6 million people, the divorce rate in Nevada, based on number of marriages, would be extremely low. However, we can likely agree, at least anecdotally, that divorce rates are higher in the early 21st century than they were in the early to mid 20th century.
Divorce is often not in the planning equation. We have tools in the form of agreements to anticipate divorce, such as cohabitation agreements, prenuptial agreements, and postnuptial agreements. However, for whatever reason, nuptial agreements are commonly taboo, associated with some sense of distrust, greed or being cold-hearted.
In many divorces, the specific issue of spousal support (commonly referred to as “alimony”) harbors much of the malevolence associated with a divorce. Although California has been a “no-fault” jurisdiction for over four decades, the issue of spousal support amplifies a lot of the resent and bitterness that lay in the background of the court action, which can be part of an acrimonious divorce.
Divorce should be an event that is planned for, but hopefully never experienced. Specifically, the issue of spousal support—frequently an issue that causes a lot of resent between divorcing spouses—should be dealt with using common estate planning tools. By planning for spousal support that may be part of a potential divorce, using many of the tools commonly used for estate planning, spouses can contain many of the messy issues related to a contested support issue.
Spousal Support – Background
As a general rule, as long as husband and wife are living together, they owe each other a mutual duty of support. The mutual spousal support duty during marriage operates independently of the spouses’ marital estate or financial circumstances. The spouses’ respective support obligations are not conditioned on the existence of community property or income. However, during divorce proceedings, a court has the ability to award a support order to one of the spouses. The trial court has broad discretion in making the order. The propriety of a spousal support award (whether to order it and, if so, its terms) is judged broadly by the parties’ “circumstances” in reference to the standard of living established during their marriage and their respective needs and abilities to pay.
Without going into the specifics of the factors that must be analyzed in order to shape the support award, courts apply a formula that calculates an initial (temporary) spousal support order. This calculation is often performed using court-authorized software applications. The software generally deducts a percentage of the lower-earning spouse’s net income from the higher-earning spouse’s net income. The remaining amount is the support obligation that the higher-earning spouse must pay to the lower-earning spouse until final resolution of the case, or modification/termination of the court order, whichever happens first.
Problems Spouses Face With Spousal Support Orders
Spousal support orders often create or amplify acrimony between two ex-spouses. A strong possibility is that financial issues were the cause of the breakdown of the marriage. Whatever the reason for the divorce, when one spouse is ordered to pay the other spouse after-tax money, every month, it tends to rub the higher-earning spouse the wrong way. Two main problems result from spousal support orders.
First, spousal support orders can fuel a spiteful fire. Spousal support orders create a disincentive for the lower-earning spouse to find a job if he or she is unemployed, or to seek out better opportunities if he or she is under employed. The lower-earning spouse could choose to benefit from his or her higher-earning spouse’s net income rather than to go and get a job. This would also create a spiteful burden on the higher-earning spouse.
Second, fewer dollars are left for minor children or other important expenses. With every dollar spent on spousal support, it equals a dollar fewer to be used toward the children’s expenses, or toward expenses that may indirectly benefit the children of the spouses, like a nice place to live close to a good school.
Additionally, family resources are often expended on attorneys during the divorce to prove the parties’ incomes in order to determine the appropriate spousal support amount. Time and money, both which the parties will never see again, are wasted contesting the singular issue of spousal support—an issue that is as much emotional as it is pecuniary.
The days of Ward and June Cleaver are long over. In this sophisticated, and more expensive, day and age, two incomes are commonly required to run a middle class household. Spousal support orders create strife, undue burden, and acrimony in an already stressful situation.
Using Common Estate Planning Tools to Avoid Spousal Support Orders
In general terms, a spousal support order creates an income interest for the lower-earning spouse in the parties’ joint net revenue stream. In crudely general terms, it’s much like an annuity or income interest from a trust. The legislature decided years ago that two former spouses owe each other a duty to support each other in the event of a divorce instead of laying the burden on taxpayers (public benefits for the lower-earning spouse). This assignment of burden is justified and well reasoned. However, the spouses should plan better to avoid splitting the limited net income pot at the time of divorce.
Spouses, and business partners, often have to deal with the idea that neither partner is immortal. To that end, partners typical purchase life insurance. The thinking is usually summed up with the phrase “you never know”. Divorce should be treated with the same care. You never know.
Spousal support orders in divorce proceedings should be treated like a cross between retirement and death. It is like retirement in that you never know what your financial situation may be like in the future. It is like death in that you never know when it’s going to happen.
Financial institutions could offer programs that are like individual retirement accounts. Spouses can then make either pre-tax or post-tax contributions to the account. The funds are invested in a diversified portfolio. Conditions are placed on the account such as early withdrawal penalties, minimum contribution limits, maximum contribution limits, et cetera.
The current method of dealing with spousal support in a cash-poor household, via current financial products like qualified retirement accounts or life insurance policies, the spouses would have to withdraw the funds early, paying a penalty, or borrow against the funds, creating a debt obligation that may end up being as burdensome as the spousal support order itself.
With a spousal support contribution account, in the event of a divorce, the parties are then allowed access into this “joint” account. The lower-earning spouse would have a greater share than the higher-earning spouse. The longer the spouses remain married, the larger this fund becomes. In many respects, the marital union itself has a “retirement” account. If the spouses never divorce, conditions can be placed on the account regarding the manner in which the funds can be used with both spouse’s consent. For example, the spouses can decide to put the funds toward an adult child’s down payment of a home. The idea would be that toward the latter end of a marriage, the expenses are lower and the likelihood of a drawn-out acrimonious divorce is ostensibly lower.
A spousal support contribution account can also accept contributions from sources other than the spousal income. This fund can be treated in conjunction with each spouse’s estate plan. It can have a life insurance quality to it as well, whereby the fund is distributed upon one spouse’s death to the surviving spouse. If both spouses pass simultaneously, it can have a designated beneficiary, which could be their family trust or surviving children.
A spousal support contribution account is no free lunch. It certainly cannot contemplate every situation in which spousal support would be unexpectedly warranted.
First, a spousal support contribution account is most effective with long-term marriages, as the funds have had time to grow into a sizeable amount. A spousal support contribution account will do little good for a marriage of shorter than, say, five years, for example. It may provide for some relief to the higher-earning spouse, but the account is presumably not very large five years in.
Second, the contribution account does little to provide an incentive for the lower-earning spouse to obtain gainful employment. Said another way, a “deadbeat” spouse can still sit back and collect the income from this account upon divorce. That being so, the account provides clarity to both spouses as to the finite amount set aside for support. More importantly, the amount in the fund is pre-determined. It has been contributed into over the course of the marriage. A spousal support order would require the higher-earning spouse to compensate the lower-earning spouse on the fly, regardless of current financial obligations.
Third, in light of the recent economic downturn, one of the first expenses that would likely be cut by a struggling family would be a spousal support contribution fund. Unless the divorce is very likely to happen, contributing to a spousal support account when a family is having a tough time making ends meet would be absurd. Therefore, spouses would likely not contribute to this fund when times are tough. Ironically, when times become tough is when spouses usually contemplate dissolving the marriage.
Fourth, with all other contributions—retirement accounts, children’s savings, general savings, daily expenses—the spouses will need to determine an appropriate amount to contribute to the spousal support fund for the fund to be worthwhile. As mentioned above, planning for divorce is not the top priority for most people. It comes in a distant fourth to death, retirement, and children’s savings. That being said, even if both spouses contributed a collective $500 per month, that is a $6,000 contribution annually which could be rather sizeable after even ten years.
Divorce usually gets paid short shrift when it comes to marital planning. The specific issue of spousal support can prove to muddy the waters of the river that is divorce. For the higher-earning spouse, this means being in the unfavorable position of literally paying your soon-to-be ex-spouse’s way. For the lower-earning spouse, spousal support means using the double-edged sword that is not looking for work and requiring your spouse to pay you after-tax monies.
One way to ease stress on the back end is to “amortize” it over the course of the marriage. With such estate planning devices like qualified retirement plans, annuities, life insurance policies, and other similar financial products, people are able to plan for death, injury, and the inability to work due to old age. However, divorce oftentimes creates similar hardships. Thus, estate planning techniques should be employed to anticipate a potential future obligation such as spousal support. If a joint contribution fund is employed, the spouses will have transparency and clarity as to the nature and extent of a spousal support obligation in the event of a divorce. Additionally, if divorce never occurs, the spouses will ostensibly have a sizeable asset with which to invest or distribute. Divorce, and related issues such as spousal support, should be treated in the forefront of a marriage and not in the shameful backroom. Divorce is a fact of life that carries with it substantial economic and emotional turmoil. It would be absurd not to plan for it.
 All references in this post to divorce and marriage also include related concepts for registered domestic partners. Although the accurate legal term for “divorce” is “dissolution”, I will refer to dissolution by its common name of “divorce”.
 The scope of this post is limited to the issue of spousal support as it relates to a divorce and does not touch upon issues related to child support. Child support may just as easily arise out of circumstances unrelated to marriage or divorce. As such, it is a much more complicated issue than this post would like to address.
 See Cal. Fam. Code §§ 4320, 4330(a); Marriage of Meegan (1992) 11 Cal. App. 4th 156, 161.
In the last post, I raised some issues regarding most people’s approach to marriage. I touched on aspects of marriage that significantly impact both spouses’ lives and yet most people feel it is taboo to even discuss nuptial or cohabitation agreements. In this post, I will raise issues stemming from divorce. Specifically, how divorce impacts a newly-single person’s estate plan. Please note that the following assumes the following facts: the marriage was for over 5 years, there are young children from the marriage, and there were some assets divided between the ex-spouses, and the ex-spouses are both currently employed.
(Part I can be found here.)
Divorce: So you’re newly divorced. Congratulations! That must have been a strange, emotional journey. But, alas, you’ve made it to the other side–granted, a helluva lot poorer–but you’ve made it nonetheless. What’s even more important is that your minor children can move on with life and just be a kid again.
There are few issues, though, that are imperative to address before you get too happy over in divorceville. Mainly, now that you are single, did you make sure to cover all your bases with respect to your “new” estate plan? What I mean is that you don’t have a wife anymore, but you still have children. If you were to keel over and die right this second, what would happen to your 401(k), stocks, savings, car, house, etc.? Did you think that they would go directly to your children?
Yes and no. I guess the first question is, “Do you have a will?”
No will: Anytime someone dies without a will, his/her property is distributed to heirs as determined by what’s called an “intestacy statute.” By default, in California, a dead person’s property first goes to a surviving spouse. You got rid of that person. Next, it goes to one’s surviving children. Bingo! That’s what you wanted, right? Almost. Children under 18 years of age cannot hold property. Therefore, all that property going to a minor is frozen by the court, and promptly released to that child upon turning 18 years of age. That’s bad in two respects. One, the property is frozen (i.e., no one can do anything with it, including investing it). Two, an 18 year old will come into a whole lotta cash when he/she is way too young to do smart things with it. That’s bad all around.
Will: Phew! Ok, so you at least have a will in place. Well, if that will provides for a minor taking property, see above.
On a similar note, imagine if you listed your ex-spouse as a beneficiary to those things that do not pass through your estate when you die (e.g., 401(k), pension, life insurance, etc.). Without changing that beneficiary to someone else, that ex-spouse you took your time and money to get rid of is now the proud beneficiary of all of those assets!
If you were thinking, “Ah, who cares? It all goes to my kids someday anyway.” That’s a bit short-sighted. What if your ex-spouse re-marries with someone who has children from a previous relationship? Well, all of those assets that just passed to your ex-spouse upon your death may end up going to someone else’s children! The bottom line is that now is the time to declare what you want done. Once you’ve died, well… “speak now or forever hold your peace.” I’m sure you remember that one from your wedding day.
So what’s the solution, then?
First, upon final judgment of divorce, notwithstanding what was decided during the divorce, a newly-single person should review all of his/her beneficiary designations, all insurance policies, all deeds, and all forms of title. Make sure it’s consistent with your divorce and with your wishes. Second, think about seeing an estate planning attorney to discuss appropriate estate plans for you now that you are single, have minor children, and want to make sure your wishes are carried out post-death. One way is by way of a trust, where someone else holds property for the benefit of your minor children. Maybe just a thorough will suffices.
The bottom line is that you are a newly single individual charged with the task of caring for minors. Single parents do this all the time. They try their best to get by. However, you’re different. You used to be married. You’re used to a certain lifestyle. You’ve accumulated quite a bit of assets, and debts, that are now crudely divided. You worked hard to get through your divorce. Death is another form of divorce, where life leaves your body and takes all of your property with it. Don’t leave it up to chance.
Preface: Probate attorneys fees are set by statute. A lawyer’s fees in probate are not necessarily increased or decreased by more involvement with the realtor selection process.
Under ethical rules promulgated by California, lawyers must refrain from making contact with a person represented by a lawyer. The lawyer may only communicate with that person’s legal representative. This is to ensure that one lawyer does not undermine the relationship between attorney and client and to also keep the dialogue between lawyers, as opposed to splintered discussions between lawyers, parties, and lawyers with the parties themselves. However, this ethical rule is, as far as I know, unique to the legal profession. Accountants may speak to anyone else, even if that person has an accountant. Doctors may speak to any else, even if that person is the patient of another doctor.
It may seem ridiculous to limit accountant or doctor communications, but there are a few circumstances where I think people would benefit from limited communication from certain professionals. One of those circumstances is within the probate realm. As an estate goes through probate, the assets are inventoried and oftentimes sold so that the assets can become liquid to distribute to beneficiaries (e.g., a house is sold so that it can be “split” between multiple beneficiaries who do not want to live in and maintain the house). In this situation where the estate’s real property is sold, a realtor is often used to market and sell the property. The broker is hired by the estate’s personal representative (the executor or administrator).
While the personal representative of the estate is often represented by an attorney, there are no limits as to whom a realtor may contact like there are for lawyers. Therefore, a realtor can keep an eye out for the public notices denoting recent probate filings (all public records) and then cold-call each and every representative of each new probate filing. It’s something akin to ambulance chasing, except it’s more like hearse chasing! As you can imagine, the realtor has a financial interest in getting the listing–the commission. The realtor will also try to steer the client toward early marketing and to forgo any court confirmation of the sale in order to get his commission quicker and easier. Sometimes this meddling by the realtor undermines the attorney’s representation of the personal representative. Once that probate is filed and the notice is posted, the personal representative of the estate is literally bombarded by realtor phone calls, flyers, mailers, personal visits, etc. It gets overwhelming. The personal representative often feels pressure to sign the listing before he/she has authority to act on behalf of the estate. It’s ugly.
If there is a place other than the legal industry where there should be limited communication with represented individuals, this is surely one of them. With the stress of going through the funeral process, sifting through a dead person’s records and property, and answering to heirs who want their distribution of the estate, the representative must also deal with greedy realtors looking to score a listing. When trying to counsel the client to be very careful in choosing the realtor, the realtor oftentimes convinces the personal representative that the lawyer is merely dragging his/her feet. It can be an ugly push-pull. If realtors were required to communicate with the estate representative through his/her attorney, then this predatory behavior would at least be hindered. In this case, more lawyer involvement is beneficial.
We’re all going to die. I don’t mean that in a Chicken Little sort of way. I mean that in a stating-the-obvious sort of way. The jury is still out as to what happens to us after we die, but one thing that is fairly certain is that once you die you have little say over what happens to your property, to whom you give your property, and any other instructions you’d like to make from “beyond the grave.” Of course, you can have a say if you properly draft and execute a will.
Wills are cheap and easy to create. I even saw a commercial on TV where a famous lawyer advertised will drafting services online for less than $100. Even still, there are few people out there who have a will. Statistics vary, but one study shows that 55% of adult Americans do not have will.
If that’s the case, it seems like it’s not that big of a deal to die without a will, right?
Not exactly. When someone dies without a will, the person is said to have died intestate. For those keeping score at home, that means “without a will.” When you die intestate, your property (which becomes your estate’s property, since you’re dead and all) is distributed using your state’s intestacy statute. Well, we all know what intestate means, but what exactly does statute mean? A statute is a law created by the legislature, or law-making body of the government (think, Congress). So somewhere in the California Code (Probate Code sections 6400, et seq. to be exact) there is a statute (remember, that just means “law”) that says where a person’s property goes if he or she dies intestate. Well, that then suggests that if you don’t have a will when you die, then the legislature decides who gets your property.
Who cares? I don’t even own anything!
The cool thing about a will is that it doesn’t “speak” until you die. So it can dispose of property that you don’t even own yet. You don’t have anything now, but what if you start accumulating property? Or what if you are later the beneficiary of someone else’s estate? Or you marry someone else who has some property? Just as importantly, you can “cut” people out of any share of your estate if you so decide.
Let me use an example to illustrate an extreme circumstance where a will would certainly clarify any ambiguity. Hypothetically, let’s assume Harry is in a relationship with Wendy. Harry and Wendy have a child, Cheryl. Unfortunately, Harry and Wendy start having problems and decide to split up. They were never married. Harry moves on, and although he remains a loving father to Cheryl, he decides to marry his new girlfriend Greta. Greta has two children from her previous marriage. As tragedy would have it, Harry chokes on a pretzel and dies. Harry never got around to drafting a will. Under California’s intestacy statute, all of Harry’s community property and one-half of his separate property go to his surviving spouse, Greta. When Greta dies, all of her property (including the property she acquired from Harry’s estate) is now disposed of through her will, or if there is no will, by the intestacy statute. In other words, unless Greta provides for Cheryl through her own will, Cheryl will have to somehow intervene in order to assert her rights, if any, to take some of her father’s property. However, if Harry had a will providing for Cheryl, then disaster could be averted… or, at least Harry’s true wishes would be clear.
So, what’s the point? I still don’t have any more property than when this post began.
The point is that peoples’ living situations are changing constantly. These days, a Thanksgiving feast involving ex-spouses, step-children, biological children, half-siblings, etc., are commonplace. Divorces are par for the course. People are living longer and dying with considerable amounts of property. Property is being re-characterized all the time. Everyone should take the time to at least consider drafting a will.