In Tomorrow We Trust

Consider Marcy’s hypothetical story.

Marcy was devastated. She and her husband, William, had been having some marital issues after she discovered that he was using drugs recreationally. When she found out he was also having an affair, it was the final straw. After learning of William’s infidelity, she went through a brutal separation and divorce. Her attorney negotiated a favorable separation agreement, including primary custody of her twin nine-year-old daughters, alimony, and postseparation support. Even though William was the one who had been unfaithful to Marcy, William’s siblings sided with William throughout the divorce. In fact, William’s sister, Anastasia, testified against Marcy at a temporary custody hearing. Their divorce was finalized in December 2017, and William remarried in May 2018. Fortunately, Marcy was close to her mother and siblings and they were very supportive of her during her divorce.

In Marcy’s separation agreement, William waived all his estate rights, including rights to Marcy’s retirement and insurance benefits. Marcy was very busy after the divorce, managing her full-time job and mothering her twins four days a week. She had not made time to meet with an attorney to update her estate planning documents. She also had not made time to update the beneficiary designations on her IRA and her private life insurance policy.

Tragically, Marcy’s vehicle was hit by a distracted driver on August 5, 2018. Fortunately, the twins were not in the car with her at the time of the crash, but Marcy was severely injured and spent 20 days, mostly unconscious, in the ICU, before passing away on August 25^th.

Marcy’s estate planning documents, executed while she was married, included a inancial power of attorney, health care power of attorney, and will.

A financial power of attorney (also called a “durable” power of attorney, or “power of attorney”) is a written instrument by which one person, the principal, appoints another person as his or her agent (sometimes referred to as an “attorney in fact”). The instrument generally grants broad financial authority to the agent to act on behalf of the principal, if the principal is incompetent.

Marcy’s financial power of attorney named her former husband, William, as her financial agent, designated to make financial decisions on her behalf. The laws in Marcy’s state did not automatically revoke William’s authority as her financial agent upon entry of their divorce. Therefore, to the dismay of Marcy’s mother and her siblings, her ex-husband William was the only individual authorized to access and manage her checking account and other financial accounts during Marcy’s time in ICU. Marcy had planned to update her financial power of attorney naming her mother as her agent.

A health care power of attorney (also called a “medical power of attorney” or “medical proxy”) is a document that allows an individual to name someone to make medical decisions, including end-of-life medical decisions, when the individual lacks sufficient understanding or capacity to make or communicate his/her own health care decisions.

Marcy’s healthcare power of attorney also named William as her health care agent, designated to make medical decisions on her behalf when she was otherwise unable to give informed consent. The laws in Marcy’s state automatically removed William as her healthcare agent upon entry of their divorce. Marcy had named her former sister-in-law, Anastasia, as her alternate health care agent out of convenience, as her own sister lived across the country. Therefore, Anastasia was the only individual authorized to receive medical information and make health care decisions during Marcy’s time in ICU. Sadly for Marcy’s family, Anastasia was also the only individual authorized to make end-of-life decisions for Marcy and to direct the disposition of her remains. Marcy had planned to update her heath care power of attorney naming her sister, a nurse, as her agent.

A will is a document that only speaks at death, and, in addition to providing instructions regarding the disposition of assets upon death, should name an individual or individuals to serve as executor of the estate, guardian for any minor child or children in the event there is no living natural parent, and possibly name an individual or institution as a trustee to hold funds for young children, until the children reach a predetermined age, such as their mid-twenties, or older.

Marcy’s will was very similar to that of millions of other Americans who are married with minor children, as it left all her assets solely to her husband. If her husband had predeceased her, then her assets would go to a trust for her children to be held by a trustee until the children reached the age of 25. Marcy had also named guardians for her minor children, but as William survived, and was a natural parent, he automatically received sole custody of the children. Marcy had also named William as her executor and sister-in-law Anastasia as the alternate executor and as trustee for her children. The laws in Marcy’s state provide that after a divorce order is entered, any provisions in favor of the former spouse are automatically revoked. Therefore, sister-in-law Anastasia served as the legal executor of Marcy’s estate. As legal executor, she was in charge of organizing and settling Marcy’s final affairs, sorting through and selling or distributing her personal effects, and other important responsibilities. Pursuant to the terms of the will, and after payment of all expenses of the estate, Anastasia distributed all the remaining estate assets to a trust account for the benefit of the twins, for which Anastasia became trustee until they reached age 25. Marcy had planned to update her will to name her sister as executor and trustee of her minor children.

Retirement accounts and life insurance policies can be benefits related to work, such as a 401(k) and group life insurance policy, or individually acquired financial instruments, such as an IRA or private life insurance policy. Work-related benefits are governed by a special set of federal laws called ERISA. which stands for the Employee Retirement Income Security Act.

Marcy had both a 401(k) and a life insurance policy through her job with a national pharmaceutical company. The 401(k) had a balance of $500,000 and the group life insurance benefit was in the amount of one year’s salary, or $150,000. Just as with her estate planning documents, Marcy had not taken the time to review and update the beneficiaries on her retirement account and life insurance policy. William was still listed as the primary beneficiary on these assets at the time of her death, with the trust for her children named as the secondary beneficiary. Remember, William had expressly waived his right to claim any funds in Marcy’s 401(k) plan and to the proceeds of Marcy’s life insurance policy under the separation agreement. Under ERISA, the last beneficiary designation generally controls who receives the retirement plan proceeds, regardless of the terms of the separation agreement. So, despite the separation agreement, William received $650,000 in proceeds from Marcy’s 401(k) and life insurance, outright, without any restrictions! Marcy had planned to update her beneficiaries on her 401(k) and life insurance naming the trust for her minor children under her will as beneficiaries.

Marcy’s case is hypothetical, but there is a myriad of case law addressing similar fact patterns. Hilmann v. Maretta, 569 U.S. 483 (2013), and Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 129 S. Ct. 865 (2009), and the cases cited in these opinions are a good starting point to learn more. We encourage you to follow up with your attorney and make needed updates today. Your attorney might refer you to an estate planning attorney for further assistance.

Checklist for Post-separation/Post-divorce Document Updates

• Will
• Revocable trust
• Financial power of attorney
• Healthcare power of attorney
• Other advanced directives, such as living will, HIPAA authorization, declaration for a natural death
• Life insurance (both through work and private)
• Retirement accounts (both through work and private)
• Bank accounts—Joint or POD designations
• Real estate—Joint or survivorship designations
• Vehicles, stocks, and bonds
• Name change documents (social security, driver’s license, passport, voter registration, post office)
• Safe deposit boxes

Domestic Relations Order

When retirement benefits are divided in divorce, usually a separate domestic relations order (DRO) is required. It is best to follow up with your attorney and make sure DROs are entered as soon as possible. If a party dies prior to the entry of a domestic relations order, the plan may or may not be required to accept the DRO.