San Diego Estate Planning Lawyer Blog
Estate planning is more than just signing a last will and testament. It entails making provision for all of your assets through various legal instruments. In many cases, isolated estate planning events take place over a period several years, even decades, so that different laws may be applicable to the disposition of certain assets. Failure to regularly update your plans can prove costly after your death.
Divorce, Remarriage and the Meaning of “Net Assets”
Last year a state appeals court in San Diego had to sort out one such mess. The case was not officially published, and so it out cannot be relied upon as a statement of the law. However, the discussion in the opinion is a helpful way to understand the legal issues at play.
John and Katherine were divorced over 20 years before John’s death in 1998 opened up a dispute over a previous agreement regarding his future estate. The couple’s 1977 divorce agreement, filed in Illinois, said John would leave one-half of his “net estate” to the couple’s two children upon his death. The agreement defined net estate as those assets which would be taxable under federal tax code. That is to say, the Internal Revenue Code of 1954, as amended and in effect in 1977. Congress replaced the 1954 tax law in its entirety in 1986 and continues to amend the rules annually.
John remarried after his divorce. He later hired an estate planning attorney to revise his estate plan and name his second wife as sole beneficiary of a retirement account and two living trusts. He named his wife and attorney as successor trustees of the trusts, where he had transferred a significant portion of his assets.
After John’s death, his attorney informed the children from his first marriage that they were the beneficiaries of one of the living trusts. Each child would receive a distribution of about $450,000. In 2004, however, the children obtained a copy of the federal estate tax return filed on behalf of their father’s estate, which showed a net estate of over $8 million. The children retained their own estate attorney, who advised them that under the terms of their parents’ 1977 divorce agreement, the “net estate” would be valued at around $4.3 million–meaning the children, who were entitled to half the net estate under the divorce settlement, had been seriously shortchanged.
When Probate Court Can’t Be Avoided
The children subsequently sued the estate in probate court. After four years the court dismissed their petition. Last year, the California Court of Appeals reinstated the case and sent it back to the probate court. The immediate question was whether the California Probate Code allowed the probate court to even deal with this situation. John’s estate argued that since the children made claims related to assets outside the “probate estate”–the retirement account and the trusts–the probate court could not act. The court of appeals said this was incorrect. Merely placing assets outside the probate estate does not eliminate that court’s ability to grant relief if, as the children allege, their father violated his divorce agreement by moving those assets in the first place.
So the litigation will continue–nearly 15 years after the man’s death. In this instance, estate planning failed because of a failure to reconcile the obligations of a 1977 divorce agreement with Kasch’s desire to provide for his new wife. While most people don’t have the luxury of worrying about how to divide over $8 million in assets, divorce and remarriage are quite commonplace and require special attention when it comes to estate planning. If you find yourself in such a situation, feel free to contact the Law Office of Scott C. Soady to speak with an experienced California estate planning attorney.