Several months ago, the Pennsylvania Supreme Court decided a case regarding the relative rights to a pension plan and life insurance benefits between a decedent's estate and those of his surviving spouse who was engaged in divorce proceedings against the decedent at the time of his death. In re Estate of Michael J. Easterday, Deceased, 209 A.2d 331 (Pa. 2019). This case is a reminder of the interaction of probate law, marriage and divorce.

This article provides an overview of issues that trusts and estates practitioners need to consider with regard to marriage and divorce, whether in the planning stages or in the administration of a trust or estate, as well as statutory provisions that attempt to solve for a failure to provide for a spouse or to make changes to a plan drafted prior to a divorce.

A Spouse's Rights

If a Pennsylvania domiciled married couple fails to execute valid wills, the intestacy statute will determine how their probate estate is distributed. If a person dies fully or partially intestate, the surviving spouse is ordinarily entitled to a share of the intestate estate, see 20 Pa. C.S. Section 2102. The good news is that Pennsylvania law provides default rules that anticipate what a person might have wanted to do. The bad news is that the result is not what everyone would have intended. The amount of the intestate share of a surviving spouse is dependent upon such factors as whether the couple had any surviving issue, whether the decedent has living parents (if the decedent had no issue) and whether all of the decedent's surviving issue were also the issue of the surviving spouse.

If the decedent has surviving issue and all of those issue were the progeny of the couple, the surviving spouse is entitled to $30,000, plus one half of the intestate estate. If any of the decedent's surviving issue were not the issue of the surviving spouse, the surviving spouse is entitled to half of the intestate estate. If the decedent has no surviving issue and dies with a surviving parent or parents, the parents and surviving spouse are each entitled to half of the intestate estate. If the decedent has no surviving issue or parents, the surviving spouse receives the entire intestate estate. As one might imagine, these provisions might not result in the desired outcome when large sums of money pass to minor children or if parents who are estranged from a decedent are entitled to receive the decedent's assets.

In the event a decree of divorce is issued prior to the decedent's death, the surviving ex-spouse would have no interest in the decedent's intestate estate unless the divorce decree provides for some interest. This outcome is clearly what most would anticipate. If divorce proceedings are not instituted, but a spouse has willfully neglected the decedent spouse, refused to support the decedent spouse or willfully and maliciously deserted the decedent spouse for one year or more prior to the decedent spouse's death, the surviving spouse's intestate share shall be forfeited.

If divorce proceedings were instituted prior to the decedent's death, but no decree of divorce has been issued, the surviving spouse's intestate share is forfeited in the limited situation where grounds for divorce have been established. Grounds for a divorce are generally established by either a court determination that grounds for divorce exists, or if both parties admit that such grounds exist by consenting to the divorce through affidavits effectively filed with the appropriate court. Likewise, if the decedent dies testate and provides for the surviving spouse in a will, that designation will be honored unless a decree of divorce has been issued after making the will or if the "grounds for divorce" criteria set forth in 23 Pa. C.S. Section 2323(g) are satisfied. The caveat is that the gift under a will to the surviving spouse will be enforced if it appears that the gift was intended to survive a divorce.

Similar statutory language exists to terminate a spouse's rights under a revocable trust or pursuant to beneficiary designations on a life insurance policy, retirement account, annuity or other contractual arrangement for situations in which there is a decree of divorce or the commencement of divorce proceedings coupled with "grounds for divorce." The Easterday case is an interesting example of a likely unintended result that cropped up regarding these nonprobate types of assets. In Easterday, the wife filed for divorce and the husband and wife executed a property settlement agreement in which each of them retained their own pension and retirement benefits. At the time the husband died approximately one year after the divorce action was filed, no divorce decree had been issued. While both parties had signed affidavits consenting to the divorce, the husband's affidavit of consent was not filed within the time permitted by the Divorce Code and the husband never re-executed and filed another affidavit. For this reason, the court held that there were no grounds for divorce prior to the husband's death and therefore no revocation of the designation of the wife as beneficiary of his life insurance policy under 20 Pa. C.S. Section 6111.2. On the other hand, the decedent's estate was permitted to bring a breach of contract claim for funds paid directly to the wife under the husband's pension plan since the property settlement agreement had been properly executed and was not preempted by ERISA.

Notably, Pennsylvania law also addresses a divorced spouse's right to act as a fiduciary on behalf of a decedent in divorce proceedings. If a principal names a spouse as an agent under a power of attorney or advance directive for health care purposes, for example, that designation is revoked immediately if the principal or the spouse files a divorce action, see 20 Pa. C.S. Sections 5605(c) and 5430(a), respectively. This makes sense, since one would not want an estranged spouse to retain continued access to the principal's financial information or make health care decisions on the principal's behalf. Of course, it would be prudent to execute a new power of attorney and advance directive and attempt to retrieve any copies that the former agent might possess. Similarly, the divorced spouse may not act as executor despite such designation in a will, unless it appears that the decedent would have still wanted the divorced spouse to act in such a role.

Items to Consider in a Remarriage

Pennsylvania law also seeks to protect a decedent who was remarried after a divorce. If the decedent fails to execute a new will naming his most recent spouse as a beneficiary, the "new" spouse is entitled to at least the intestate share that they would have received absent the will. The exception is that a will made in contemplation of the new marriage that leaves out the new spouse may be enforced to deprive the new spouse of this minimum intestate share. In such a situation, the new spouse would be left with the option of electing against the will, which would entitle the new spouse to a one-third share of a statutorily defined portion of the decedent's property. This decision needs to be made within six months of the decedent spouse's death. The rights of the "new" spouse to receive a share of the estate or elect against a will may be waived by the use of a pre-marital agreement.

In the planning stages, a practitioner must determine whether a remarried client would like to leave property to children from a previous marriage and how property would be divided among the most recent spouse and those children. For example, a person entering a new marriage with two children from a prior marriage will likely want to leave some assets to those children and some to the new spouse. To avoid any disputes over the allocation of assets among these persons, the client should consider whether to enter into a marital agreement in which the new spouse agrees to forgo electing against the will and pursuing any assets left to the children from the previous marriage.

The client may decide upon direct gifts under a will in which assets are split between the most recent spouse and children from a previous marriage as the client deems fair. In this case, the most recent spouse and children from the previous marriage would have immediate access to their share of the decedent's assets upon the decedent's death and could use and give away those assets as they wish. One downside of this approach is that any funds left directly to the children, as opposed to the spouse, will immediately be taxed for inheritance tax purposes and consume a portion of the decedent's credit against the federal estate tax. Depending upon the age of the children, this factor may or may not make sense.  Another downside is that the most recent spouse will be able to leave any assets she received to anyone of her choice, including a new spouse.

To avoid this result, the client can leave some or all of the assets that would otherwise pass outright to the most recent spouse to a qualified terminable interest trust (QTIP). The QTIP method allows the funds to avoid inheritance and estate tax when the client dies, includes terms designed to provide support for the surviving most recent spouse and then mandates that the remaining QTIP property pass to the client's chosen beneficiaries when the surviving most recent spouse dies.

Summary

The Easterday case teaches us that couples in the middle of divorce proceedings should give consideration to the changes they would like to make to their estate-planning documents and beneficiary designations as soon as they are able to do so. The failure to consider these issues during and at the conclusion of the divorce process might result in an unintended or less than optimal result.

Joseph N. Frabizzio is of counsel at Robson & Robson where he focuses his practice on tax planning and controversy. Frabizzio holds an LL.M. in taxation and helps clients minimize their federal and state tax obligations associated with business transactions. He also assists clients with complex trusts and estates issues and succession planning. Contact him at 610-825-3009 or [email protected].