Video Transcript: Estate Planning and COVID-19
Dan Couvrette: I’m Dan Couvrette, the publisher of Divorce Magazine and Family Lawyer Magazine, and today I have the pleasure of speaking with Sharon Klein. Sharon heads up Wilmington Trust’s National Matrimony Advisory Solutions Practice and is president of Wilmington Trust’s Family Wealth, Eastern U.S. Region. She coordinates the delivery of all wealth management services including planning, trust, investment management, family, office, and private banking services, to high-net-worth clients. Sharon began her career as a trust and estate attorney and has over 25 years’ experience in the wealth advisory arena. She’s also the smartest person I know on wealth and trusts and managing it, and so that’s why I invited her today. Today we’re going to talk a little bit about divorce and estate planning urgency in light of COVID-19. Sharon, thank you very much for joining me today.
Sharon Klein: Thank you for having me Dan, it’s always a pleasure. And wow, that was quite an intro that’s high praise indeed. Maybe we should end right here!
We should share a little bit of information that may help people. Is there any urgency for divorcing people to deal with their estate planning now?
When you refer to urgency you’re of course referring to the pandemic in which we find ourselves now, but I want to preface my remarks by saying that reviewing estate planning when a divorce is pending is always urgent and that’s because you want to make sure that your designated heirs are appropriate and that you have the right people designated on documents like a health care proxy and a Power of Attorney. It’s likely the case that you don’t want your soon-to-be ex-spouse to inherit one dollar more than you have to give them and you likely don’t want an estranged spouse making important life and death healthcare decisions for you or conducting financial transactions on your behalf.
So all of those documents need to be looked at very closely. During the pendency of a divorce, it might not be possible to change all of your documents, so, for example, you might not be permitted to change account titles or beneficiary designations on accounts like retirement accounts because typically the courts will want to maintain the status quo until the divorce is finalized, but the important message I want to convey today is that people should change the documents that they can change immediately and be poised to change the balance as soon as they’re able. And then when we think about the documents that people should review when the divorce is pending, the first document that comes to mind is a will. A will should be reviewed immediately and unless there is some constraint because of a prenuptial agreement that you’ve signed or the particular provisions of your state’s laws, ordinarily wills can and should be changed during the pendency of a divorce to make sure the heirs are still appropriate and that you don’t leave more than you want to a soon-to-be ex-spouse.
Actually, in a recent case in New Jersey, this was illustrated very well. That case was called Acosta Santana v. Santana. In that case, a husband was getting divorced from his wife. The divorce was not yet final. In his will, he left his estate to his wife and his children and he died. Had he been divorced from his wife before he died, she likely would have received less than half the amount to which she was entitled under the will. However, because they weren’t divorced, she got a lot more than she otherwise would have received. In some states, if you are actually divorced, so if the divorce decree is final, they have statutes that are known as ‘Revocation on Divorce’ statutes, and what those statutes say is that if someone is divorced and they haven’t updated their estate planning documents – so the ex-spouse is still named as their beneficiary – when they die, the statutes do revoke the bequest to the ex-spouse. But a couple of caveats before people think that they could rely on those types of statutes: first of all, not all states have them. Many states do not. Secondly, they do not kick in during the pendency of a divorce. For those revocation statutes to be effective there actually needs to be a final divorce – a divorce decree. The third caveat is that even when they do kick in, they might not work so perfectly. A perfect example of that is the New York case Matter of Lewis, where a woman died about 10 years after she had been divorced but she hadn’t updated her planning documents so her ex-husband was named as her beneficiary. New York does have a Revocation on Divorce statute, so in that regard, New York law came to the rescue and revoked the request of her whole estate to her ex-husband. However, the problem was that her alternate beneficiary was her ex-father-in-law – the father of her ex-husband. The court acknowledged that the father was just going to inherit all the assets and leave them to his son – the ex-husband – which was precisely the result that the statute was intended to prevent. But that is the way the statute worked.
So the most important lesson to be learned is: don’t rely on state statutes. Proactively change your planning.
So it sounds like it is absolutely necessary, at any time, to make sure that your affairs are in order. But now, with the pandemic, is there an added urgency that people need to be paying attention to? And is there an opportunity for them to do anything right now?
Yes, very very good questions, and as I mentioned I think planning during the pendency of divorce is always urgent, but there is heightened urgency now. And why is that? Because we have hearing delays, we have court closings. So the pendency of a divorce is going to be more protracted. It’s going to take longer than ever to get divorced so it’s particularly important to attend to planning during that prolonged period, and particularly since the prolonged period happens to be in the middle of a pandemic when people have concerns about mortality anyway. So that means it’s more important than ever to attend to those documents. And you raise a very good question: can people even do it at this time? That is a very important, practical question because ordinarily, estate planning documents need witnesses. They need notaries. How do you do that with people working from home and social distancing? You can’t typically go to your attorney’s office and have your will witnessed and notarized. The good news is that many states have enacted emergency orders that permit remote witnessing and remote notarization. You have to take a look at the provisions of your particular state. There is actually a tremendous resource – a state-by-state survey that’s put out by ACTEC, which is the American College of Trust and Estate Counsel, which is the highly-selected, peer-selected organization of the top trust and estate lawyers in the country. I’m very proud to be a fellow of ACTEC, and we have on our website a state survey of all the states that have enacted this legislation. So you can go and take a look at the requirements in your state. You could get that on the ACTEC website by searching for remote notarization. It’s very important at these times.
Is there any other general advice that you would give divorcing people. You’ve covered a lot here already, but particularly high-net-worth divorcing people – can you give any advice about what they should be doing now, and or should always be doing?
Yes, for the high-net-worth people now more than ever, I’d like to give two pieces of advice. One is to focus on the importance of leverage and credit, because oftentimes when people are getting divorced they have assets that aren’t susceptible to easy division and if one spouse is going to get that illiquid asset there may not be enough liquid assets to make the other spouse whole, that could be because the couple owns a family business, Artwork, or partnership interests. So leverage and borrowing can become very important, particularly in times of the pandemic where you don’t want to impair the underlying holding by perhaps selling during a fire sale with the volatile markets and the pressure on family businesses. If you could access credit and borrow and get the liquidity to buy out an ex-spouse that might be the best result, and quite frankly, in and out of the divorce context and whether you have illiquid assets or liquid assets for that matter, credit and borrowing have been very popular during this pandemic because no one wants to engage in a fire sale even for a liquid basket of assets. You want to make sure that you’re thinking about the underlying assets, and if you don’t want to distort the underlying holdings and you could borrow against them and leave them intact that’s often a very wise solution.
The other thought that I want to end with is to emphasize the importance of analytics in the divorce setting. Analytics are always important and having a comprehensive asset review where you have the values of all of the assets and you have cash flow projections and you have risk analytics – that’s always important. In today’s environment, it may be even more important in positioning yourself at a negotiating table to show, with the hugely volatile markets and the pandemic’s effect on valuations, that one spouse needs more assets to sustain a lifestyle in order to give them a cushion, in times like this – particularly if the settlement is designed to last a person’s lifetime – I often see matrimonial attorneys using Excel spreadsheets to predict future returns, so, for example, they may say they expect a 6% return going forward but markets, as we can see in times of pandemic, are not static, and you have to take into account stress on a portfolio with sophisticated analytics that go way beyond an Excel spreadsheet. And if you can stress just a portfolio and if you can take into account tax considerations, you could potentially position yourself very well at the negotiating table for a larger settlement than you might otherwise have asked for, and at Wilmington Trust, we do those types of sophisticated analytics all the time. We have proprietary software that comes in very handy for people and their attorneys because it’s very difficult to argue with hard data.
Dan Couvrette: Sharon, thank you once again for joining me on this Zoom cast and the urgency that you’ve expressed is something that people should pay attention to and they should get everything in order as quickly as possible. No time to delay. We don’t know when their divorce is going to get completed and that just puts more pressure on them if something does happen. So the advice is: people get your estate in order. I have two websites listed on the screen right now one is the Wilmington Trust website where you can find more information. It’s www.WilmingtonTrust.com/Divorce and the other one is to a place where you can find more information about how you can get things notarized and how you can get things moving ahead so that you don’t have to wait. Sharon thank you once again. Stay safe and be well.
Sharon Klein: Thank you, likewise.