Failure to Update Existing Plan in Virginia: How Divorce Can Impact Your Estate Plan
Now that we have addressed property settlement agreements, beneficiary designations, real and personal property and special needs, what happens if an estate plan already exists and you do nothing to update it? Presumably, the existing plan was prepared during the marriage and has the former spouse in fiduciary positions and named as a beneficiary. The entire plan should be updated to reflect new trustees, personal representatives/executors, financial powers of attorney and healthcare agents. But often, recently divorced individuals simply do not have the inclination to handle one more legal matter (particularly if the divorce was not amicable).
Virginia law has a savings clause that may apply. Under Virginia law, if a person creates a last will and testament while married, divorces and subsequently dies without updating his or her last will and testament, the divorce “revokes any disposition or appointment of property made by the will to the former spouse.” Va. Code §64.2-412. In addition, any appointment of the former spouse as a fiduciary under the will, including as executor, trustee, conservator or guardian, is revoked. However, this law does not change any financial power of attorney or healthcare power of attorney under which the former spouse may be named. Furthermore, the law does address provisions contained in a trust agreement. Therefore, a former spouse may have authority to act or be treated as a beneficiary unless changes are made or other state statutes apply.
Moreover, if there is an irrevocable trust or “spousal lifetime access trust” (SLAT) that benefits a spouse, then there may continue to be income tax consequences to the creator of that irrevocable trust even though the parties divorce. The regulatory and legislative history surrounding the applicable tax code sections (Sections 71, 672, 677 and 682) is not as clear as it should be, in certain circumstances, as to whether a grantor (or creator of the trust) will still be held liable for the income tax associated with the irrevocable trust that otherwise benefits an ex-spouse. Therefore, the trust agreement and relevant tax law need to be reviewed and a determination made regarding any ongoing tax liability.
Overall, taking into account all of the considerations described throughout this series, it is clear that after a divorce (and perhaps even during a divorce), it is imperative that you begin the process of updating your estate plan to avoid the potential of having a former spouse in a position of authority during incapacity or upon death and to avoid a former spouse unintentionally benefiting from your demise.