How Divorce Affects Trusts in Massachusetts
Most couples arrange their financial affairs so that in the event that one of them dies prematurely, the other spouse is the major or only beneficiary. Shared children may change the arrangements that spouses make so that children are taken care of if one or the other spouses dies. What these arrangements cannot and do not do is to prepare for what could happen if the marriage ends and the couple files for divorce.
One of the two most challenging sets of decisions that has to be made if a divorce is impending is working out how assets, shared or individually owned, are distributed (the other challenging set of decisions is about child custody and the ongoing welfare of shared children and other dependents). Typically, if arrangements have been made to bequest assets to a spouse on death have been made in a will or a trust, then the person who made these arrangements may want to change them so the other spouse no longer becomes a beneficiary. This decision also includes arrangements like power of attorney, health care proxy or life insurance beneficiary, if a spouse had been named as such.
The timing of decisions about wills and trusts is important because it can take a minimum of 3 months, if uncontested, or much longer for a contested divorce to become finalized. At any point before a divorce becomes final, the arrangements made in relation to your spouse still stand. This means that if you had named your spouse as the major beneficiary in a will or revocable or irrevocable trust, then she or he will be entitled to that share of your assets if you die before the divorce is finalized. This is because you would be legally still married until that date.
This transition state also applies to a spouse’s designation as health proxy or power of attorney. If you become incapacitated before a divorce has become final, your spouse may still be in a position to make decisions about your health outcomes and financial arrangements even though your marriage is on its way to ending.
When the divorce has been finalized, under Massachusetts law, any will that has named your spouse as a beneficiary will become invalid and your spouse will no longer then be regarded as a beneficiary.
Revocable trusts and divorce in Massachusetts
Many people create a revocable or irrevocable trust at some point in their adult lives, especially if they have children they wish to protect if and when they die. Trusts have some advantages over wills. In particular, the assets they hold may be distributed towards named beneficiaries without having to go through probate.
There are also differences between revocable and irrevocable trusts which affect how assets can be protected as well as the effect on them if a married couple becomes divorced. Trusts until recently have been regarded as assets if a court has to decide on how assets are to be shared on divorce. This means that whatever the arrangements made under a trust, this could have been disregarded by a court and the assets used to distribute to one or other of the divorcing spouses according to the decisions made by the court. This still applies to a revocable trust, but may not now to an irrevocable trust. The change in law was made recently (July 2019) by the Massachusetts Supreme Court in a case involving the distribution of assets in an irrevocable ‘spendthrift’ trust. The Supreme Court decision overturned a lower court decision to include the assets in the trust as marital assets for division in the divorce of Mr. and Mrs. Pfannenstiehl.
Protection against unwanted use of trust assets before a divorce is finalized
There are various ways of protecting assets from being awarded to your spouse even when a divorce is impending. These measures should be made before divorce papers are filed, as when these have been received by the court, no more changes to things like wills, trusts, life insurance beneficiaries can be made until the divorce is finalized.
One way to protect assets from being awarded to your spouse is to change your will, revocable trust, life insurance policy, power of attorney and health care proxy before filing for divorce, not after! Irrevocable trusts cannot be changed and according to the new Supreme Court decision should not be affected anyway. Revocable trust arrangements are easier to change, especially as is often the case, you have named yourself as one of, or the only, trustee. Generally, it is easiest to use your attorney to go through your financial arrangements and make the changes if you think that your marriage has become irreconcilable and is heading for divorce.
One other way to protect assets from being awarded to your spouse even if you have named him or her as a beneficiary is to make a pre-nuptial agreement before marriage. This is easier said than done if you didn’t think about it before you got married, but if you have substantial assets which could be used in a divorce settlement if such an eventuality arose, it may prevent a lot of frustration and legal wrangling if you did go through a divorce.
If you didn’t change any of your financial arrangements before filing for divorce, then you will certainly need to do so after the divorce has been finalized. Your will would have become invalid if your spouse was a beneficiary and so until you make a new will, intestacy rules would apply. You will also need to remove your ex-spouse as a beneficiary in a revocable trust. This cannot be done in an irrevocable life insurance trust without the written approval by your ex-spouse in your Separation Agreement.