December 8, 2017
In Wisconsin, divorce raises significant challenges for both revocable and irrevocable trusts. Failure to address issues raised by divorce proceedings will often result in unfavorable or undesirable outcomes.
In the third of our series about how divorce effects estate planning in Wisconsin, we explore how divorce impacts revocable and irrevocable trusts.
Revocable Trusts Can be Modified Due to Divorce
The “dispositive” or beneficiary provisions of a trust that benefit a former spouse are generally revoked by divorce. The appointment of a former spouse as trustee is also generally revoked. Often, this is desirable. As most premarital revocable trusts in Wisconsin are “joint” trusts, failure to update a revocable trust will result in a complicated post-death trust administration process.
Where there is a preexisting revocable trust, our estate planning attorneys will discuss it with our client’s divorce attorney. During the divorce process, we will work to determine the most appropriate timing of any trust update. Revocable trusts are often not updated during the divorce process. Rather, trust updates are completed after the divorce has been finalized.
In rare instances, post-divorce updates can be completed with a simple trust amendment. However, it important to note that failure to update a revocable trust is likely to result in multiple post-death issues.
Exceptions to the General Divorce Rule
Although the general concept is that a former spouse is removed from a revocable trust as a beneficiary and as a trustee upon the conclusion of a divorce, this is only the general rule. Much like our discussion of divorce and Last Wills and Testaments, there are many exceptions to this general rule.
The “Intent” Exception
One of the primary and legally problematic exceptions is the “intent” exception. Similar to a Last Will and Testament, the general rule that a former spouse is removed from a revocable trust upon divorce is subject to the “intent” exception. If a former spouse can show that the trust creator “had an intent contrary to” Wis Statutes Section 854.15, then the former spouse can be included as a trust beneficiary if the revocable trust was not updated following divorce.
The easiest way to eliminate the “intent” exception is to execute a new revocable trust, as a single, unmarried person.
Unique Issues Due to Wisconsin’s Joint Marital Revocable Trusts
Most Wisconsin revocable trusts created during marriage are joint trusts. Often in Wisconsin, there is only one trust document created for both spouses. In addition, the husband and wife as the persons making the trust, are usually also joint co-trustees. These trusts are created jointly for numerous Wisconsin marital property reasons that no longer apply once the couple divorces.
Therefore, upon the termination of a marriage, a new single revocable trust should be created. This new trust will set forth the new trustee, successor trustees, and new dispositive beneficiary provisions. Normally the former spouse is removed as a beneficiary and as a trustee or successor trustee. The creation of this new trust will eliminate arguments that a former spouse was meant to be included or was still intended to be a beneficiary.
Also, most trusts do not require court involvement upon death. As such, an unscrupulous former spouse could act as trustee by not disclosing the divorce. If no family member is aware of the Wisconsin law, the former spouse could use the non-updated trust to take financial advantage for him or herself.
Revocable Trusts Present Asset Retitling Issues
A joint trust likely contained assets titled in the trust name as marital property owned by both former spouses. After a new single revocable trust has been established, property titles and beneficiary designations should be updated to reflect ownership by the new trust. For example, a house can be retitled to the name of the new trust establishing that the house ownership is now in a new trust name and not in the former spouse’s name.
Assets such as bank accounts, IRAs, investment accounts, and life insurance should be updated to change ownership to the trust name or to name the trust as beneficiary as appropriate. Bank accounts, life insurance, or other assets may have named the marital trust as beneficiary. As part of the new Wisconsin trust process, our attorneys will advise you on how to update asset ownership and beneficiary designations to name the appropriate beneficiaries for the new revocable trust.
Irrevocable Trusts Should be Reviewed and Updated
Normally, the person establishing an irrevocable trust will not be able to modify or update the irrevocable trust after divorce. During the divorce process, it is imperative that irrevocable trust issues and necessary changes be identified and addressed.
Typically trustee changes or beneficiary changes are addressed through court action to modify the trust, in the divorce judgment, or by agreement of the parties through a non-judicial settlement agreement. If this is not addressed during the divorce process, updating or modifying irrevocable trusts can be difficult.
Experienced Revocable Trust and Irrevocable Trust Attorneys
We have handled thousands of revocable trust estate plans. Our lawyers have worked through thousands of post-death trust and probate administrations. We have modified and updated hundreds of trusts and estate plans after a divorce. We invite you to contact our office to speak about how we can use our Wisconsin estate planning experience to help you.