Articles

November 7th, 2022

The Marriage of Family & Estate Planning

Posted in: Estates, Trusts & Probate  Family Law    Tagged: Rama Taib-Lopez, Sarah J. Broder

Though a different set of laws governs estate planning and family law, the issues facing married or divorcing clients often intersect.

At Stein Sperling, we have the unique benefit of attorneys with concentrations in a range of practice areas “under one roof.” Our team of attorneys collaborate today to assure clients their full needs are covered.  

As a divorce and family law attorney, Rama Taib-Lopez represents individuals experiencing an upheaval of their family unit and relationships. With those changes, Rama often fields questions from her clients that pertain to their wills and estates.

As an estates and trusts attorney, Sarah Broder helps her clients in all aspects of estate planning. Many of her clients are either preparing to enter a marriage or are starting new chapters of their lives in the wake of a divorce. Sarah also specializes in preparing Qualified Domestic Relations Orders (QDROs) and other necessary orders to divide retirement assets pursuant to a divorce (including private employer-sponsored plans governed by ERISA, Federal Government pensions, Thrift Savings Plans, military pensions, etc.).

Rama and Sarah share the most common questions their clients have in the other’s respective fields:

QUESTION: Can a divorcing spouse have a Will done or re-done that removes their soon to be ex-spouse from their will (before the divorce is final)?

Sarah: Yes, a spouse can modify a Will/Revocable Trust to exclude a soon-to-be ex-spouse from receiving an interest in his/her estate. However, in Maryland, absent a marital property agreement (prenuptial agreement or post-nuptial/marital property agreement) specifically waiving certain spousal rights, the soon-to-be ex-spouse maintains by law certain legal rights that could impact the distribution of the other spouse’s assets if one spouse were to pass away. Specifically, Maryland protects surviving spouses from being disinherited (even if divorce proceedings were pending at the time of a spouse’s death). Accordingly, if a married individual dies while divorce proceedings are pending, the surviving spouse would still have the right to file an election to receive a portion of the deceased spouse’s estate. Current Maryland law provides for that election to be one-half or one-third of the estate (depending on whether there are surviving children). Under relatively new Maryland law (enacted in 2020), this election has been expanded to a formula that considers more than just probate assets when determining the amount of the elective share.

QUESTION: Can a spouse keep an asset from being divided as marital property by placing the asset in a trust?

Sarah: This depends on the type of trust and when the trust was established. If the trust is Revocable (also known as a “Living Trust”), then it would not be shielded from division by the Court in a divorce proceeding, assuming it was otherwise considered marital property under Maryland law. However, if a spouse transferred assets to an irrevocable trust during the marriage (i.e., before the divorce was contemplated or pending), then it could be argued that such assets would no longer be considered marital property. This question would need to be resolved by the Court on a case-by-case basis, as it depends on many factors including, but not limited to, the reasons for transferring the asset to the irrevocable trust, when the assets were transferred, and whether the transferring spouse retained any interest in the property transferred.

QUESTION: If my spouse and I agree on the terms of our prenuptial agreement, can one attorney represent both of us? Why or why not?

Rama: This is a very common question. Whether it is a pre-nuptial agreement, post-nuptial, or a separation agreement, one attorney cannot represent both parties, although it is possible for just one attorney to draft or prepare the agreement, each spouse will need to have their own attorney to represent them.

Even though the parties may be amicable and share the same end-goal, i.e. to reach an agreement, it is ethically prohibited for an attorney to represent two people who have conflicting interests.

The reasoning behind this is premised on the idea that the parties entering into these agreements have different, and oftentimes conflicting, interests. A single attorney could not possibly advise one of the parties of his or her potential rights or options without undercutting the other party’s potential rights or options.

QUESTION: Assuming we do not have a prenuptial agreement, should we keep our assets in separate accounts/trusts in case we might separate in the future?

Rama: This is one of those questions that appears simple, but the answer is actually quite complicated and depends on a number of details. The first detail is understanding the difference between pre-marital, non-marital, and marital assets, as defined by the Maryland Family Law Article. Simply stated, pre-marital assets are those assets acquired prior to the marriage. Non-marital assets include pre-marital assets and other assets that are acquired through an inheritance or gift. Non-marital assets can also stem to those assets that are directly traceable to an asset acquired prior to marriage or acquired by an inheritance or gift.

With that understanding, I would ask the client for more information about the assets that they are contemplating keeping separate.

Are these pre-marital assets? If so, then yes, you should continue to keep those assets in separate accounts/trusts and avoid any commingling, i.e. the mixing pre-marital funds with marital funds.

Are these non-marital assets, then the answer would again be yes, you should continue to keep those assets in separate accounts/trusts and avoid any commingling.

However, if these are marital assets, then keeping the assets in separate accounts/trusts does not prevent a Court in Maryland from including those assets in its valuation of marital assets and its determination of a monetary award.

If there are certain assets (whether they are pre-marital, non-marital or marital) that you want to make sure stay separate for purposes of a division of property in the future, then you should make sure those assets are clearly identified in any pre-nuptial or post-nuptial agreement.

QUESTION: What is a QDRO? Do I need one?

Sarah: The concept of a QDRO can be overwhelming but it helps to first understand why QDROs exist before determining whether one is necessary. As a general rule, ERISA-qualified employee benefits (such as 401(k) plans) are personal to the employee and ownership of such benefits cannot be assigned to other individuals. So, in a divorce, if most of the couple’s marital assets are held in 401(k)s, for example, it would be impossible to divide those assets equally between the spouses without an exception to that general rule. Thus, a QDRO (which is an acronym for “Qualified Domestic Relations Order”) is the exception, allowing an employee to assign all or a portion of his/her benefit (again, like a 401(k)) to a former spouse as part of the overall division of marital property in a divorce. Other tax rules allow this transfer to be a non-taxable event under the right circumstances.  

A QDRO is a court order usually prepared by an attorney that must meet certain legal requirements in order to qualify for the exception. Keep in mind that QDROs can be used for other purposes (e.g., collecting a court-ordered support obligation), but it is most often used to divide marital assets in a divorce.

QUESTION: Do I need a QDRO for an IRA?

Sarah: It surprises many people to hear that a QDRO is not a requirement under the Internal Revenue Code to effectuate a tax-free transfer of an Individual Retirement Account (IRA) pursuant to a divorce. Once a divorce decree or other written instrument incident to such a decree is entered by the Court, the IRA owner just needs to direct the trustee or IRA custodian to transfer the appropriate amounts (a fixed dollar amount or a percentage) directly to the trustee or custodian of a new or existing IRA, maintained on behalf of his/her spouse or former spouse. That said, often an IRA custodian or trustee will require certain additional documents or information to effectuate a tax-free transfer of an IRA pursuant to a divorce. For example, most will require a certified copy of the divorce decree. Beyond the divorce decree, particularly if the divorce decree (or incorporated documents) does not set forth the specifics of the division and transfer, the custodian or trustee may require a separate court order (i.e., a Domestic Relations Order (DRO), which is often erroneously characterized as a QDRO), setting forth the parties, addresses, biographical data, amount of the award, account numbers, etc.

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