UNADDRESSED CHANGES – WHAT HAPPENS IF I DON’T UPDATE MY PLAN?
“The Best Laid Plans of Mice and Men Often Go Amis” – Robert Burns
“Man Plans, and God Laughs” Proverb
Life happens. Over the years, things change. Children get born, grandchildren get born. Couples get married, couples get divorced. Loved ones pass away.
When these life-changing events happen, it’s important to review your estate plan, and, if appropriate, update the plan accordingly. But most people don’t think about their estate plan on a regular basis, and quite often plans are not updated the way they should. So what happens if you don’t update your estate plan?
James Brown created a very good estate plan, including a Trust and a Last Will and Testament, in 2000.
In 2001, James Brown may, or may not, have gotten married again. Whether or not the marriage was valid, he also fathered another child. His estate plan was not updated.
When James Brown died in 2006, leaving behind a $100 million estate, it set off a series of litigation that only ended fifteen years later, in 2021, when everyone finally agreed to settle – had they not reached an agreement, the litigation would have continued for who knows how much longer. (Also remember that estate planning services are not just for high net worth individuals, but for anyone with a family or has specific wishes for asset protection and to minimize estate taxes.)
DIVORCE
Let’s start with an easy one – divorce (or any other dissolution of marriage, including annulment).
In Florida, by statute, if a married person divorced, the divorced spouse will be treated as having passed away at the time of the divorce. This is automatic – anything that would be left to the spouse is instead given to whoever would inherit under the Will if the spouse had passed away instead.
There are two exceptions to this:
1) If the divorce judgement says otherwise. It’s not uncommon for a divorced couple to maintain some rights or claims, and a divorcing spouse may be entitled to a share of the inheritance.
2) If the Will says otherwise. This applies in two situations. First, if, after the divorce, a new Will is created leaving assets to the former spouse, this will be honored. Second, if the Will says something along the lines of “I leave everything to Judy, whether or not we are still married”, then Judy will receive everything. It is not merely enough to list Judy by name, the Will must be clear that the bequest will survive a divorce.
The application of this statute is broad – it doesn’t just apply to probate assets, but to (almost) all assets
- Whether or not the decedent had a will or died intestate
- Life insurance policies and annuities
- Employee benefits and IRAs (but not plans governed under ERISA, such as 401k)
- Bank and brokerage accounts
- Revocable Trusts (but not Irrevocable Trusts)
Speaking about Trusts, if the married couple had established a joint Revocable Trust, then typically the Trust will split into two separate trusts, one for each spouse.
So, if you don’t update your plan, your ex-spouse is also automatically your ex-beneficiary.
MARRIAGE
The opposite (sort of) is true if you get married, but it does get a bit more complicated.
If you get married without a pre-nuptial agreement, and forget to update your plan, when you pass away, your spouse will have two choices: your spouse may choose to be treated as a “pretermitted spouse”, or your spouse may claim the “elective share”.
A “pretermitted spouse” is entitled to the same share that the pretermitted spouse would have been entitled to had the decedent died intestate (i.e. without a Will). The spouse’s intestate share is the entire probate estate if neither of them had any children, or if all their children belonged to both of them. Alternatively, if either spouse had a separate child, then the spouse’s intestate share is half of the probate estate.
Note that the probate estate is not the entire estate, and here’s where it gets tricky. There are ways for assets to transfer outside of the probate process, such as a life insurance policy with a named beneficiary. The pretermitted spouse does not get those assets.
Alternatively, the spouse may demand the “Elective Share”. The elective share is a smaller part of a bigger pie – the spouse is only entitled to 30%, but that includes any revocable trusts, pay-on-death accounts, life insurance, and more.
None of this matters, however, if there’s a prenuptial agreement.
BIRTH (OR ADOPTION) OF A CHILD
A child born after a Will is created will be treated as a “pretermitted child”, who is entitled to the same share that the child would have been entitled to had the decedent died intestate. First the spouse takes whatever share the spouse is entitled to; after that, the remaining probate estate is determined “Per Stirpes” (see below) and the pretermitted child is entitled to that full amount. For example, if the decedent had four children, the pretermitted child gets one-fourth of what’s left of the probate estate after the spouse takes his or her share. Every other beneficiary will proportionally receive that much less.
For example, if a decedent had three children at the time the Will was signed, and the Will disinherited one child with the remaining two getting half each, a fourth pretermitted child would get ¼, and the two other beneficiaries would split the remaining ¾.
Note that this only applies to the probate estate – any assets that are disposed of in another way are out of reach of the pretermitted child.
DEATH OF A BENEFICIARY
“It Depends”. That great lawyerly answer that nobody wants to hear.
Let’s start with intestacy, meaning without a Will. In that case, as stated above all or half of your assets will go to your spouse; any assets not distributed to a spouse will be divided among your descendants, per stirpes.
Per Stirpes is a Latin phrase meaning “by branch”. If you have four children, each child will receive ¼. If one child predeceased, but had children of their own, that share will be divided among that child’s children – if there are two, they would each take half of the ¼, or 1/8th. Likewise if one of the grandchildren had predeceased, but had descendants, those descendants would share the 1/8th between them. On the other hand, if a child predeceased, and left no children, then the branch is eliminated. So if you have four children and one passed away leaving no descendants, each of the remaining children would receive 1/3rd.
Per Capita is an alternative distribution, and means “by number of persons”. Each person is entitled to an equal share – but it’s important to know who is counted.
If a decedent with three children says “to my children, per capita” only the surviving children are counted – if one child predeceases, the other two children receive half each, and the predeceased child’s descendants get nothing.
On the other hand, if the decedent wrote “to my descendants, per capita”, and the predeceased child left two grandchildren behind, then each descendant, the two children and the two grandchildren, would receive equal shares, or ¼ each. (note that the count stops at a surviving person – had all three children been alive, the estate would have been divided 1/3rd each – the grandchildren would not receive a share).
Alternatively, let’s stick with this example, and say one of the surviving children is childless and the other has 3 more children – so the decedent has 5 grandchildren altogether. If the statement is “to my grandchildren, per capita”, the three children are skipped, whether or not they are alive, and the five grandchildren each receive 1/5th. (note that, per stirpes, two grandchildren would receive ¼ each, and three grandchildren would receive 1/6th each)
Pro Rata is another term that can be used, and means “in proportion”. Pro Rata is often (incorrectly) used instead of “Per Capita”, but more properly, it should mean that the remaining beneficiaries divide that person’s share in proportion to their own share. For example, Jack may receive 20%, John 40%, and Jill 40%, but if any should predecease, their share is to be distributed to the survivors, pro rata. John is to receive twice as much as Jack, so if Jill predeceases, Jack will inherit 1/3rd, and John will inherit 2/3rd. On the other hand, John and Hill each receive the same amount, so if Jack predeceases, John and Jill will each receive half.
A Last Will and Testament, or a Trust, may distribute assets in any way (subject to the Spousal Elective Share, and subject to the Pretermitted Spouse/Child rules). A well-drafted estate plan might leave assets to a particular beneficiary per stirpes, or that if the beneficiary predeceases the gift will lapse. While most people prefer a simpler distribution plan, it’s possible to craft a plan that’s as intricate and detailed as anyone might want.
If a Will is silent, Florida’s rules of construction state that if you leave any assets to a grandparent or a descendant of a grandparent (which includes your children/grandchildren, your nieces & nephews, and even your cousins), the gift to that person will be distributed to his or her descendants, per stirpes. For any bequest to someone other than a grandparent or a descendant of a grandparent, if it’s a specific gift (e.g. “I give $50,000 to Johnny”, the gift fails and becomes part of the residue – being everything that’s left over after any specific gifts. If a bequest of residue fails, then that bequest is distributed pro rata to the other recipients of the residue. If ultimately all else fails, then whatever is left over is treated under the rules of intestacy.
The default rules for a Trust, on the other hand, treat all gifts as being per stirpes, unless the Trust specifies otherwise. If a gift lapses (i.e. the beneficiary is predeceased and has no descendants, or the Trust specifically excluded any descendants), and there are no other provisions that address how to dispose of the assets, then those assets will be distributed according to the decedent’s Will – and if that too doesn’t work, then under the rules of intestacy.
Any account or contract with a pay-on-death beneficiary, such as life insurance, investment accounts, and retirement accounts, will be distributed to the beneficiary. For such accounts, it may be possible to specify that the beneficiary is per stirpes, and it is usually possible to specify a contingent (backup) beneficiary. If all else fails, the assets go to your estate, and will then follow the terms of your Will, or, if that doesn’t work, the rules of intestacy)
EPILOGUE
The above does not cover all the possible things that can change over time, such as having a falling out with a beneficiary, or losing touch with a fiduciary. We strongly recommend looking over your estate plan every year, and seeking a consultation with qualified estate planning attorneys at our law firm every few years, just to make sure your plan still meets your needs.
