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Specialty tag(s): Complex Property
How Family Law Issues Often Complicate Estate Planning
Jeff Shore | January 27, 2023
One of the most troubling events for estate planning attorneys is when their married clients get divorced. This is because a divorce drives a wedge through the middle of the marital estate and puts the attorney who helped plan the estate at the center of the fray.
An impetus for problems arising in these types of situations is that married couples often start the estate planning process at a time when they are deeply in love, share mutual goals of building wealth together, and are not thinking about what happens if their relationship sours. By the time of divorce, however, these spouses’ interests will likely have changed dramatically. The mutuality of interest from years prior is often replaced by frantic and competing desires to reclaim property that they brought into the marriage, and achieve financial independence from the other spouse. Unfortunately, this sudden change in their interests puts the couple’s estate planning attorney in the middle of the conflict. And clients, who once may have been very satisfied with the attorney’s work, often become angry about how their assets are tied up in the marital estate.
If not prepared to navigate this common scenario, the estate planning attorney will be put in a difficult position, and find him or herself at risk for a potential malpractice claim. However, there are a number of measures that lawyers can undertake at the outset of client representation to limit his or her future exposure.
Declare Separate Property
First, the attorney should have both spouses complete and sign forms declaring all property they intend to maintain as separate property during the marriage. Separate property is any property owned before marriage and any property acquired during the marriage by gift, inheritance, or as compensation for personal injury damages such as pain and suffering. If a dispute arises in a future divorce regarding the treatment of any property that was not previously disclosed, the attorney will have a clear record of the clients’ stated instructions in the file.
Explain Joint Representations and Potential Conflicts
Second, the attorney should develop a handout explaining joint representations for an estate plan and the potential conflicts that may arise. Prior to beginning the joint representation, have the clients sign a form acknowledging they were provided this information in writing and that they agree to waive any conflicts of interest. If the couple later divorces and one of the spouses tries to claim his or her interests were not appropriately served, the attorney will have a clear record of the written waiver as reference.
Provide Other Written Disclosures at the Outset
Third, the attorney should provide other written disclosures that the attorney deems to be necessary at the outset of engagement. These disclosures can be tailored depending on particular client situations or other unique circumstances. At a minimum, include disclosures about the differences between separate and community property. Also disclose how spousal interests often change in the event of divorce, family deaths, or other contingent events that may arise. A discussion of options for these possibilities is a necessary element of a client being able to provide “informed consent” for a particular estate plan. The lawyer may also want to ask the clients to sign a disclosure acknowledging that they are giving up important marital property rights to accomplish their desired estate plan. The lawyer should keep all signed disclosure forms in a file. These signed documents will help protect the lawyer from becoming a target for client unhappiness at the time of a future divorce.
Field Questions About the Estate if They Divorce
Fourth, the attorney should be well prepared to field questions about the possibility of unwinding an estate in the event of a future divorce. This is not always an easy task. For example, there are special rules when clients use legal entities as part of their estate planning goals. When a spouse as part of an estate plan conveys his or her separate property into entities such as a trust or family limited partnership, the contributed property loses its separate property character and becomes the property of the entity itself. Additionally, if the entities are created during the marriage, the spouses’ ownership interests in these entities are treated as community property. They will have no direct interest in the property contributed to the entity. In some estate plans, only one of the spouses has managerial powers over the entity, yet both spouses will still hold the same undivided, community property interest in the entity itself. At the time of divorce, the court will value and award a spouse’s interest in the entity, but not the property owned by the entity. While a divorcing spouse can ask the court to dissolve an entity and distribute its assets, how readily that can be accomplished depends, in part, on the terms of the formation documents. Importantly, if a spouse contributed separate property to the entity and is successful in getting the court to order dissolution of the entity and distribution of the assets, the property being returned out of the entity will be community property—and will not revert to its prior separate character.
By preparing in advance and taking the right steps at the outset of representing married couples, an estate planning attorney’s effort will go a long way in protecting themselves from the claims of their clients in the event of a future divorce.
Jeff is a highly experienced litigator, mediator, and Collaborative law attorney. With a versatile skill set, he is exceptionally equipped to advise clients on the best approach to resolve their family law matters and achieve an outcome that is ultimately successful. Jeff manages the full range of family law issues, with special expertise in high net worth business and complex property cases.
*Originally published in the Dallas Bar Association December 2022 Headnotes