The process of legally separating from a spouse can be extremely emotional and draining.
Navigating property matters and parenting arrangements within the family law context can involve a very steep, and sometimes winding, learning curve, and create a lengthy “to do” list for the people involved.
An important step that can sometimes be overlooked or “put off for later” in the initial stages of separation is a review and update of your estate planning. Who wants to add death into the thought matrix at such a time as this, right?
Failure to tick this job off the list early on, however, can lead to unexpected and often undesirable consequences in the event of the unexpected death of a separated spouse.
What is estate planning?
Planning an estate is the process of putting all necessary measures in place to ensure that when you die your assets are administered and distributed in a way that best reflects your wishes and personal circumstances.
This includes appointing an appropriate person to do the work of calling in your assets and ultimately distributing them (your executor), appointing a testamentary guardian for minor children, and clearly setting out to whom and in what proportions your assets should be distributed (your beneficiaries).
It also includes a thorough assessment of your assets to see which of them are personally owned and will, in fact, be transferred to beneficiaries under the terms of your will, and which are not personally owned and, accordingly, not governed by your will. For the latter, alternative steps may be required, which will be discussed below.
Separation and estate planning – what can go wrong?
In the framework of separation from a spouse, whether married or de facto, and regardless of the duration of the relationship, there are several problems that can arise if estate planning is not carefully considered and updated to reflect your change of circumstances. Potential outcomes vary depending on a number of factors including:
- whether you have a will (and, if you do, whether it names your former spouse as an executor and/ or beneficiary);
- whether you were married or in a de facto relationship (and, if married, whether or not there has since been a divorce);
- whether property proceedings have been commenced in Court;
- the types of assets in question.
Often, the legal outcomes of outdated estate planning are in stark contrast to the desired outcomes you are investing considerable time, emotional reserves and financial resources into achieving in your family law matter. For example, your former spouse could inherit your entire estate despite your separation.
Importantly, you should also be aware that while a formal property settlement, once achieved (by agreement or by order of the Court), prevents claims that your former spouse may have against you during your lifetime, it won’t necessarily preclude him or her from receiving a benefit from your estate or making a claim in the event of your death. This is particularly relevant if you are not yet divorced and have not changed your will or do not have a will.
This can easily be avoided by preparing a new will as soon as possible after separation. Other estate planning tools may also be required depending on the type of assets in question.
Personally owned assets
On death, personally owned assets will be dealt with under the terms of your will, or if there is no will then under the rules of intestacy.
If your will names your former husband or wife as your executor and/or beneficiary and you are separated but not divorced, then those appointments will take effect on your death. Divorce will revoke an appointment of your former spouse as executor and beneficiary, however divorce is only possible after a separation of at least 12 months, leaving you exposed in the meantime. Further, there are many couples who choose not to get a divorce after separation, so their former spouse may still be entitled to the estate years into the future if the will is not changed.
If your will names a de facto spouse as an executor and/or beneficiary, those appointments will be revoked upon separation and the remainder of the clauses in the will continue to apply. The will ought to be reviewed to ensure that the fall-back positions as originally drafted are still satisfactory given your change in circumstances.
If you die intestate (that is, without a valid will) then if you are separated but not divorced your spouse will be the first in line to administer and benefit from your estate. If you have separated from a de facto spouse on the other hand, they will not be eligible to inherit under the rules of intestacy.
Assets which are not personally owned cannot be dealt with under the terms of your will. How they are treated on death in the context of separation depends on the type of asset. Some brief examples are set out below.
1. Jointly owned property
If you co-own real property such as your home with your former spouse, in most cases you are likely to do so as “joint tenants”. When a joint tenant dies, the property is transferred to the surviving owner despite any terms to the contrary in the will.
You should consider “severing” the joint tenancy of your property upon separation, particularly if there is likely to be a delay in negotiating a property settlement with your former spouse or commencing Court proceedings.
It is strongly recommended that you discuss this with your family and estate planning lawyer to decide whether a severance of tenancy is appropriate and desirable in your circumstances.
Superannuation is often one of an individual’s most significant assets on death because of the contributions made and also the life insurance policy often owned within the fund.
The payment of superannuation death benefits is governed by the trust deed of the fund, and generally the trustee of the fund has discretion to decide who to pay the death benefits to, and in what proportions (if relevant). This can create problems both in selfmanaged funds, where the transfer of control of the fund is of paramount importance, and in ordinary funds.
The best way around this in the context of separation is to ensure that a valid binding death benefit nomination has been made in favour of your children or other chosen eligible beneficiaries. Failure to do so, or failure to update a nomination previously made in favour of your former spouse, could see the trustee pay the entirety of the superannuation death benefits, or a portion of them, to your former spouse.
3. Life insurance
Life insurance will be paid to the beneficiaries nominated on the policy. Accordingly, unless it is your intention for your former spouse to receive your life insurance despite your separation, it is important to remove or update any nomination in his or her favour if you would prefer your life insurance to be paid to someone else.
4. Companies and trusts
There are a range of measures that can be put in place to ensure the effective transfer of your interests in any entities such as companies and trusts to your chosen beneficiaries. This requires a thorough review of relevant documents including the trust deed, company constitution and other associated documents.
“There but for the grace of God go I”
It may seem that the chances of something happening to you prior to the finalisation of your family law matter are slim. However, a “chance” by its very definition means that it is possible.
It is therefore highly recommended that you discuss your personal circumstances with your legal advisers, and update your estate planning documents accordingly so that your interests (and those of the potential beneficiaries of your estate, such as your children) are protected in the period between separation, finalisation of property proceedings, and divorce.