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Unintended Consequences of Divorce: Court Holds Oral Agreement Could Overcome Automatic Revocation On Divorce Statute

Unintended Consequences of Divorce: Court Holds Oral Agreement Could Overcome Automatic Revocation On Divorce Statute

In a recent decision issued by the United States District Court for the District of New Jersey, the issue presented was whether an alleged oral agreement between divorced spouses was sufficient to overcome NJ’s automatic “revocation on divorce” statute. See Banner Life Insurance Company v. Song, 2024 WL 1270815 (D.N.J. Mar. 26, 2024).  

By way of background, more than half of all U.S. states have enacted some type of revocation on divorce statute that automatically revokes a former spouse as a beneficiary under wills, trusts, life insurance policies, bank accounts and certain retirement accounts.

New Jersey’s revocation on divorce statute provides, in relevant part:

“a. Except as provided by the express terms of a governing instrument, a court order or a contract, . . . a divorce or annulment:

               (1) revokes any revocable:

(a) disposition or appointment of property made by a divorced individual to his former spouse in a governing instrument . . . .”

N.J.S.A. 3B:3-14 (emphasis added).

In Banner Life Insurance, the decedent took out a $300,000 life insurance policy which designated his then-spouse as the sole beneficiary. Four years later, the couple divorced, but pursuant to an oral agreement between the parties, the decedent’s former spouse continued paying the policy premiums to remain listed as the sole beneficiary on the policy.

After the decedent passed, the premium-paying former spouse made a claim for the proceeds that the insurance company refused to process based on N.J.S.A. 3B:3-14. In addition, since the policy did not list any contingent beneficiaries, the insurance company sought out the decedent’s heirs who opened an estate for the decedent and ultimately made a competing claim for the proceeds.

To resolve the dispute, the insurance company filed an interpleader action in Federal District Court and paid the entire amount of the proceeds into court. After the pleading stage of the case concluded, the estate filed a motion for judgment on the pleadings arguing that an oral contract was insufficient as a matter of law to overcome NJ’s automatic revocation on divorce statute.

In deciding the motion, the district court framed the issue as follows: “[D]oes a contract contemplated by the statute need to be reduced to writing?” After reviewing relevant caselaw, the district court ultimately held that “[n]either the plain language of the statute nor the legislative history dictate that a ‘contract’ must be in writing to satisfy the exception to the statute’s automatic revocation.”

While revocation upon divorce statutes are meant to protect what might simply be an oversight after dealing with a divorce, there are many situations in which revocation of your former spouse as beneficiary is not the intended outcome. Conversely, it is never a good idea to rely on the default provisions of New Jersey law to remove your former spouse from your estate planning if that is your desired outcome. It is prudent to, with the help of an experienced estate attorney, review all beneficiaries after any significant life event, including marriage and divorce, in order to ensure your intent is carried out after death regardless of your state’s stance on revocation upon divorce.

Eyet Law Featured on Talking with the Experts: PPP Loans and Estate Tax

Eyet Law Featured on Talking with the Experts: PPP Loans and Estate Tax

Recently, our very own Matthew Eyet, Esq. talked with Rose Davidson, host of Talking with the Experts, a vodcast for business owners, about various hot-button business planning issues including Paycheck Protection Program (PPP) loans and estate tax under the new administration.

You can find the full conversation here, but we have put together a few key takeaways below.

PPP Loans 

Many businesses have applied for PPP loans, and issues with the first draw loans from the spring of 2020 are now in the news again as federal prosecutors have committed resources to going after fraud.

However, as Matthew emphasized, PPP loans aren’t the only type of loan out there. Economic injury disaster loans (EIDL) also exist, and businesses can qualify for both. In fact, between state and federal relief programs, there are many layers of support available to businesses. It’s possible for businesses to find relief from, five or more different local state and local federal sources.

Estate tax

Matthew and Rose also delved into estate tax and possible legal changes under the Biden administration.

Matthew explained step-up in basis, which has been receiving some press attention lately: If a farming couple in Iowa bought their land for $100,000, but it grows to be worth $10 million by the time of their deaths, then the asset of the farmland has appreciated significantly—yet there is no liquidity to pay the estate tax because it’s a farm. The step-up in basis means that the inheritors of the farm will not be taxed on the gains in value, so long as the property is held in the name of an individual until their death. 

The reverse is also true: You can’t claim a loss if your property depreciates from $10 million to $100,000. “Hold on to the appreciated assets until you die and sell the ones that depreciated before you die,” Matthew advised.

Another area of concern when it comes to changing tax laws is the amount of the gift and Estate tax exemption lifetime, which are currently set at a gift of 11.7 million per person. If the value of your entire estate doesn’t exceed $11.7 million, then you don’t pay federal estate tax on it when transferring the assets to the next generation (although you may have to pay state tax). Married couples get to each use the unused portion of the other’s exemption. Once you cross the threshold, you’re facing a flat tax rate of 40%.

Fourteen years ago, the lifetime exclusion amount was only $1 million—a significant difference. Will the Biden Administration succeed in shifting the threshold again? We can’t say, but it helps to be prepared.

Full-spectrum planning

As Matthew and Rose discussed, there are many forms of federal and state relief available to businesses. If you have questions about loan forgiveness, especially if you didn’t have much in payroll expenses—or if you have questions about planning for changes in estate tax—then we recommend consulting a qualified professional such as Matt to help navigate the monies you will encounter through the process.

At Eyet Law, we offer concierge legal services by providing full-spectrum support for our clients in tax law, estate planning, business law, and civil litigation. Questions? Contact us.