A Beneficiary’s Divorce – The Unexpected Estate Planning Factor
Many people planning their estate wonder what impact a divorce will have on a beneficiary. The most common question I get goes something like this: “What happens to my son’s/daughter’s inheritance if they get divorced?” To answer that question, we need to review how divorce law works in Michigan. Here are some basics:
Not all states approach property division in divorce the same way. Michigan uses an “equitable distribution” legal framework in divorce. Equitable doesn’t always mean equal. Equitable has more to do with fairness than equality. It certainly does not mean an automatic 50-50 division. Courts want both parties to walk away with a fair property division in light of the circumstances of the marriage.
Michigan divorce courts do recognize separate property, defined as assets (e.g., investments, business interests, real estate, and inheritances) initially owned by only one spouse, either prior to the marriage, or by way of a specific inheritance during the marriage. But just because a judge recognizes an asset as separate property does not always mean it will stay separate property. It could still be something that gets divided, and several factors affect that determination, all within the context of fairness. Here are some of the factors considered:
- How long ago was the inheritance received? Inheritances received many years ago slowly start to be considered marital property for the benefit of both spouses. Inheritances received closer to the date of the divorce filing are more likely to stay as separate property not subject to division.
- Was the inheritance commingled with other joint assets? An inheritance that stays intact—in a separate brokerage account, for instance—stands a better chance of not being divided than an inheritance that was combined with other assets of both spouses. Commingling not only makes it hard to identify what’s left of the inheritance, it also can show intent by one spouse to share it with the other. Specific trust language can help avoid a commingling issue.
- The intention of the person who gave the inheritance is important, too. A will or trust that states: “I give to my son and his spouse…” or “…to my son’s family…” can cause a different property division than one that states: “I give to my son…”.
More general factors of fairness also influence divisions of inheritances. An unhealthy spouse who cannot go back to work will need more, as will a spouse who is awarded primary custody of minor children. Relative financial need is important.
Whenever a judge is required to make a fairness determination, rest assured that his or her discretion will be very broad. Some divorces get nasty simply because one or both parties want to sway the judge’s perception of fairness.
Divorce is often a very unpleasant and disruptive time for the parties involved. If you have a beneficiary whose marriage gives you some concern, make sure you run it by your estate planning attorney so that your documents can be drafted to provide some possible divorce protection for your intended beneficiary.
Interesting (though not so fun) Fact: Among Americans age 50 and older, the divorce rate has roughly doubled since the 1990s, even as overall divorce rates have declined. Sociologists often call this trend “gray divorce,” and it’s especially common among long-term marriages.
