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Fifty Percent of marriages end up in divorce. This is a commonly known statistic. Therefore, the subject of
divorce comes up often in discussing the estate planning of parents or grandparents who are concerned that
the inheritance of a child or grandchild will be swallowed in whole or in part in the event of divorce.
Dealing With Reality. What can parents and grandparents do about the possibility or probability of divorce in
setting up their plan for the passage of wealth to succeeding generations? There are several considerations
and actions that can be brought to bear. First, concerned seniors (the ones usually raising the questions)
should be informed about spousal agreements for their descendants. Second, they should think about what
provisions they want to make in their own estate planning documents for the possibility of divorce. Finally, they
should consider steps that they should urge upon their children or grandchildren to minimize the possibility
that inherited property will be significantly invaded by a divorcing in-law.
Spousal Agreements. There are a lot of jokes and casual conversations about "Pre-nups". Prenuptial
Agreements are agreements entered into prior to marriage that are generally enforceable but are most
frequently subject to challenge on grounds of duress, lack of knowledge about a partner’s financial situation,
lack of counsel, or change of circumstances (sometimes called "unconscionability") . Often a Pre-nup is
promoted by a wealthy partner, marrying a less wealthy partner. Pre-nups are most common in the case of
second or third marriages, where the spouses are older and perhaps have been wounded by prior battles.
Pre-nups for first marriages are not very common, nor are they very popular because they conflict with more
romantic notions of marriage. We nonetheless urge seniors to promote Pre-nups for children or
grandchildren, especially to deal with gifted and inherited property.
Postnuptial Agreements. Postnuptial Agreements ("Post-nups"), entered into after marriage, are becoming
more common as couples in second and third marriages, in particular, realize that there are statutory
spousal rights that can interfere with an orderly estate plan implementation. There is often a belated
realization on the part of both spouses that property divisions and the rights of a surviving spouse should be
spelled out to avoid delays, anger and possibility litigation at the first death.
Separate Property. In making a divorce settlement, there is a concept of separate property which is
considered property not subject to division between divorcing spouses. Typically, separate property is
property received by gift or inheritance, or property brought to the marriage, which has not been co-mingled
with marital property so as to lose its protection and status as property belonging exclusively to one spouse.
We advise parents and grandparents that in order for property gifted or inherited to be immune from invasion
at divorce, such property should be segregated, held separately by the recipient in his or her name alone.
This is generally easier said than done because young people often want to invest their inheritance in a new
house or vacation property which is often jointly owned. As a male and grey-haired attorney, I can attest that
there are often gender specific attitudes about gifted or inherited property. Men often feel that "what’s mine is
mine and what’s hers is ours". It seems harder for women to insist on keeping gifted or inherited property in
their own name. For example, a wife’s inheritance may well be absorbed in a new residence or invested in
the husband’s business and, thus, lose any protection as separate property in the event of divorce.
Protecting Separate Property. The typical way that parents or grandparents choose to protect inherited
property is through a trust that continues until a child reaches 55 or 60, before the property is distributed. The
child can be made a trustee, but still retain the trust protection and segregation of the property under the
terms of the trust. That being said, state laws vary on whether appreciation of the trust property will be taken
into account in making a property division, barring a Pre-nup or Post-nup Agreement.
Trusts Established by Children. Individual trusts for each spouse are a common estate planning technique,
dividing spousal property to take advantage of the federal estate tax exclusion for each spouse, while still
permitting use and enjoyment of the separate property by a surviving spouse. This technique fits in well with
the concept of dividing separate property and marital property. Here again, state laws vary and without a
marital agreement there are spousal rights at death that may defeat the best laid plans for maintaining
property succession through blood relatives. For example, recently a client receiving an inheritance created a
separate trust for inherited property, to make sure that it went to his descendants, and we created a specific
agreement that each spouse would relinquish any claim to property inherited by the other. For spouses in
Michigan, a Revocable Trust defeats the rights of a surviving spouse to make a claim against trust property for
a statutory share. (In many other states that is not the case and Revocable Trusts are included in the
calculation of a surviving spouse’s statutory share.)
Fairness. This letter is not intended to be a complete synopsis of family law. Suffice it to say that a very small
percentage (certainly less than 5%) of property settlements at divorce are imposed by the judge. Most
settlements come after arduous negotiations and even mediation. The overriding consideration of a judge
making a decision on property division is "fairness," considering all the circumstances (including a spousal
agreement). Nonetheless, advance planning by both the donor and the donee can go a long way toward
protecting gifted or inherited property.
If you have clients who wish to deal with the potential of divorce by children or grandchildren and can benefit
from professional, experienced counsel, please contact Jim Modrall at 231-941-9660.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| September 2004 DIVORCE - IF EVER THE TWAIN SHALL PART by James R. Modrall III, J.D., C.P.A. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |