Divorce; Disinheriting the Beneficiary

Take-Away: While the Estates and Protected Individuals Code (EPIC) addresses the impact of a divorce on a spouse’s intestacy rights, it is important to note that some EPIC provisions also expressly deal with the divorce’s impact on  a spouse’s Will or a Trust or other governing instrument. Some of those provisions do not however cross-over from intestacy to Wills and Trusts (or other governing instruments.) Consequently, making assumptions that the intestacy situation applies to governing instruments can get you into trouble.

Background: EPIC lumps a Will, a Trust and beneficiary designations together as a ‘governing instrument.’ MCL 700.1104. But it is dangerous to assume that  intestacy and a Will and/or Trust will always be treated the same if the testator/testatrix/settlor later divorces.

Intestacy: MCL 700.2801 specifically deals with the impact of a divorce on a  spouse’s intestate succession rights. That EPIC section provides that if the a named individual is divorced  they will not be treated as the decedent’s surviving spouse. But this section only applies to a divorce, not a legal separation. In addition, if a married couple have signed a settlement agreement that divides their wealth, but they have not finalized their divorce, they will be treated as married if one dies, and thus MCL 700.2801 will not apply, i.e. the other spouse will continue to be treated as the surviving spouse for intestate succession shares and other EPIC allowances and elective share rights.

The scope of this statute also gets a bit murky when it provides that living apart may also be the equivalent of a divorce judgment. Specifically the statute notes that if the surviving individual did any of the following for 1 year [calendar? 12 consecutive months?] before the death of their spouse they will not be treated as a surviving spouse: (i) they were willfully absent from their deceased spouse; (ii) they deserted their deceased spouse; and (iii) they willfully neglected or refused to provide support for the decedent spouse if required by law.  Thus, living apart may be treated as a divorce, leading to a denial of intestacy rights.

In something of a surprise, in the past decade Michigan Courts have actually addressed the scope of a willfully absent spouse on three occasions. In Tkachik v Mandeville (2009) the court held that the consequence of a spouse being willfully absent only impacted their right to inheritance and other surviving spouse benefits under the probate code, e.g. allowances, but not entireties owned assets between them, thus permitting the willfully absent spouse to retain the entireties owned assets. In In re Estate of Erwin (2016) the court found that a physical separation between the spouses was not determinative. The fact that the spouses had been living apart for 35+ years was overcome by the fact that the spouses had filed a lawsuit together, 34 years after their separation, alleging in that lawsuit that they were spouses. And in In re Estate of Peterson (2016) the court found that a survivor’s acquiescence to the decedent’s absence was insufficient by itself to constitute willful absence; for the absence to be willful, the evidence must demonstrate that the survivor’s actions (or failure to act) were done with the intent to be absent from the decedent spouse, but there need not be a showing of intent to abandon one’s marital rights. In this last case, the husband moved out of the home and started living with another woman. The husband’s wife did not file for divorce and appeared to tolerate his dalliance in the same small UP community. When the husband died, his estate argued that the spouses had been willfully absent from one another. The court found otherwise.

Governing Instruments: There is an express EPIC provision that focuses on the impact of a divorce [but not a decree of separate maintenance] on the legal effect of a governing instrument. A governing instrument includes a Will, a Trust,  a beneficiary designation, e.g. TOD, POD, IRA beneficiary designation, life insurance or annuity beneficiary designation, and an instrument that  exercises a power of appointment. MCL 700.2806. The impact of the divorce is to treat the former spouse has having made a disclaimer of all of the provisions for his/her benefit under the governing instrument. MCL 700.2807(3). If this statute applies, then the following are covered: (i) a disposition or appointment by property to a former spouse named in the governing instrument, or a disposition created by law or statute; (ii) a provision that confers a power of appointment (general or limited, lifetime or testamentary) on the former spouse; and (iii) naming a former spouse, to serve in a fiduciary capacity under a Will, Trust, funeral representative, agent under a durable power of appointment, or conservator-guardian.

Note, however, that living apart for more than a year by willful absence does NOT impact this EPIC section. That willful absence rule only applies to intestacy and probate allowances.

Something of a surprise to many is that a relative of the former spouse is also disinherited by virtue of the divorce or marriage annulment. For purposes of this disinheritance a relative of a divorced individual’s former spouse means an individual who is related to the former spouse by blood, adoption and who, after the divorce, is not related to the decedent by blood, adoption, or affinity. The relative is treated just like the former spouse. For example, if husband names wife as the primary beneficiary of his IRA, and he names his wife’s children from her prior marriage as the contingent IRA beneficiaries, the divorce between husband and wife will cause not only wife to be treated as if she disclaimed her primary beneficiary interest in the husband’s IRA, but also wife’s children will be treated as disclaiming their contingent beneficiary interest in the IRA as well, whether or not husband intended to  disinherit his step-children.

Making these rules a bit more problematic is that these rules are controlled by the governing instrument. For example, a Trust I adopt might indicate that even if my wife and I divorce, provisions for her children under my Trust will continue in effect- in short, my Trust can intentionally override the terms of the statute. But that would be a conscious choice that I make when I adopt my Trust. However, what about a custodian’s IRA or 401(k) beneficiary designation form, or a beneficiary designation form supplied by a life insurance company, or any third party? Who reads the fine print in those forms furnished by the insurance company or  IRA custodian? In that situation, the client often assumes that the Michigan statute will apply to the beneficiary designation form when, in fact, the third party’s form controls; all named beneficiaries may not  be disinherited because the beneficiary designation form can  override the statute’s presumed disclaimer provision. Which is reason enough to read all beneficiary designation forms, including the fine print that addresses how the form will be interpreted if the owner later divorces.

Additionally the courts have not helped by holding that these statutes are only rules of construction that interpret all governing instruments. What this means is that instead of literally applying the statutes as written, a court may take additional evidence to determine the decedent’s actual intent. In re Estate of Fink, (2008.) For example, if a husband and wife entered into some type of an agreement to remain each other’s beneficiary, despite their divorce [and strange things like this do happen more than you would imagine] that agreement might override the statute. In re Adams Estate (2014.)  Thus, while the statutes are supposed to provide a clear set of rules that will help to identify who is, and who is not, a beneficiary, claims by a former spouse that ‘we had an agreement’ will tend to slow down the distribution of assets otherwise controlled by the governing instrument. Conceivably an oral agreement between the former spouses might lead to a result contrary to what the statutes provide; recall that in the past year we had a Michigan court decision that held that an unsigned Will (only a draft) was formally admitted to probate, so it is not too far a reach to predict that a verbal agreement between the decedent and his/her former spouse might overcome a statute that precludes the survivor’s beneficial interest in a Will, Trust, or some other governing instrument.

Conclusion: We live in a time when the concept of a legal marriage is rapidly changing. We live in a time when close to 50% of marriages end in divorce. While we have statutes that try to address the impact of a divorce on Wills, Trusts, and other governing instruments, those statutes are either not all that clear, or courts seem to be disinclined to literally read the statutes. Willfully absent or deserting spouses may forfeit their rights of intestacy, even if still married when one spouse dies. Relatives of a former spouse are automatically disinherited, even if that is not consistent with the deceased former spouse’s intent. Statutes are categorized as only rules of construction that can be overcome with extrinsic evidence of the decedent’s intent [a decedent is who is no longer alive to challenge a claimed agreement or understanding.] All of which leads to the conclusion that the best way to address these uncertainties is to clearly address the impact of a divorce in a Will or Trust or Durable Power of Attorney. Since the statute normally deal with divorce the individual’s intent if there is only a legal separation should also be addressed. And if a desire exists to continue to benefit step-children or other more remote descendants of a former spouse, that intent needs to be clearly stated in the governing instrument. Finally, because a tremendous amount of wealth can pass on death with a beneficiary designation, it is wise to carefully read the fine print on the beneficiary designation form to make sure that the owner understands what happens if there is a divorce.