Divorce: Property Settlement Trumps Trust Code

Take-Away: The Michigan Court of Appeals recently held that the terms of the spouses’ divorce Property Settlement Agreement will override the terms of the Michigan Trust Code.

Reported Decision: Johnson v. Shaffer, (In re Gerald F. Johnson Revocable Trust), No. 351134, Unpublished, 2021 Mich App. LEXIS 3732 (June 17, 2021)

Facts: In 2008 Gerald and Barbara obtained a divorce. They entered into a Property Settlement Agreement in which Gerald agreed to pay Barbara $10,000 a month in alimony. The alimony obligation was for Barbara’s life or until further order of the Court, which gave the Court the discretion in the future to amend, modify, or terminate the alimony obligation when there was a change in circumstances.

The Property Settlement Agreement (the Agreement) awarded to Gerald his business ‘free and clear of any right title or interest’ of Barbara. Gerald’s other obligations to Barbara were secured by a lien against the assets Gerald was awarded, and Gerald was required to maintain a life insurance policy until those obligations to Barbara were satisfied. However, there was no security ordered for Gerald’s alimony obligation to Barbara. The Agreement provided:

– “Gerald shall have as his sole and separate property free of any claims thereto by Barbara, except as hereinafter stated to the contrary, subject to any and all debts which he shall and does assume and pay and hold Barbara harmless thereon and Barbara shall provide any signatures thereon: …1. All his right title and interest in a business known as Novi Spring, Inc. located in Brighton, Michigan, including but not by way of limitation, all stock therein, contents, licenses and the real estate where it is located.”

The Agreement also contained fairly standard provisions found in many divorce settlement agreements. It contained a release of claims provision that existed as of the date of the Agreement, but it did not waive future claims.

“Except as otherwise expressly provided, the parties shall and do hereby mutually remise, release, and forever discharge each other from any and all actions, suits, debts, claims, demands and obligations whatsoever, both in law and in equity, which either of them ever had, now has, or may hereafter have against the other, upon or by reason of any matter, cause or thing up to the date of this Agreement.”

After the other obligations under the Agreement were satisfied, and the lien released, Gerald then gave some of the business stock to his son from a prior marriage and he then assigned the balance of his business stock to his revocable trust.

On Gerald’s death, his Personal Representative filed a motion in the divorce court to terminate Gerald’s alimony obligation. While that motion to terminate the alimony obligation was pending, and while the probate estate claims period remained open, the trustee of Gerald’s trust transferred the remaining business stock from Gerald’s trust to three business employees who were named as the specific devisees of the stock under Gerald’s trust.

Dispute: Barbara petition claimed that the trustee’s distribution of the business stock from Gerald’s trust rendered the trust insolvent, and if the divorce court continued her alimony award using  its discretion, there were no assets available to satisfy her alimony award, which was a contingent debt Gerald owed at the time of his death.

Courts: Both the probate court and the Michigan Court of Appeals found that Barbara had waived her interest in the business stock, even in her capacity as a creditor to any assets awarded to Gerald, under the Agreement. In doing so, both Courts seemed to completely ignore the protection afforded creditors under EPIC and the Michigan Trust Code. Consider the following provisions of those two Michigan statutes:

– MCL 700.3806(5): This EPIC section provides that if the Family Court continues an alimony obligation owed by the decedent, it will be deemed an allowance of the award recipient’s claim against the decedent’s estate, i.e. an allowance of that alimony award is a contingent, unliquidated, or future claim against the decedent’s estate.

– MCL 700.7614: This Michigan Trust Code provision is provides pretty much the same for trusts as MCL 700.3806 does for estates, meaning the alimony claim, if continued after the obligor’s death, is treated as a viable debt that must be paid by the trustee prior to distributing assets from the trust.

– MCL 700.7506(1)(b): This Michigan Trust Code provision provides:

“ Whether or not the terms of a trust contain a spendthrift provision, the following rules apply…After the death of the settlor and subject to the settlor’s right to direct the source from which liabilities will be paid, the property of a trust that at the settlor’s death was revocable by the settlor, either alone or in conjunction with another person, is subject to expenses, claims and allowances provided in Section 7605.”

Despite these clear provisions of EPIC and the MTC which tell a trustee to not make any distributions until all debts of the deceased settlor have been paid in full or addressed by agreement, the release and waiver provisions in the divorce Agreement were found to override Barbara’s rights as a creditor, particularly when Barbara’s rights as a creditor that arose after the date of the Agreement. So despite the language of the Agreement to limited Barbara’s release to claims existing as of the date of the Agreement, and not later, the Court chose to ignore the after the date of the Agreement limitation.

Conclusion: Once again, we have a Michigan Court of Appeals panel that simply chooses to ignore the provisions of EPIC or the Michigan Trust Code as a convenience in order to reach a result that it wants. Fortunately the Johnson Trust decision is unpublished, which means that it has no precedental weight and cannot be cited as legal authority in other courts. However, this decision still makes you wonder if the appellate judges, (or more accurately their clerks who research and often writhe for the appellate judges ) are even aware that the Michigan Trust Code exists to answer many questions.