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George F. Bearup, J.D. Senior Legal Trust Advisor

8-Dec-18

Limits on Michigan’s Revocation-on-Divorce Statute

Take-Away: The Michigan statute that revokes a provision in a Will or trust when a former spouse dies is fairly broad, which can lead to many assumptions, some of which might not always be accurate. In additional, there are limits to what governing documents are impacted by the Michigan revocation-on-divorce statute.

Background: This topic has been addressed in the past, but it is important to understand the scope of the ‘revocation-on-divorce’ statute to avoid making erroneous assumptions. The Michigan ‘revocation-on-divorce’ statute is part of the Estates and Protected Individuals Code (EPIC.)

  • Revocation-on-Divorce: This statute provides that a divorce will revoke all of the following which are revocable: (i) a disposition of property to a former spouse (or their relative) in a governing instrument; (ii) a provision in a governing instrument that confers a general or limited power of appointment on a former spouse (or their relative); and (iii) the nomination in a governing instrument of a former spouse (or their relative) as a fiduciary. [MCL 700.2807(1)(a).] A divorce will also sever jointly held property which then makes the former spouses tenants-in-common owners of the property. [MCL 700.2807(1)(b).]
  • Effect: The former spouse, and the relatives of the former spouse, will be treated as if they disclaimed all of the provisions that are revoked by operation of the Michigan statute. [MCL 700.2807(3).]
  • Relatives: The revocation of a former spouse’s relatives relates only to those relatives who are of the former spouse, not the decedent. As such, children of the marriage would not be removed from the governing instrument after a divorce. [MCL 700.2806(e).]
  • Governing Instrument: EPIC contains a very broad definition of what constitutes a governing instrument. A governing instrument is defined to include a deed, Will, trust, insurance or annuity policy, a TOD or POD transfer by beneficiary designation, a qualified pension, profit sharing or retirement plan, a similar benefit plan [which probably covers an IRA] a power of appointment, a power of attorney, and any other nominative instrument, e.g. a funeral representative designation. [MCL 700.1104(m).] But it is possible that Michigan law might not apply to or control a governing instrument. Consider an IRA beneficiary designation which is controlled by the law where the IRA custodian’s principal place of business is located. The custodian’s ‘fine print’ in the custodial agreement might specify as a matter of contract right that it’s state laws may trump Michigan’s revocation-on-divorce statute.

Limits to the Revocation on Divorce Statute:

  • ERISA: In 2001 the U.S. Supreme Court made it clear that the Employee Retirement Income Security Act [ERISA] preempted all state ‘revocation on divorce’ statutes. Egelhoff v. Egelhoff, 532 U.S. 141 (2001.) Accordingly, if a spouse is named as the beneficiary of a 401(k) retirement account, or a qualified profit sharing plan, or 403(b) annuity, and the spouses later divorce, and the plan participant fails to formally  change the beneficiary designation to remove their former spouse as the primary beneficiary, then the former spouse will still be entitled to receive the benefit under the qualified plan. Note that more than just retirement account benefits are included. If the employee maintained a life insurance policy through an employee welfare plan that is governed by ERISA, the death benefit that named the employee’s former spouse will prevail even if the employee later divorced if that beneficiary designation is not changed. In short, some life insurance beneficiary designations, which are governing instruments, will be covered by Michigan’s revocation-on-divorce statute, and other life insurance death benefits which are part of an employee welfare plan will not be covered by the same revocation-on-divorce statute.
  • Revocable: As noted above, the Michigan ‘revocation on divorce’ statute only deals with governing instruments that are revocable by the decedent. For this purpose, the statute defines revocable a one under which the divorced individual, at the time of the divorce, was alone empowered by law or the governing instrument, to cancel the designation in favor of his/her former spouse or former spouse’s relative. [MCL 700.2806(f).]For example, assume that an individual creates an irrevocable life insurance trust (ILIT) which names his/her spouse as beneficiary. Even if the couple later obtain a divorce, the former spouse will remain as a beneficiary of that ILIT. This is why most ILITs  or spousal lifetime access trusts (SLATs) contain  provisions that remove a spouse as a beneficiary of the ILIT if there is a subsequent divorce, or the ILIT is drafted in a vague manner to address the risk of a future divorce, e.g. “the trustee may make distributions of trust income or trust principal, as the trustee determines in the trustee’s sole discretion to a child of mine or any person to whom I am legally married while I am alive and not divorced from prior to my death….”
  • Governing Instrument: For purposes of Michigan’s revocation-on-divorce statute a governing instrument is defined as an instrument that is executed by a divorced individual. [MCL 700.2806.] For example, if a wife takes out a life insurance policy on her husband ‘s life, and they later divorce, the wife’s ownership of the life insurance policy on her former husband’s life is not affected by the revocation-on-divorce statute. This was the subject of recent litigation in New York, in New York Life Insurance Company vs. Sahani, Nos 17-1804 cv. In that case the wife owned a $1.0 million term life insurance policy on her husband’s life for which she named herself as the beneficiary. The couple divorced in 2013. The former husband died in 2014. A claim was made on the death benefit by the former husband’s mother, who asserted that New York’s revocation-on-divorce statute precluded the former wife from receiving the life insurance death benefit on her former husband’s life. The Courts rejected that claim concluding that the New York statute does not apply to a ‘nonrevocable beneficiary designations.’ If the former spouse owns and controls the asset or the beneficiary designation, then the Michigan revocation-on-divorce statute will not apply.

Complications From Revocation-on-Divorce Statute?: One graphic example where a state’s revocation-on-divorce statute actually harmed the decedent’s estate is Smoot v. Smoot, 2:13-cv-00040-LGW-RSB 2015 BL 102347 (SD Ga. March 31, 2015.) There the decedent’s estate consisted primarily of life insurance death benefits and retirement benefits governed by ERISA. The decedent was divorced but had failed to change the beneficiary designations on both the life insurance and the ERISA retirement benefits. On the decedent’s death his former wife received $5.0 million in ERISA covered assets, his son received $2.2 million in assets, and his former business partner received $100,000 in assets. The federal estate tax due at the decedent’s death was $1.4 million. Litigation was commenced against the former wife to compel her to contribute to the federal estate tax liability under an estate tax allocation clause in the decedent’s Will. [Note, the assets transferred to the former wife were not covered by the unlimited federal estate tax marital deduction, resulting in the large federal estate tax due.] The federal court rejected the estate’s claim for contribution to the federal estate tax liabilty from the former spouse. In doing so, the federal judge noted that the application of Georgia’s revocation-on-divorce statute eliminated any interest the former wife had in her husband’s estate or under the decedent’s governing instruments. As a result of being totally eliminated from those governing instrustments the former no longer had any corresponding obligation to contribute to the payment of the federal estate tax liability. In sum, rather than inherit $2.2 million on his father’s death, the son’s net inheritance was around $800,000. This case is just one example of how ERISA preempts state revocation-on-divorce statutes, and the corresponding federal estate tax liabilty hardship that preemption can cause to the decedent’s estate beneficiaries.

Conclusion: Michigan’s revocation-on-divorce statute probably implements most individual’s probable intention if there is a divorce and they never get around to changing their governing instruments. But that statute might lull those individuals into a false sense of comfort when you consider how many assets, and their values, are preempted by ERISA. In addition, the scope of the revocation-on-divorce statute will not extend to assets, or beneficiary designations, that the decedent does not control. And to the extent that the revocation-on-divorce statute does not apply, there is the risk of additional federal estate tax liablities that the former spouse may not have to contribute to, if courts follow the Smoot analysis.