Take-Away: Generally, property that is inherited or received by gift during a marriage is treated as the recipient’s separate property in a future divorce. However, there are exceptions to this general rule, both under Michigan common law and statutes, and with other state’s statutes, that permit a divorce judge to ‘invade’ one spouse’s separate property. The key point is that while a gift or an inheritance should not be included in a divisible marital estate, there are plenty of exceptions to that general rule.

Michigan Background: As a common law jurisdiction, Michigan generally treats property that came to a spouse as an inheritance, devise, bequest, or lifetime gift as that individual’s separate property that is excluded from the marital estate for purposes of a property division in a divorce. However, even when the property clearly came to one spouse by virtue of a lifetime gift or inheritance, a divorce judge still possesses the discretion to treat the inherited/gifted property as part of the divisible marital estate. Predicting how a divorce judge will rule often simply is reduced to guesswork.

  • Segregated Separate Property: Inherited or gifted property that is held separately from marital property, like in a revocable trust, is generally considered separate property and normally a divorce judge will not invade that property. Dart v. Dart, 460 Mich 573, 584-585 (1997.)
  • Invasion of Separate Property: If the Michigan divorce judge decides to include separate property in the marital estate for property division purposes, there will be some critical fact that the judge relies upon to justify that invasion of one spouse’s separate property. Some situations where the facts of the marriage warranted the divorce judge including one spouse’s inheritance in the divisible marital estate include: (i) the inherited property was commingled with marital property, e.g. deposited in a joint account with the non-inheriting spouse; (ii) the non-inheriting spouse contributed to the acquisition, growth, or improvement of the inherited/gifted asset, an invasion that is authorized by MCL 552.401 if that spouse’s contribution is material; (iii) marital funds were used to acquire or improve the separate property that remained in the inheritor’s sole name, e.g. a mortgage that encumbered the inherited real estate was paid using marital funds; and (iv) after the division of the marital estate, the non-inheriting spouse continues to have financial needs that cannot be satisfied with his/her share of the divided marital estate, an invasion that is authorized by MCL 552.23(1) due to that spouse’s continuing financial need.
  • Reliance on Inheritance: With regard to this last exception, in a recent Michigan court decision one spouse’s separate property was invaded because both spouses reasonably anticipated or relied upon the fact that one’s inheritance would be available for ‘their’ retirement, which led the non-inheriting spouse to not save for retirement.

Other States: Every state has its own rules with regard to what assets are includible in a marital estate for property division purposes. For example, in Massachusetts, all assets, regardless of when or how they were acquired, including gifted or inherited assets, are treated as part of the divisible marital estate in a future divorce action. Most common law states tend to follow Michigan’s approach to gifted inherited assets, but with some modest variations. Community property states usually identify and treat separate property by statute. One recent example of how a separate property statute was narrowly interpreted came from, where else?, California.

Decision: In re Marriage of Deluca, California Court of Appeals

Facts: Deluca died in 1990, survived by three children. His three children engaged in 4 years of litigation over their late father’s trust that held real estate. During those years of sibling litigation, son George married Rosalinda. The three siblings settled their litigation over their father’s trust in 1996, shortly after George’s marriage. The settlement agreement awarded George three parcels. That agreement also caused George to relinquish his interest in all other real estate parcels held in the father’s trust. A year later George and his sister Rosalie agreed to amend that settlement agreement to enable George to receive title to a parcel, (Florida Street) initially allocated to Rosalie in the settlement agreement. In exchange for George receiving the Florida Street property, George gave to Rosalie cash and a promissory note. A year later George had Rosalinda sign a quitclaim deed to the Florida Street property to George, in which she acknowledged it as his sole and separate property. In 2002, George mortgaged the Florida Street property; in order to obtain the mortgage, Rosalinda signed a Spousal Acknowledgement in which she claimed no ownership rights in the Florida Street real estate. George and Rosalinda started their divorce action in 2011.

California Law: The California Family Code creates a presumption that property that is acquired during a marriage is community in nature. [Section 760.] However, there is also a statutory exception that provides that the “separate property of a married person includes all property acquired by the person after the marriage by gift, bequest, devise, or descent, as well as the rents, issues, and profits of such property.”[Section 770.]

Divorce Court: The divorce judge found that George had inherited the Florida Street property from his father, and as such it was George’s separate property and not subject to division in the divorce proceeding.

Claims on Appeal: Rosalinda appealed the divorce judge’s decision. Rosalinda claimed that the Florida Street property should be treated as community property. She also argued that George purchased the Florida Street property from his sister using community funds. George’s position was that the Florida Street real estate came to him by inheritance from his late father’s trust, and that Rosalinda knew it was part of his inheritance as demonstrated by the quitclaim deed that she signed at the time he acquired the deed from his sister.

Appellate Court: The divorce judge was reversed. The Appeals Court rejected George’s characterization of his acquisition of the Florida Street property as an ‘amendment’ to the trust litigation settlement agreement regarding inheritances. The Court felt that for the exception statute to apply, the gift or inheritance had to be directly received by the inheritor, which was not the case when George ‘purchased’ the Florida Street asset from his sister Rosalie.  Perhaps also explaining it decision, the Court also found that the quitclaim deed that George had Rosalinda sign was the product of his undue influence.

Conclusion: The upshot of this California case, and practically speaking most of the Michigan court decisions with regard to classifying gifted or inherited assets as the recipient’s separate property, is that the asset must come to the recipient as a direct gift or inheritance. In the California case, the Court looked through the transaction between George and his sister Rosalie to identify the real intent of the transaction. For the Court, it was difficult to find a direct connection between Mr. Deluca’s death in 1990 and George’s receipt of his ‘inherited’ real estate in 1997. If there is any type of probate litigation to resolve a decedent’s estate that is resolved through a settlement agreement, it would be a good idea to include in that probate litigation settlement agreement language to the effect that if it is subsequently amended, that amendment will have retroactive effect to the date of the original settlement agreement. That seems to have been the problem when George ‘purchased’ the Florida Street real estate from Rosalie after the settlement agreement had been negotiated and signed.