Trust Distributions Conditioned on a Postnuptial Agreement – Enforceable in Michigan?

Take-Away: While Michigan recognizes the validity and use of a postnuptial agreement, if history is much of any indication, they are frequently viewed as against Michigan’s public policy and thus they are not enforceable by courts in a future divorce. Thus, conditioning a trust distribution on the beneficiary entering into a postnuptial agreement may prove to be futile.

Background: Often when a trust is created its settlor will express concerns about the trust beneficiary’s future divorce, where the trust’s assets might be lost to a former spouse of the trust beneficiary. As such, it is not uncommon for the settlor to impose a condition on the distribution of assets from a trust to the trust beneficiary requiring that the trust beneficiary have a signed prenuptial agreement if the trust beneficiary is not then married at the time of the distribution, or a postnuptial agreement if the trust beneficiary is then married, before the distribution is made from the trust. The use of these marital agreements would result in the anticipated spouse, or the existing spouse, of the trust beneficiary releasing all claims associated with the assets to be distributed from the trust. These assets would be classified under Michigan’s common law as the beneficiary’s separate property in a divorce, as the property came to the trust beneficiary via a gift or an inheritance. While satisfying the distribution precondition with the use of a prenuptial agreement is often enforceable, such may not the case with the use of a postnuptial agreement, which is enforced much differently than a prenuptial agreement under Michigan’s common law. A few cases show how hard it is to predict if a postnuptial agreement entered into by the spouses will be enforced by a court in a later divorce.

Contrary to Public Policy: Under Michigan’s common law, a couple that maintains a marital relationship may not enter into an enforceable contract that anticipates and encourages a future separation or divorce. The linchpin to the agreement’s enforcement is when the agreement is signed, i.e. during the marriage. Day v. Chamberlain, 223 Mich 278 (1923.)
Determine Property Rights: In Randford v. Yens, (1965) a divided Michigan Supreme Court found a postnuptial agreement to be valid, even though it was entered into before the spouses’ separation and it did not deal solely with their inheritance rights. The agreement was found to be valid because “it did not anticipate or encourage a divorce.” Both spouses had substantial premarital property, and a dispute had arisen over one piece of property. The Court found that the purpose of the postnuptial agreement was to determine what property rights already existed, not to change or define future property rights in a divorce.
Anticipating Divorce: In Wright v Wright, 279 Mich App 291 (2008) the Court of Appeals declared unenforceable any postnuptial agreement that is entered before the parties’ separation and which expressly deals with the distribution of property in their subsequent divorce.
Promoting Harmonious Marriage: In a relatively recent case, Hodge v Parks, 303 Mich App 552 (2014), the Michigan Court of Appeals observed that a postnuptial agreement may be valid in unique circumstances. In that case the wife had filed for divorce after 6 years of marriage. She then reconciled with her husband pursuant to which they signed a postnuptial agreement. That agreement specified certain property provisions, mandated intensive marital counseling by both spouses, and also contained other provisions that apparently were intended to preserve their marriage [i.e. keeping their children from their prior marriages from meddling in their marriage.] Key to the Court’s decision was that the parties did not contemplate a separation in the near future at the time they signed their postnuptial agreement. In fact, the agreement was signed at the same time the wife dismissed her first complaint for divorce. The reconciliation, however, did not last and the wife file for divorce five years later. The Court noted that in earlier Michigan court decisions a married couple who maintained a marital relationship simply could not enter into an enforceable contract that either anticipated or encouraged a future separation or divorce. In short, a postnuptial agreement that is calculated to leave one spouse in a much more favorable position to abandon the marriage will not be enforced. However, the Court then went on to note that all postnuptial agreements are not necessarily invalid. “Postnuptial agreements are not invalid per se, because some postnuptial agreements may be intended to promote the harmonious marital relations and keep the marriage together. In such situations, the public policy objection to postnuptial contracts…does not arise. If a postnuptial agreement seeks to promote marriage by keeping a husband and wife together, Michigan courts may enforce the agreement if it is equitable to do so.” Note, however, that the Court did go out of its way to also find that the postnuptial agreement did not leave one spouse in a much more favorable position if the marriage ended and that the agreement provided for a relatively balanced distribution of property, which obviously tells us that the Court was still using a ‘fairness’ or an ‘equity’ standard to evaluate the terms of the contract entered into by the spouses.
Contemplation of Divorce: Last month the Court of Appeals was again called upon to determine if an alleged postnuptial agreement between spouses should be enforced. In this case the wife contemplated a divorce. The wife had purchased a ‘marital home’ in 2016 for $375,000 using her own earnings, when there was stress in the marriage. Unclear why she did so, title to this home was taken in the names of both husband and wife. Husband later transferred $100,000 of his separate earnings to wife with regard to her purchase of the home. The wife then filed for divorce. The wife claim that she and her husband had entered into verbal postnuptial agreement that this home was the wife’s separate property which had to be excluded from the marital estate. Neither the trial judge nor the Court of Appeals panel was enamored with the wife’s argument that an enforceable oral postnuptial agreement existed. The Court affirmed the trial court which found no postnuptial agreement, primarily on the grounds that a verbal contract with regard to real estate must be in writing to satisfy Michigan’s version of the Statue of Frauds [MCL 566.106]. The appellate court noted that even if the alleged contract did not violate the Statute of Frauds, such an alleged contract would likely be against public policy to uphold it because it appears that it was made in contemplation of divorce. [Wife] cited her personal illness as the reason for the dismissal of her earlier 2015 divorce complaint, rather than any intention to remain married. At approximately at the same time, she found the home and told the [husband] that she intended to purchase it separately. She did not testify that she entered into the agreement regarding the home in an effort to keep the marriage intact. To the contrary, she testified that she specifically told [husband] that their marriage was not stable and that she wanted him to promise her that he would not make any claim to the home if the marriage ‘went south.’ Based on those facts and that testimony the Court found the alleged verbal postnuptial agreement to be in contemplation of divorce and thus unenforceable. Gappy v Gappy, Mich Ct Appeals, No 342861 (September 19, 2019) Unpublished.
Consideration: Finally, Michigan Courts require that for a postnuptial agreement to be binding, there must be valid consideration exchanged between the spouses for it to be a valid contract. This requirement is contrary to a prenuptial agreement, where the marriage entered into by both parties is deemed to be the consideration that each provides for there to be a valid contract. Since the parties are already married in the postnuptial agreement setting, there must be new, or additional, consideration, e.g. mutual promises, new benefits, the transfer of separate assets to the other, etc, for the contract to have the necessary legal consideration to make it a binding contract.

Trust Distribution Precondition: All of which brings us back to the settlor’s requirement that the trust beneficiary first obtain a binding postnuptial agreement as a precondition to the distribution from the trust to that beneficiary.

If the beneficiary is married, what is the consideration that the beneficiary’s spouse receives as an inducement to enter into the postnuptial agreement so that his/her spouse can receive a distribution from the trust? That his/her spouse will have control over their inheritance?
More to the point, the primary purpose of imposing the postnuptial precondition on the trust beneficiary is to preserve the distributed asset for that beneficiary if he/she later finds himself/herself in a divorce, which clearly begs the application of Michigan’s public policy to not permit the postnuptial agreement to stand if it results in the trust beneficiary spouse in much more favorable position if the marriage ends.
Finally, if in the end, a divorce court is still free to ignore the implications of a postnuptial agreement if the judge finds its terms to be unfair or not result in a balanced distribution of the marital estate, then why even impose the precondition of a postnuptial agreement.

Conclusion: It is possible that a postnuptial agreement can be window-dressed with multiple provisions that recite that the marriage will be enhanced and preserved by the execution of the agreement. However, if the spouse receives no separate consideration, it is probable that a divorce court will not enforce the postnuptial agreement. Similarly, even in the absence of marital distress caused when the trustee alerts the beneficiary of the need to produce a postnuptial agreement, even where the postnuptial agreement is silent on the implications of a future divorce, it would seem that a divorce court would find that the spouse had signed the postnuptial agreement under some duress. All of which suggests that imposing the precondition of a postnuptial agreement is problematic at best, and undoubtedly will cause the beneficiary unwanted stress in his/her own happy marriage. To conclude, it is probably not worth the turmoil that the precondition of a postnuptial agreement will cause the trust beneficiary, particularly when a divorce judge will have the last say on the postnuptial agreement’s validity.