Why Using a Trust is Important in a Future Divorce

Take-Away: A recent Michigan Court of Appeals decision acts as a good reminder of how valuable a trust can be to prevent a commingling of a gift or an inheritance to avoid a family business falling into an ex-spouse’s hands. Had premarital stock owned by the husband, received from his father’s trust, continued to be held in that trust, the stock would not have been available to be divided with the husband’s former spouse.

Court Case: Sutariya v. Sutariya, Michigan Court of Appeals, No. 345115 (October 28, 2021)

Facts: This appellate decision was made after an earlier decision by it had returned the case to the divorce judge for further findings of fact and explanation why stock was awarded to a former spouse.

The husband held stock in Saturn Electronics. The husband had acquired the stock in Saturn before his marriage by way of his father’s trust. As such, the Saturn stock was initally determined to be the husband’s separate property. The husband’s  interest in the trust was valued at $3.0 million. However, the divorce judge awarded $1.0 million of the husband’s Saturn stock to the former wife. The case was sent back by the Court of Appeals for the trial judge to identify how the Saturn stock was valued and why the decision was made to award the ex-wife $1.0 million of the family company stock.

There was a second company that the husband also owned stock in, Chicago Circuit Board, that the divorce judge awarded one-half of to the former spouse. The divorce judge did not, however, place any value on that stock, which the husband had owned beginning in the late 1990’s, well before the parties’ 2008 marriage. So while the judge awarded half of the husband’s stock in Chicago Circuit Board to the ex-wife, the case was returned to the trial judge to explain why this asset, which was the husband’s premarital separate property, was treated as a marital asset and awarded in part to the former spouse.

Trial Judge: The trial judge, on remand from the Michigan Court of Appeals, explained why the Saturn stock was part of the marital estate and thus divided with the former spouse, awarding her one-third of its value. With regard to the Chicago Circuit Board stock, the trial judge reversed its original 50-50 division with the ex-wife, finding that the Chicago Circuit stock had been acquired by him about 10 years before the marriage and its involvement with it was minimal. The Chicago Circuit stock was thus classified as husband’s separate property and not part of the divisible marital estate.

Appeals Court: The Court found that the ex-wife’s direct and indirect contributions to the Saturn stock and its sustained value justified awarding the ex-wife one-third of the stock,  but it agreed to reverse the initial award of one-half of the Chicago Circuit stock to the former spouse.

• Saturn stock: The Appeals Court affirmed the award of $1.0 million in Saturn stock to the husband’s ex-wife, even though it was his separate property which came to him by way of his father’s trust. Why the award of the Saturn stock to the ex-wife was sustained on appeal was identified by the Court:

The Court relied on a long-standing court decision, Hanaway v Hanaway (1994), where specific facts warranted a divorce judge ‘invading’ separate property, specifically a closely held family business interest, and awarding part of it to the former spouse. In Hanaway, divorce judges were directed to look at several factors with regard to ‘invading’ one spouse’s separate property which came to one spouse through gift or inheritance: (i) the source of the property; (ii) the parties’ contribution towards its acquisition, as well as to the general marital estate; (iii) the duration of the marriage; (iv) the needs and circumstances of the parties; (v) their ages, health, life status, and earning abilities; (vi) the cause of the divorce, as well as past relations and conduct between the parties; (vii) whether the separate property was commingled with marital property; and (viii) general principles of equity.

The facts which the trial judge relied upon to award the Saturn stock to the ex-wife were: (i) this was a 10-year marriage where the parties separated after 8 years; (ii) the husband acquired his shares of stock in Saturn in late 2014; (iii) both parties were under the age of 50; and (iv) the wife underwent treatment for breast cancer shortly after giving birth to the parties’ triplets.

The Court, on appeal, looked to a different set of facts to justify awarding one-third of the husband’s stock in Saturn to his former wife. Those facts included: (i) the wife’s efforts during the marriage contributed to the increase in value of Saturn; (ii) the wife worked part-time in various roles for Saturn, and thus she directly contributed to its value through her efforts; (iii) the wife contributed indirectly to Saturn’s value because she had almost exclusive responsibility for maintaining the parties’ home and child-rearing [the husband worked 7 days a week, often working 12-hour days]; (iv) the husband would enjoy income from Saturn far into the future and that his earning ability would not be impacted or compromised by the parties’ 4 children (by implication finding that the ex-wife’s earning capacity would be.).

“ Defendant [husband] also argues that MCL 552.401 was inapplicable because plaintiff [wife] did not contribute to the acquisition of the asset. Defendant acquired stock in SE [Saturn] before the marriage by way of a trust established by defendant’s father; thus, defendant is correct that plaintiff did not contribute to the asset’s acquisition. Regardless, defendant’s contention is without merit. MCL 552.401 states that the court may award a party all or a portion of the property owned by his or her spouse when ‘the party contributed to the acquisition, improvement or accumulation of the property’. The word ‘or’ generally refers to a choice or alternative between two or more things. The fact that plaintiff did not contribute to the acquisition of the asset is not dispositive. The court made specific findings that the plaintiff [wife] contributed to the accumulation of the asset by her direct efforts as an employee and her management of the household and childcare for the couple’s children …While an increase in stock value is a measure of the contribution of both plaintiff and defendant to SE [Saturn] effort which resulted in strengthening SE are also measures. Just as the court credited the defendant’s [husband] prodigious investment of time and talent into SE, so could it credit plaintiff’s input.”

• Chicago Circuit Boards stock: With regard to the husband’s stock in Chicago Circuit Board, the Court noted that a spouse’s separate property may be ‘invaded’ only if it appears from the evidence that the other party contributed to the acquisition, improvement or accumulation of the property. In the case of the Chicago Circuit stock, which was husband’s separate property that had been acquired by him well before the marriage, it was not subject to division by the trial judge as a part of the parties’ marital estate. The Court reached this conclusion because the husband never worked at Chicago Circuit and he was not involved in its day-to-day operations. The husband testified that he consulted with Chicago Circuit for less than 20 hours during the marriage.

“Based upon this evidence, the court found defendant [husband’s] interest in CCB (Chicago Circuit) was a passive investment. A passive investment is not one that appreciated because of the defendant’s efforts or the plaintiff’s activities at home and therefore, was property excluded from the marital estate.

Conclusion: Had the Saturn stock remained in trust, rather than being distributed outright to the settlor’s son, neither the trial judge, nor the Court of Appeals, could have awarded any part of that stock to the son’s ex-wife, assuming that the trust contained a spendthrift provision. This may be reason enough to retain stock in a family business in a trust, as opposed to a distribution of the stock to a trust beneficiary, who might actually lose part (or all) of that stock in a subsequent divorce. Divorce courts are “empowered when ordering a property division in a divorce to have equitable discretion to invade separate assets if doing so is necessary to achieve equity.” In essence, ‘equity’ is what the divorce judge feels is a ‘fair’ division of all assets. Which is why divorce judgements are so subjective and hard to predict, and why a trust might be better used to protect closely held business interests, especially if one of the spouses works in the business.