Estate Plan Changes During Pending Divorce: Interesting Outcomes?
Analyzing the case of Lyden v. Lyden
Table of Contents:
Intro
The recent opinion of the Michigan Court of Appeals in Lyden v. Lyden (In re E. Earl Lyden Trust) has some important implications for those designing estate plans, especially in remarriage scenarios.
Before we get started, it is helpful to address some of the common legal assumptions in this area:
Filing for divorce does not change the estate plan. While some states automatically treat divorced spouses as having predeceased each other (both for property dispositions and fiduciary appointments) after a decree of divorce is issued, this rule typically does not apply if a spouse dies after filing a petition for divorce or legal separation is commenced but before a decree is issued by a court.
The filing of a petition for divorce or legal separation often carries with it a stay, or status quo order, under which transfers of marital assets are restricted.
However, many states lack clear guidance as to whether this also restricts changes to the estate plan, or beneficiary designations. Given that these changes usually only take place at death, and are superseded by equitable divisions of marital property (including claims under a marital agreement), the changing of an estate plan during divorce is not usually an issue. But, as we will see, it can have some interesting outcomes.
Facts
Mr. Lyden had a son from a prior marriage, and was in the process of divorcing his current spouse when he was diagnosed with terminal cancer. In anticipation of divorce and death, he amended his revocable trust to leave everything to his son - effectively disinheriting his (divorcing) spouse.
According to the facts, this amendment was carried out by Mr. Lyden after first asking his counsel if this was permissible under a status quo order (from the Missouri divorce court). His counsel advised that the changes would be OK since they only take place at his death, and that equitable division of his property as part of the divorce would override the terms of his revocable trust anyway.
Mr. Lyden and his divorcing spouse had agreed in principle to a general half-and-half division of marital property, but had not yet finalized the agreement due to unsettled negotiations about a life insurance beneficiary designation in lieu of support. Before the property settlement or divorce were finalized or enforceable, however, Mr. Lyden died. His estate and trust were administered in Michigan.
At the probate court, his (now) widow (since the divorce had not yet been finalized) filed a petition to reform or set aside the trust amendment, claiming that the disinheritance was against public policy because it transferred her share of marital property to Mr. Lyden’s son. The probate court granted summary judgment to his son, and his widow appealed.
Outcome on Appeal
On appeal, Mr. Lyden’s widow argued for the equitable remedies of reformation, or a constructive trust, on public policy grounds. However, the Court cited Soltis v. First of America Bank - Muskegon, 513 N.W.2d 148 (Mich. App. 1994) for the proposition that this public policy argument could only be sustained where intent to defraud one’s spouse is shown. Given the approval of Mr. Lyden’s counsel, along with the disclosure of the trust amendment to his widow during his life and disclosure of trust assets as marital property in the divorce filings, the Court concluded that the widow did not show an intent of Mr. Lyden to defraud her of marital assets.
Mr. Lyden’s widow also argued for equitable relief based on Mr. Lyden’s breach of fiduciary duties owed to her. However, the Court held that she did not prove the existence of any fiduciary duty. As settlor of a revocable trust, Mr. Lyden did not owe any fiduciary duties to the beneficiaries of his trust at the time of amendment. The Court also added that any faith Mr. Lyden’s widow would have placed in him to handle finances and estate planning would have terminated at the time of the filing of the divorce action, and could not be relied upon to create a fiduciary duty.
Key Takeaways
I often caution that estate plans should be drafted with an eye towards what happens if a spouse dies while a divorce is pending. Often, the outcome goes the other way - that the surviving (divorcing) spouse ends up inheriting at the expense of intended beneficiaries if the estate plan is silent on this outcome.
But, in this case, the updates to the estate plan were intended to (1) only take effect at death, presumably after the divorce, and (2) be effective after taking into account any marital property settlement.
The catch is that the marital property settlement never happened due to Mr. Lyden’s intervening death. Interestingly, however, his widow was not left empty-handed.
When a spouse is disinherited during a marriage, there are two ways that states still provide benefits to a widow. First, 50% of any community property (acquired while married in a community property state) is given to the survivor. Second, if a spouse dies while the couple is domiciled in a non-community property state, the elective share provides a surviving spouse with the option to take against the estate (often including nonprobate transfers) on a sliding scale based on the number of years of marriage.
In this case, the facts indicate that Mr. Lyden’s widow did receive an elective share. The problem is that the elective share was less than the share of marital property she would have received if they had reached an enforceable agreement before Mr. Lyden’s death. But, no enforceable agreement was ever reached. Oral negotiations were not sufficient to impose equitable principles, although there was a lengthy dissent to the contrary in this opinion (that warrants its own separate analysis).
Notwithstanding, I routinely read trusts, wills, separation agreements, marital agreements, and similar documents that are silent on the question of whether a survivor inherits from the other if a spouse dies during a pending divorce or legal separation. This especially holds true for marital agreements and divorce settlement agreements. If you practice family law or coordinate with family law attorneys, this is an important negotiation point during the divorce process. This can even be taken a step further, to consider waivers of inheritance rights such as the aforementioned elective share and other elective rights (such as personal property awards and family allowance).
A failure to address these points can lead to the outcome discussed above, especially in situations where changes to the estate plan do not violate any court-ordered or state law restrictions on transfer or dissipation of marital assets.