Divorce, Inheritances, and Estate Planning

 

            This brief analysis refers to the case Smith v Smith that is discussed in our previous blog titled “Divorced Husband Demands Portion of Ex-Wife’s Inheritance.” To best appreciate the following analysis, read this previous blog.  (Hover over the title with your cursor and click.)

            The problem in Smith was not the husband.  The real problem was the attorney who drafted the Smith Family Trust.

            First, the attorney drafted a broad provision in the Trust regarding new bank accounts established by either spouse. In suggesting that new bank accounts would be part of the marital estate, this broad provision was itself poorly-drafted.  Second, the attorney then drafted specific provisions regarding a spouse’s potential inheritance.  These two provisions were not carefully coordinated.  This lack of clear coordinated provisions led directly to the lawsuit.

            Worst of all were the attorney’s three additional failures:

  1. The attorney it seems may have failed to take the full time needed to interview his clients, determine the extent of the wife’s potential inheritance, and truly appreciate the desires of the wife to keep that inheritance separate.  Or the attorney failed to do this careful work in annual or regular follow-up interviews with the clients.
  2. The attorney then failed it seems to fully appreciate that under Utah law, a traditional inheritance, like the one the wife received from her mother, is considered separate property.
  3. The attorney then fatally failed to carefully draft a provision in the Smith Family Trust (or a later amendment after follow-up interviews), (1) clarifying beyond dispute that the wife’s inheritance would be her separate property in the event of a divorce, and (2) clarifying beyond dispute what the wife needed to do to preserve her inheritance as a separate asset, and (3) clarifying beyond dispute under what conditions the separate inheritance would lose its status as separate property and be considered marital property. References to the law in the provisions would have helped.

            This lack of careful work on the part of the Smith’s attorney directly created ambiguity.  And ambiguity is the enemy of good estate planning.  In this cesspool of ambiguity, the husband and his probate litigator were happily enabled to create a litigation mess.  Clarity would have gone a long way in containing the husband and his probate attorney—in perhaps even shutting down the conflict before the case was ever filed in the courts.

            By Alicia Knight Cunningham

            Click here to see Smith v Smith (2017) UT App 40.

            Click here to see our summary of this this case in the blog titled: “Divorced Husband Demands Ex-Wife’s Inheritance.”

 

Divorce and Estate Planning – Case Summary (Smith v. Smith)

 

            What happens when a wife receives a large inheritance from her Mom and then files for divorce from her husband? In the case of Smith v Smith, the husband sued and tried to take half of his ex-wife’s inheritance.

            Sharon and Keith Smith were married in 1979. During their marriage, Sharon often received money from her Mom who had extra income from the family farm which she chose to share with her children.

            In 2006, Sharon and Keith established the Smith Family Trust. The Trust indicated that if there was any property owned by both, it would be shared equally, including joint bank accounts and any new accounts that might be opened in the future.

            When Sharon=s mother died in 2012, Sharon received a large inheritance check. Sharon took the inheritance funds, opened up two new bank accounts in her own name, and deposited the funds in the new accounts. In 2013, Sharon filed for a divorce.

            During the divorce, Keith argued that half of the inheritance should be his because their trust indicated that money deposited into bank accounts, including new accounts, should be joint or shared property. Sharon argued that the trust specifically addressed her inheritance from her mother and declared it hers alone.

            The Utah Court of Appeals ruled that under Utah law, a traditional inheritance, like the one Sharon received from her Mom, is considered separate property, meaning that Sharon did not have to share it with Keith just because they were married. Further, the Court carefully analyzed the language in the Smith Family Trust and found that specific provisions in the Trust regarding a spouse=s potential inheritance prevailed over broad provisions in the Trust regarding new accounts.

            The Court concluded that just because Sharon deposited her inheritance into a bank account did not make it any less her inheritance. Sharon=s inheritance was her separate and exclusive property and the trust documents did not compel her to share the money simply because she deposited the money into a new financial account. See Smith v. Smith, 2017 UT App 40.

            By Alicia Knight Cunningham

            Click here to see Smith v Smith (2017) UT App 40.

            Click here to see our analysis of this case in the blog titled: “Divorce, Inheritances, and Estate Planning.”