Inheritances, Gifts and Separate Property in a Michigan Divorce

Many of the clients I see in high-asset divorces did not build all of their wealth during the marriage. There is the house one spouse owned before the wedding, the family business a parent handed down, a seven-figure inheritance, a trust, stock gifted by a grandparent. The question in each case is the same: does my spouse get half of this?

In Michigan the starting answer is usually no. But that answer comes with conditions, and many people lose separate property without realizing it.

What Counts as Separate Property

Michigan divides marital property equitably in a divorce. Separate property is generally not part of that division. In Reeves v Reeves, 226 Mich App 490 (1997), the Court of Appeals confirmed that the trial court's first task is to decide which assets are marital and which are separate, and that separate property is normally awarded to the spouse who owns it.

Separate property usually includes:

• Premarital assets. Property a spouse owned before the marriage, such as a house, investment account, retirement savings or a business interest.
• Inheritances. Money or property received by one spouse from an estate or by beneficiary designation, even if received during the marriage.
• Gifts to one spouse. Gifts made to one spouse individually, typically from a family member. Gifts between spouses and gifts to the couple are usually marital.
• Property excluded by agreement. Assets a valid prenuptial or postnuptial agreement designates as separate. See Prenuptial Agreements in Michigan.

The spouse claiming that an asset is separate generally has to prove it, which is why documentation matters so much.

How Separate Property Becomes Marital

Separate property does not stay separate automatically. In Cunningham v Cunningham, 289 Mich App 195 (2010), the Court of Appeals explained that separate assets can lose their character and become marital when they are commingled with marital assets and treated by the parties as marital property. Common ways this happens:

• Joint accounts. Depositing an inheritance into a joint checking or brokerage account that both spouses use.
• Paying for the marital home. Using inherited or premarital money for a down payment, renovation or mortgage paydown on a home titled to both spouses.
• Retitling. Adding a spouse's name to a deed or account that used to be in one name.
• Using it as family money. Paying household bills, vacations or tuition from the fund until it looks like the family's general savings.

Commingling is a matter of degree. A single deposit that can be traced may not convert a whole account. Years of mixed deposits and withdrawals often will. Bank statements, closing documents and estate records that trace the money from its source to where it is now are the most important evidence a spouse can have.

Appreciation: When the Growth Is Marital

Even when an asset stays separate, its increase in value during the marriage may not. Michigan courts generally distinguish between:

• Passive appreciation, such as market growth in an investment account or a rise in home values, which usually stays with the separate asset.
• Active appreciation, caused by either spouse's efforts or by marital money, such as running and growing a premarital business, managing a rental portfolio, or using marital funds to improve a premarital home. That growth is commonly treated as marital.

For business owners this can be the largest issue in the case. A company worth $1 million at the wedding and $6 million at divorce may be "separate," while most of the $5 million increase is on the table. See Dividing a Business in a Michigan Divorce.

The Two Statutory Exceptions

Even property that is clearly separate can be reached in two situations.

1. Need (MCL 552.23). If the property awarded to a spouse from the marital estate is insufficient for the suitable support and maintenance of that spouse and any children in that spouse's care, the court may award part of the other spouse's separate estate, after considering each party's ability to pay, their character and situation, and all the other circumstances of the case.

2. Contribution (MCL 552.401). The court may award a spouse part of the other spouse's property if that spouse "contributed to the acquisition, improvement, or accumulation of the property." A spouse who spent years helping run the other's premarital business, or whose labor and money went into a premarital home, may have a claim even if the title never changed.

These exceptions are applied case by case, and they are not routine. But they mean that a large separate estate alongside a small marital estate invites scrutiny.

Trusts and Expected Inheritances

• Trust interests. A spouse's interest in a trust created by a parent is often separate, and many family trusts include spendthrift or discretionary provisions that limit what can be reached. Distributions that were deposited into joint accounts and spent on the family, however, may have become marital.
• Future inheritances. An inheritance a spouse expects but has not received is not property and is not divided. It can still affect the overall picture, for example in setting spousal support or deciding what is equitable.
• Inherited retirement accounts. An inherited IRA kept in the inheriting spouse's name usually stays separate, but rolling it into a joint strategy or mixing it with marital retirement money can complicate tracing.

How to Protect Separate Property

If you have, or expect to receive, significant separate assets:

1. Keep it in your name alone. Use a separate account titled only to you.
2. Do not use it for joint expenses or to pay down jointly owned property unless you intend to share it.
3. Keep the paper trail. Save estate documents, gift letters, account statements from the date of marriage and the date of receipt, and closing statements.
4. Consider a prenup or postnup. A written agreement is the clearest protection, and Michigan courts generally enforce agreements that are fair and fully disclosed.
5. If you are already divorcing, do not move money. Shifting assets now can look like concealment and damage your credibility. Let your lawyer handle tracing.

The Other Side of the Case

If your spouse claims that a large part of the wealth is separate, the questions run the other way: Was it really kept apart? Did marital money or your work increase its value? Is the marital estate enough to support you? Tracing works in both directions, and so do forensic accountants. See Hidden Assets in Michigan Divorce.

Separate property disputes are usually won or lost on documents and tracing, not on arguments. Our high-asset divorce practice works with forensic accountants and valuation experts when the stakes call for it. If family wealth or a premarital asset is at issue in your divorce, a free, confidential consultation can help you understand where you stand.