An article we did on our Family Law website highlights the difference between marital and non-marital property owned by spouses. Marital property gets divided between the spouses if there is a divorce, but non-marital property doesn’t get divided in a divorce. Non-marital property remains the property of the spouse in whose name the property is titled.
The distinction between marital property and non-marital property does not apply the same way for estate planning purposes, however.
While the distinction between marital and non-marital property is significant in the event of a divorce, the distinctions fade to insignificance when one spouse passes. Understanding the distinctions, and when and whether they are important for estate planning purposes, is our aim in this article.
The distinction between marital and non-marital property turns on a number of factors, including when property is acquired, whose name the title is in and how the property was acquired. In a divorce, ownership (whose name is in title) is only part of the analysis; for estate planning purposes, however, ownership is the only important thing most of the time.
To give an example, let’s say Barbara buys a car during marriage that she acquires in her own name alone. Unless that car was purchased with non-marital funds, it car would be considered marital property. If Barbara dies, the car is considered part of Barbara’s “estate” (regardless of whether it was marital property). Subject to an important exception, Barbara can leave her car to anyone she has determined by a Will or a Trust.
In that example, if Barbara chooses to leave the car to her brother in her Trust, rather than her spouse, the law honors her intention for the car to go to her brother. Generally speaking, a spouse can’t trump that intention (though there is a big exception to that statement that we will explore below).
How about another example? If Barbara and Jeff live in a home that was purchased by Jeff prior to their marriage with non-marital funds, and the home is in Jeff’s name alone, the house would be considered non-marital property. Let’s assume the house is all that Jeff owns. Jeff can leave the house to his children in a Will, and the law will honor Jeff’s intention, but this is where the exception applies.
Wills and Trusts are not treated the same when it comes to spouses. The Probate Act gives a spouse the right to “renounce” a Will, but the Probate Act doesn’t create a similar right in respect to a Trust.
So what does that mean?
If Barbara exercises her right to renounce Jeff’s Will in the example above, she will be entitled to receive 50% of his estate (the other 50% would go to Jeff’s descendants). Thus, Barbara can frustrate Jeff’s intentions by renouncing his Will, triggering a result he didn’t intend. She would end up with half his estate in the example above though he intended for all of it to go to his children.
Note that we classified the house as non-marital property. It was non-marital property because Jeff owned it before they got married and kept title in his name alone after they were married. That means Barbara had no right to the house if there was a divorce. When Jeff dies, however, if they were married when he passed, Barbara has the right to renounce a Will and take half the estate – even though she would have had no claim to it in a divorce!
This is an example of how the classification of marital and non-marital may make a big difference in the event of a divorce, but has no effect when one of the spouses dies while they are still married.
Barbara could end up with half of the house because the rules for distribution of property in estates are different than the rules for distribution of property in divorce. If Barbara and Jeff had divorced, Jeff would have kept the house, and the other marital property would have been divided between them. But, the fact that the house was non-marital property doesn’t matter after Jeff dies.
But remember – the principle that allows a spouse to renounce a Will does not apply to a Trust. Therefore, if Jeff had owned the house in a Trust, the result would be different. A spouse cannot renounce a Trust. Jeff could have insured that the house went to his children, as he intended, by putting the house in a Trust.
The same principles apply in reverse.
Let’s change the example. Let’s say Jeff and Barbara bought the house during the marriage, but he put it in his name alone because Barbara had credit issues. The house would be considered marital property, even though it’s in Jeff’s name alone, because they bought it during the marriage. If they divorced, the house would be divided between them because it is marital property.
Now, let’s say that Jeff put the house into a trust and left the house to his children. If Jeff dies first, Barbara would have no right to the house because the Trust leaves it to the children, even though it was marital property.
The only thing that matters for estate purposes is who is in title. The distinction between marital and on-marital property has no bearing after death.
Because the rules for ownership and rights between spouses are different in divorce as opposed to estates, understanding those differences is important when doing estate planning. The differences are most profound in second marriage situations, especially when one or both spouses have been married before and one or both spouses have children from a prior marriage. Spouses in second marriage situations often want to ensure that their children from the first marriage are provided for, and that may mean leaving less (or nothing at all) to one’s spouse.
Because different rules apply in different contexts with marital property, non-marital property and estate planning, people need to be mindful of those rules when doing estate planning to ensure that their intentions will be carried out as anticipated. For these and other reasons, it’s always advisable to get the advice of an experienced estate planning attorney who also understands the difference between marital and non-marital property and the ramifications of those differences for estate planning.
