Wishful Thinking Could Cost Your Heirs Millions: The Vital Requirement for a Unified Carefully Drafted Approach to Divorce and Estate Planning

Financial Planning for Family Meets the Cold Light of the Court

Divorce is a reality for almost a million American couples each year. Across the range from amicable to hard fought, most divorces including children involve a desire from both sides to ensure wealth is passed on to the next generation. Even if many other issues are in dispute, the divorcing couple agrees that their children “should get the house someday.” The unity of sentiment and desire for the children to inherit a divorcing couple’s assets is commendable, but that sentiment must be put into action with clearly written documents ensuring the framework is in place to make that future dream a reality. Any experienced estate or family law lawyer can recall cautionary tales of plans not carried out or written out properly, and the disasters that followed. The rosy image of a positive future does not stand up in the harsh light of a courtroom absent proper textual preparation.

The following is a fact pattern based on an unfortunate real-world example. In this case a failure in drafting and planning years earlier left an unwelcome surprise for the heirs of an estate. The case turned on a divorce settlement agreement from a decades old divorce after the death of the family patriarch.

A man had been married with children. That marriage ended in a divorce with a Property Settlement Agreement. The man later remarried. After his passing, relations between the new widow and the children from his first marriage broke down over division of the estate. The children filed suit against the widow for breach of the Property Settlement Agreement and the deceased father’s verbal promise that his large primary residence would go to his children. The children lost their lawsuit, not because their father had lied or due to a lack of sympathy from the court, but because the documents that were needed to mechanize and ensure delivery of the good intentions were incorrectly drafted.

Anticipate Problems if “Anticipated” is Used in a Document without Knowing its Legal Meaning

The lawsuit described above fell apart based on an incorrect usage of the single word “anticipated” in the divorce settlement agreement. The agreement indicated that the husband would keep ownership of two pieces of real property, including the large primary residence. The agreement stated in part that it was “anticipated” that the properties would be placed in a trust created for the benefit of the children.

Despite the intention of the father, and even of the attorney drafting the Property Settlement Agreement, the court determined that this specific phrasing created an “illusory promise.” An illusory promise is one in which performance of the promise is entirely optional for legal purposes. Because the agreement had been written with transfer into the trust for the children as  “anticipated” instead of “required” or other phrases with more certainty, the father kept full discretion to act or to change his mind. The court viewed this language as a possibility or an option instead of a binding promise to his children. Since the title to the properties had not been changed into ownership by a trust during the father’s lifetime, the court declined to force what they viewed as a purely discretionary action by the estate.

One word can change the entire character of any legal document, especially in a divorce or estate planning setting. If your documents state that an action in the future is “anticipated,” “expected” or “contemplated,” it is not an ironclad promise, but a suggestion, notion or option. The law in New Jersey, where this case took place, mirrors the law in most states. “Courts enforce contracts according to their plain language. If the wording is clear, judges do not rewrite it after the fact.”  It is when the language is unclear or ambiguous that you run into issues regarding the enforcement of its intent.

Memories of Promises Cannot Overcome the Merger Clause

During the lawsuit described above, the children tried to prove their case by testifying about conversations they had with their father, arguing his verbal instructions and statements made it clear he intended the transfer of the properties to the trust to be required. This argument was immediately rejected by the court, as it ran contrary to a basic rule of contract law: testimony from outside the four walls of a contract cannot reverse unambiguous written language into the contract.

Rejection of outside evidence to interpret a contract was reinforced by the use of a merger clause within the Property Settlement Agreement from the divorce. As in other contract writing situations, a merger clause is commonly included in divorce settlement agreements to ensure the written document is the entire agreement between the parties, and all other evidence, whether other documents, recollections of conversations or anything else outside the agreement itself does not have an impact on its meaning. This accepted legal principle against reinterpreting clear written contract language with outside testimony is firmly locked and barred by inclusion of a merger clause inside the agreement.

Another aspect that cut against the children’s claim was waiting many years to raise the spoken promises made by their father. Even if the general rule and the merger clause had been overcome, the conversation in question was attested to have happened years earlier than the applicable statute of limitations of six years. Another example of a fixed legal rule that could not be overcome by intentions or sentiment is the statute of limitations. Even if the verbal conversation had been particularly compelling, the statute of limitations is an inflexible rule that parties need to take into account when asserting their claim.

Equity is Not an Escape Hatch

A common strategy for litigants in a lawsuit where the contract itself or the legal precedents are unfavorable is to pursue equitable arguments. Parties can claim that unjust enrichment has occurred or will occur unless the court acts in their favor to avoid an inequitable outcome. In the lawsuit we have been discussing, the children argued that it would be inequitable for the widow to profit from property which she had simply married into, well after the husband had purchased it, taking over their own mother’s share. The court ruled against the children’s claim, explaining that the possibility of relief in equity only exists in situations where there is not an explicit contract in place enumerating what each party’s rights and duties are in the matter.

To succeed in an unjust enrichment claim, a party must prove:

1. A benefit was received by a defendant.
2. An inequity exists that makes retention of the benefit unfair.

The court in this suit ruled that these elements were not met because the former wife had received consideration for her interest under the Property Settlement Agreement, and she had willingly agreed to and signed off on that agreement. Since the agreement was voluntarily signed and the former wife received other benefits and property as part of the divorce settlement, she had indeed received consideration and accepted it. The court ruled it would not be its role to step in and rewrite a freely approved agreement ex post facto to try and force a more “fair” outcome in the eyes of the court or any party feeling regrets years later. Equity is not a free pass to change a valid contract that has become burdensome or unfavorable.

Divorce Settlement Agreements Do Not Fully Cover Estates  

As this example lawsuit demonstrates, a divorce settlement agreement’s main purpose is to divide assets and settle matters between divorcing spouses at the specific point in time when the divorce is finalized. The preferences of the former spouses, or their children, may change radically over the years to come, and what was appropriate or desired at the time divorce was finalized may now be highly undesirable for one or more parties.

To avoid similar problems in a case where the parties actually intend on a desired outcome, parties should avoid any language in a divorce settlement agreement that is nebulous or aspirational, especially in regards to events further in the future to benefit children and the like.  Those intents and plans need to be nailed down and made explicit in the divorce settlement agreement. For example:

In a similar vein, estate plans need to be checked and updated regularly, especially after major life events. Births, deaths, remarriage or the disposition of major assets, such as the sale of a primary home or a business, all mean that wills, trusts and beneficiary designations should be checked to make sure the right people will receive the correct inheritance. Estate plans must also be checked against the mandates of a previous divorce settlement agreement to make sure that none of the changes will interfere with that agreement or require action from the spouses to ensure their intended heirs are not adversely impacted based on what is already in the divorce settlement agreement.

Written estate plans are most critical of all in blended family or other settings with the potential for conflict or complexity after a person passes away. Before even aligning estate planning documents with a divorce settlement agreement, a person should ensure that a written will and any other estate documents have been created in the first place. Intestacy, which is the handling of an estate where the deceased person had no will or other estate documents, is time consuming, expensive and to be avoided.  It is even more so when there are disputes amongst surviving family members.

Conclusion: Certainty and the Security of Properly Prepared Documents Beat Chance and Sentimentality in Court

To those in the midst of a divorce or considering what to leave those who will survive them, sentimental aspirations for the future are unavoidable. But for parties that are going through a divorce or estate planning, they must remember that the court and the law it upholds work on an almost exclusively mechanical and textual basis, following the terms of a clear divorce settlement agreement, will or trust. They will not read into any of those document’s intent that is contrary to clear terms. What people may have hoped for or wanted will not stand up to what their attorneys drafted when they or their heirs are before the court.

To avoid undesirable or disastrous results for parties or their heirs, careful drafting and an understanding of how a divorce settlement agreement and estate planning documents interact are essential. In these situations, the choice of words is not a pedantic concern. As the lawsuit discussed in this article demonstrates, a single word could decide a person’s legacy and the future of their family, and it may not be what they intended.

Proper preparation, proper drafting, proper coordination between divorce and estate documents and proper and timely updates to the documents ensure “unanticipated” situations do not adversely affect those navigating a divorce or those closest to them.

For any questions regarding the intersection of estate law and divorce law, contact our attorneys here.