Massachusetts divorce lawyer Nicole K. Levy reviews the treatment of future inheritance and unvested expectancy interests in Massachusetts divorce cases.
Dividing up property and assets in the midst of a divorce is difficult, particularly, when the sentimental value of contested property outweighs its monetary value. Parties may fight over a retirement asset worth thousands, a marital home worth millions, or a child’s kindergarten drawings from six years ago. Massachusetts Probate and Family Court judges are not insensitive to the sentimental value of marital property, but generally speaking, the equitable division of assets is based on the objective, fair market value of the property owned by the parties. The judge’s job is to determine what property is worth, then assign shares to each party based on the factors set forth in the Massachusetts property division statute, Chapter 208, section 34.
The division of assets is based on an objective valuation of the parties’ property; however, certain types of property pose special challenges for judges. For example, if one spouse earns restricted stock units (RSUs) as part of his or her compensation, a court may struggle to determine whether unvested RSUs awarded to the spouse during the marriage should be treated as assets, and subject to division, or as future income as a source for the future payment of alimony or child support. Similar complexities arise out of a party’s receipt of substantial gifts or inheritances during the marriage. Still more complex are divorce scenarios in which one party’s potential acquisition of a future inheritance plays a factor.
Inheritance, especially future inheritance, is a unique “asset”, that often reflects one party’s unique family circumstances, which are independent from the marriage itself. Moreover, it is problematic to refer to a future inheritance – also known as an expectancy interest – as an “asset” at all. For example, what if one party’s wealthy parent decides to write his or her child out of the will after the divorce is complete? Or what if the wealthy relative faces unexpected medical expenses, and spends all of his or her money before dying? Or what if the relative simply keeps living, decade after decade, well past the age of 100? Each examples illustrates why a future inheritance is an expectancy; that is, an asset a party expects to receive, but is not certain.
Table of Contents for this Blog:
- Assets Subject to “Defeasance”: how Massachusetts Courts Treat Uncertain Assets in Divorce Cases
- How Massachusetts Treats Future Inheritances and Expectancy Interests in Divorce Cases
- Gifts and Inherited Property Received During the Marriage and the Treatment of Trusts in Massachusetts Divorce Cases
Assets Subject to “Defeasance”: how Massachusetts Courts Treat Uncertain Assets in Divorce Cases
The word “defeasance” is not one you hear often. But it represents a fairly straight-forward concept: if a person’s right to receive an asset in the future is subject to a condition, and the absence of the condition means the person will not receive the asset, then we say the asset is subject to “defeasance”. For example, let’s say your old Aunt Rose has earmarked $1 million for you in her will. If Rose died tomorrow, you would be very sorry for the loss, but you would also be $1 million richer. For today, however, Rose remains alive and well, which means that she could change her will on a whim. This is why you bring Aunt Rose cookies once a month. It is also why your “right” to receive $1 million under Aunt Rose’s will is subject to “defeasance”.
It is easy to see why future assets that are subject to “defeasance” are problematic in a divorce context. What happens if Rose changes her mind? If your potential acquisition of a future inheritance from Aunt Rose played a major part in your divorce, then Rose’s decision to write you out of her will, two years after you were divorced, could mean that your former spouse received a far greater share of the assets than you did. For this reason, Courts view mere expectancy interests with suspicion in divorce cases.
The mere fact that an asset is subject to “defeasance” does not automatically mean the asset is excluded from division in a divorce. Let’s return to the example of RSUs. In general, RSUs are a type of employment compensation that require an employee to remain employed by the employer for a period of time (commonly three years) before his or her RSUs “vest”, and the employee can cash them in. If the employee leaves the employer before the RSUs vest, the employee loses the RSUs. Accordingly, unvested RSUs are subject to “defeasance” – if the employee leaves before the vesting date, the employee gets nothing.
However, we know from Attorney Lynch’s blog that unvested RSUs can be divided as asset in a divorce, despite their non-guaranteed nature. A similar example is often found in employee 401(k) plans in which the employer’s “match” does not vest until the employee has worked at the company for several years. As such, the employer match portion of the 401(k) is subject to “defeasance” – the employee does not receive the match if he or she leaves the firm before vesting.) Like RSU’s, 401(k) employer match funds can be divided in a divorce, despite being subject to “defeasance”. Yet another example is defined benefit pensions. Many pension plans require employees to work for upwards of ten years before the employee becomes eligible for the employer’s pension plan. However, a Massachusetts Probate and Family Court may be divide the unvested portion of a spouse’s pension, even though the benefit subject to defeasance if the spouse leaves the employer before reaching the vesting date.
In all of the examples, the mere fact that an asset is subject to “defeasance” – i.e. the asset could be rendered worthless if some future condition occurs or does not occur – will not prevent a probate and family court from divided the asset in a divorce. Despite the seeming inconsistency, future inheritances are treated differently in Massachusetts.
How Massachusetts Treats Future Inheritances and Expectancy Interests in Divorce Cases
Massachusetts courts have consistently held that a future, expectancy interest in a living person’s modifiable (i.e. revocable) will or estate plan cannot be divided in a divorce. In other words, even if old Aunt Rose is on death’s door, and Rose’s last will and testament provides that you will receive $1 million when Rose dies, a Massachusetts probate and family court judge will not consider your inheritance from Rose to be an asset subject to division in a divorce until and unless Rose actually dies. Why? Because your interest in Rose’s estate is a mere expectancy interest that could be changed by Rose at any time.
The reasons appellate courts have given for treating future inheritances differently from other assets that are subject to “defeasance” are numerous. For example, in the case of RSUs and 401(k) matching funds, the spouse typically has a contractual right to receive the asset so long as they keep working. An heir or legatee under an individual’s will generally does not have a contractual right to receive the inheritance. Accordingly, an employee has a degree of control over his receipt of RSUs or matching 401(k) funds; he or she must simply keep doing his job, and the benefit is relatively guaranteed. Similarly, the value of an inheritance to very wildly before the testator dies and the inheritance becomes payable. How knows: Aunt Rose might reduce your share under the will, or it may turn out she had a secret gambling problem, and she spent all of her money before she died. In contrast, RSUs and matching 401(k) funds represent assets whose values might fluctuate, but which can be ultimately measured in dollar value at any particular point in time.
The bottom line is that Massachusetts courts have found that assigning a present value for a potential future inheritance is simply too speculative for the division of assets in a divorce. Clearly, the examples of unvested RSUs, 401(k) matching funds, and unvested pension benefits demonstrate that Massachusetts courts are willing to divide assets that carry a risk of defeasance. However, these assets do carry a degree of predictability compared to a future inheritance, both in terms of an employee’s contractual right receive such benefits, and the ability to estimate or forecast the future value of such benefits.
Mere Expectancy Interest vs. Divisible Assets
Massachusetts courts employ a term of art to describe assets that are too uncertain or speculative to be divided in a divorce. They call such assets a “mere expectancy interest”. In contrast, courts refer to assets that can be divided as “divisible assets”. In the recent case of Pfannenstiehl v. Pfannenstiehl (2016), the Supreme Judicial Court offered a lightening review of historical cases in which “mere expectancy interests” were distinguished from “divisible assets”:
When interests are properly characterized as mere expectancies, however, they may not be included in the divisible estate of the divorcing parties. We have “drawn a line around certain interests that are so speculative as to constitute nothing more than expectancies, and thus, are not assignable to the marital estate.” Adams v. Adams, supra at 374. Because “[e]xpectancies … embody no enforceable rights accruing during marriage,” Hanify v. Hanify, supra at 188, they more properly are characterized as “anticipated” but “indefinite” opportunities for the future acquisition of assets or income. Mahoney v. Mahoney, 425 Mass. 441, 444, 446 (1997). This is because expectancies have “only theoretical value,” and do not create a fixed entitlement to income. Adams v. Adams, supra at 376. See, e.g., Drapek v. Drapek, 399 Mass. 240, 244 (1987) (future earned income from professional degree); Yannas v. Frondistou-Yannas, 395 Mass. 704, 714 (1985) (anticipated future income from patents); Davidson v. Davidson, 19 Mass. App. Ct. at 374 (husband’s interest in inheritance from living testator who could have altered will).
Clearly, some “expectancy interests” have value. For example, the husband’s impressive resume and work experience in Drapek was unquestionably valuable, but the SJC held that the theoretical “value” of a spouse’s future career was so speculative and theoretical that it could not be treated as a current asset in a divorce case. Meanwhile, in Yannas, the husband clearly owned several patents; however, at the time of the divorce, these patents had no clear, marketable value. The Court acknowledged that the patents might be valuable in the future, but was not willing to assign a substantial value at the time of the divorce, where the future value was dependent on so many factors.
How do Expectancy Interests Affect the Division of Assets?
All that said, one party’s expectancy interest in a future inheritance can influence the division of assets in a Massachusetts divorce. The Massachusetts divorce statute requires judges to review fourteen mandatory “factors” when determining the division of assets. One of these factors reads as follows: The opportunity of each for future acquisition of capital assets and income.
In the majority of divorce cases, one or both parties’ potential right to receive an inheritance from a parent or family member will have minimal effect on the division of assets. However, if one party appears well positioned to receive a very substantial inheritance – think: $1 million or more – then a judge may factor the likelihood of a future inheritance into the division of assets. While a judge is very unlikely to award the other spouse a direct share of the future inheritance, the division of current assets – i.e. those actually owned by the parties in the present tense – can be influenced by the likely inheritance.
For example, in Pfannenstiehl, which dealt with one party’s status as a beneficiary of a trust, the Court held:
Considering the language of the 2004 trust, and the particular circumstances here, the ascertainable standard does not render Curt’s future acquisition of assets from the trust sufficiently certain such that it may be included in the marital estate under G. L. c. 208, § 34. … As noted, however, the trust may be considered as an expectancy of future “`acquisition of capital assets and income’ in determining what disposition to make of the property that [i]s subject to division.” [Citations omitted.] [Emphasis added.]
The problem with treating a future inheritance as an “opportunity of [a party] for future acquisition of capital assets and income” is the same problem suffered by all of the “factors” under Section 34. Namely, it is very difficult to quantify how a judge should weigh any one of the fourteen mandatory factors, versus the remaining factors. There is broad agreement that the “length of the marriage” is, by far, the most important factor in determining the division of assets in a Massachusetts divorce. After the length of the marriage, however, it is nearly impossible for parties and attorneys to forecast how must weight a probate and family court judge may give to one party’s ability to acquire assets in the future in the context of the thirteen other mandatory factors.
Going Deep in the Weeds: Vaughan’s Affidavit, a Unique Creature of Massachusetts Law
Most states consider a spouse’s potential receipt of a future inheritance irrelevant in a divorce. Massachusetts is somewhat unique in treating future inheritances as a relevant “factor” in the division of assets, despite agreeing with the majority view that such expectancy interests cannot actually be divided. Because a future inheritance is relevant in Massachusetts, a family member whose will may or may not include a divorcing spouse can be deposed or subject to discovery.
In most states, a divorcing spouse who demands to receive a copy of Aunt Rose’s will, or records of Aunt Rose’s assets, would be unsuccessful. In Massachusetts, however, such documents and information are relevant, and therefore fair game in discovery. More than 25 years ago, this issue was addressed in a seldom cited, unpublished ruling of the Massachusetts Supreme Judicial Court known as Vaughan v. Vaughan, SJC Single Justice, No. 91-485, p. 3 (1991).
In Vaughan, the Single Justice of the SJC held that the husband’s parents could be subject to discovery, where the husband’s potential receipt of a future inheritance was relevant to the divorce as a factor under Section 34:
Although it is true that Allan’s expectancy interests are not subject to division, a [probate court] judge, nevertheless, might properly take them into account in determining what disposition to make of the property which is subject to division.
However, the single justice also recognized that family members had privacy interests worth protecting, adding the following:
At the same time, the petitioners have legitimate privacy interests, particularly since they are not parties to the underlying action, and these interests should be protected wherever possible.
The “compromise” between the competing interests of privacy and discovery led to the birth of the so-called “Vaughan Affidavit”, in which a judge may:
[P]rotect [a spouse’s family members] from undue burden by offering to allow them to comply with the discovery order by affidavit rather than by deposition and document request, and by offering to limit the information disclosed to: (1) their approximate current total net worth (plus or minus $500,000), (2) a general description of their current estate plan and wills, and (3) the date, if any, when the estate plan or wills were last amended.
As a result of this obscure case, Massachusetts divorce cases involving a substantial future inheritance for one of both parties have featured the “Vaughan Affidavit”, by which the wealthy family member of a spouse must disclose the three facts above – or face a deposition – when served with a subpoena. Oddly enough, we are not aware of any published opinion of the Appeals Court or Supreme Judicial Court that makes Vaughan official “law” in Massachusetts. Instead, it appears that the practice has been based entirely on a non-binding, unpublished decision of a Single Justice that is more than twenty-five years old.
Gifts and Inherited Property Received During the Marriage and the Treatment of Trusts in Massachusetts Divorce Cases
It is important to distinguish the subject of this blog – future inheritances in divorce cases – from related subjects. For example, how courts treat gifts and inherited property received during the divorce is markedly different from how future inheritances are treated. Moreover, other forms of expectancy interests, especially trusts, can be much more complex than a simple inheritance, resulting in a rather different analysis. Stay tuned, as we will address each of these subjects in future blogs.
About the Author: Nicole K. Levy is a Massachusetts divorce lawyer and Massachusetts family law attorney for Lynch & Owens, located in located in Hingham, Massachusetts and East Sandwich, Massachusetts. She is also a mediator for South Shore Divorce Mediation.