On September 10, 2020, the Michigan Court of Appeals issued its opinion in the case of Wilson v. Wilson. The issue on appeal was the division of 401(k) plans in divorce, passive and active appreciation.
Division of 401(k) plans in divorce – passive and active appreciation
If an asset grows because of the contributions or decisions made (e.g. investment choices) during the marriage the appreciation is active. For example, if a spouse continues to contribute to his/her 401(k) or makes investment choices. However, if an asset grows because of market forces during the marriage without contribution or decisions from a party the growth is passive appreciation. Another way to think of active and passive appreciation is active appreciation requires work by a party whereas passive appreciation requires no work, it simply grows.
Before dividing marital property, the court must determine if the property is marital or separate. Typically, each party will keep their separate property in a divorce action. When considering the division of 401(k) plans in divorce, the plan may be both separate and marital. That is a portion of the plan earned prior to marriage is separate and the portion of the plan earned during the marriage is marital.
As a general rule, Michigan property law provides that marital property is property acquired by reason of the marriage or during the marriage. For example, income earned during the marriage is marital property and savings earned before marriage is separate property.
The seminal case on appreciation and the division of 401(k) plans
In the seminal Michigan Property Law case of Reeves v. Reeves the court of appeals provided an exception to the general rule. Specifically, if the increase in value of property during the marriage is a result of passive appreciation, the property is separate and no longer marital.
In the Wilson case, the issue involved the increase in husbands’ 401(k) during the marriage. A 401(k) plan is a type of retirement plan (also called a defined contribution plan) where a party invests pre-tax dollars in an investment and pays tax on distribution at retirement. Husband argued that since he owned the 401(k) before marriage and both parties equally contributed to his/her 401(k) during the marriage that his 401(k) was his separate property because the increase in value during the marriage was passive appreciation.
The trial court agreed with the husband and the court of appeals affirmed the decision. They Court of Appeals acknowledged that the appreciation was active however concluded that the trial court’s decision was fair notwithstanding.
The key learning in this case is that the law is sometimes just a prophecy of what a trial court will do. Distinguishing between active and passive appreciation is a cornerstone of Michigan divorce law. However, in this case, the Michigan Court of Appeals affirmed a trial court’s decision deciding otherwise. However, since the case is not published, it does not have to be followed by other courts.
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By: Daniel Findling