Quimbee logo
DMCA.com Protection Status
On Demand 1h 1m 17s

Protecting an Inheritance in the Event of Divorce

4.8 out of 5 Excellent(47 reviews)
Start your FREE 7-day trial
Access Quimbee's CLE library for free with a 7-day free trial membership.
View all credits25 approved jurisdictions
Play video

Protecting an Inheritance in the Event of Divorce

In this program, Patrick Lannon and Dolly Hernandez will discuss how trust assets can be vulnerable upon the divorce of a beneficiary. You will learn planning steps that can be implemented to reduce the divorcing spouse’s access to trust assets.

Transcript

 Hello, everyone, and thank you for joining us today. Our presentation is going to be protecting an inheritance in the event of divorce. My name is Patrick Lannon. I'm an attorney with Shutts and Bowen LLP, Miami, Florida. And with me today is Dolly Hernandez. Dolly? - Good morning, and thank you Patrick. My name is Dolly Hernandez and I practice exclusively in marital and family law. I am a partner at Boyd Richards Parker and Colonnelli, PL in Miami, Florida. Patrick, do you want to provide a general overview of our program? - Sure. So, before we get started, I'll let the audience know that we have based this presentation on an article that we co-authored together with attorney Mary Karr of the Gunster law firm, also in Miami. And we published an article with the "Florida Bar Journal," and we want to give Mary full co-author credit for these materials. So, the topic began as a conversation between Mary and I about a very common issue that comes up for us as estate planners. And as estate planners, we often have clients, I think for whatever reason, my clients more than Mary's, but it comes up a lot regardless. A lot of clients will come to me and say, "Look, I've done well in life. If I pass away before spending all my assets, I'd like to leave those assets for my descendants. But I wanna make sure they're for my descendants, they're not for anybody else. They're not for my descendant's favorite charities. They're not for my descendant's friends, and they're not from my descendant spouse, or most especially, they're not from my descendant's ex-spouse." Even if they're okay with the assets going almost anywhere else. It's very common in my practice for a client to say, "I do not want the ex-spouse, or the future ex-spouse of my descendant to end up with my money. That's not why I'm leaving it." Sometimes they're very apologetic in saying, "Look, I love my son-in-law, daughter-in-law. I just feel no particular desire to provide for them." Sometimes they're less apologetic and say, "I do not like my son-in-law, daughter-in-law. And when that scum finally gets kicked to the curb, I wanna make sure that my money doesn't support him or her." And in particular, this may even apply to clients whose children are young and they have no spouses and they certainly don't have any prospective ex-spouses, but nevertheless, divorce is a big issue in our country, and everyone has had some personal experience with it. Now, I'm gonna make this personal to you as an example, let's say for the sake of argument that I have saved up $10 million. And I wish that I had. And that I'm going to leave that $10 million, let's just say I have one child. And so I'm going to leave this $10 million to my daughter. But when she marries, I expect her spouse to take care of him or herself and not to use my money to live on if they get divorced. Maybe the money is available to them during the marriage. Maybe it's not. But if they get divorced, that individual should not be living off of my money. Now, again, this is not a goal that I am pushing on clients. It's not a goal that every client has. Some clients will say, "Look, once I give my money to my child or grandchild, knock themselves out, do whatever you want with it, right? You wanna leave it to your favorite charity or your favorite celebrity or whoever. That's on them, that's their money. And if we wanna leave it to an ex-spouse, knock yourself out." So, I'm not suggesting this is a goal that we're pushing on them. But if is a goal, then it is one that we should be ready to support. So for that purpose, we have first to understand how are assets allocated on divorce. And this is where Dolly comes in to explain to us in a separate property jurisdiction like Florida. Can you tell us a little bit about marital assets and non-marital assets and what is kept on divorce? - Yes. In Florida, we have the concept of, as Patrick said, separate property or equitable distribution. And the equitable distribution statute is at 61.075. And in there, there's a number of different factors and anything that is acquired by either party or the parties jointly during the marriage is presumed to be marital property, whether it's an asset or a liability. Now, the statute also addresses what's called non-marital assets, which are those assets typically that are acquired by either party prior to the marriage, or that's acquired during the marriage by devise or inheritance, or a non-interspousal gift. So a gift from a relative, specifically to one of the parties, as opposed to a joint gift. So, that's the basic schematic in terms of what is marital and non-marital assets during a marriage pursuant to statute. And there's certain nuances and the like, but that's just basic divorce law in Florida, if the parties don't have a prenuptial agreement. - So, our takeaway from this is that as a first run through, and we're gonna see why the first run through is not a good place to end. As a first run through inheritance assets are not gonna be marital assets and they're not going to be subject to division. However, we're gonna run into why we're gonna still talk for another 50 minutes. Because you might think, well, then there there's your answer. Inherited assets are not marital assets. They're not subject to equitable division. Why are we still talking? And we'll get into to why that's not a complete answer, including the fact that inherited non-marital assets can change character to marital assets, and some other issues we'll come up with. And there's also alimony. We're not covering child support in this presentation because that's a whole different issue. But we will talk about alimony as well. So, how does alimony work? - Basically, Patrick, alimony in the state of Florida, and it may change come July 1st of 2022, depending upon whether Governor DeSantis signs into law Bill 1796. But as it is right now, it's need and ability to pay. And there's various forms of alimony. And depending on the number of years that you've been married, you can request different forms of alimony. But the amount that will be received by the recipient spouse is typically based upon their lifestyle. And lifestyle is not a super factor, but it's a factor. And all the different factors are in Florida Statute 61.08. And it's based upon the inability to pay and any sort of income will be used to determine ability. So trustees fees, any distributions from a trust, even if it's a non-marital asset. All of that is taken into account. - Right. So, again, our preliminary takeaway and we'll get more into it. Our preliminary takeaway here is that alimony may be based on available income, even from non-marital assets. So, in my example of leaving a $10 million to my daughter. If I just leave that to her outright, she invests it. She makes a conservative $500,000 a year in income, which is then used for marital purposes and gets divorced. That income is going to be attributed and used as a basis, or could be used as a basis for the calculation of alimony, such that even if the principal of my assets is not touched. Nevertheless, since assets are fungible, if the income is being siphoned off the value of what I have left is nevertheless being reduced and in terms of its benefits to my daughter. So at this point, I wanna make the point that we just talked a bunch about Florida and we know that most of you won't be in Florida. But when we're looking into this, we understand that the beneficiaries are probably not gonna be in Florida either. They may be, they may not be. So if I have a client, I practice in Florida. And let's say he, in this case wants to leave his assets to his daughter. The daughter could live anywhere. Could live anywhere now. Could live anywhere in the future. And divorce is going to be determined by the state of marital domicile. So, when we are planning to protect these inherited assets. All we have to think about the 50 states and frankly, the whole world in terms of how those assets might be divided on divorce. So, we're gonna continue talking about Florida law, but we'll also talk about some cases that have come up in other states, and understanding that Florida's just an example. So, back to the original question I raised, which is why are we not done when we have determined that inherited assets are non-marital assets? And so to conceptualize this, we put together a paradigm of looking at the inherited assets of being at risk. At risk that is, of being siphoned off to the non-descendant spouse on divorce. And the first risk we're gonna talk about is transmutation risk. And that's where inherited assets, any non-marital assets can change character from non-marital to marital. Dolly, can you talk a little bit about how that might happen? - Okay. There is a case in point, and it's called the Hooker v. Hooker case. It's a Florida Supreme Court state case. But before we get into that, there's a number of factors. For instance, that are addressed in that case, which are the actual use of the property during the marriage. The intent to have a gift of that property during the marriage, and paying expenses on that property. Improving the property. Capital improvements on the property. Anything that not just only adds value. It's also based upon the conduct of the parties and what the parties believed that property was going to be used for. So for instance, in this Hooker case, there were two pieces of property that were at issue and the parties had a prenuptial agreement. And the two properties were non-marital for all intents and purposes. And one of the properties, and this was a long-term marriage. And I think that that was a particularly significant factor in the Hooker case. I think that the decision from the court may have been different based upon a short-term marriage. And here in Florida, there's a presumption of a long-term marriage after 17 years. And here the parties were married for 20 some odd years. So, one of the properties was utilized as a summer residence for the family every summer during this long-term marriage. And the wife even kept a card from the husband that he had given her during one of the holidays that specified, well, this is our family home. And the wife was in charge of a number of different components for the home, paying expenses, decorating. Basically she was in charge of upkeep and care of this particular home. So in the Hooker case, while the court said, "Yes, this is a valid prenuptial agreement." It split the proverbial baby and said, "But these two non-marital assets will be deemed marital assets." So there you have- - I just wanna stump you right there for a moment, Dolly, and reiterate that in this particular case, there was a prenuptial agreement that specifically categorized this property as being the separate property of the husband. - Correct. - And nevertheless. - Yes. - Nevertheless, the Florida Supreme Court decided that it was no longer to be treated that way. And just to reiterate how easy it is, even in the case where explicit as possible to just sort of slide from one characterization to another. - Correct. And that's why I've seen a number of different prenuptial agreements. And I know I have this language in my prenuptial agreement where I specifically go into all the factors that the court determined were indicative of donative intent of the husband to wife to transmute this property from non-marital to marital. And basically it's conduct, a conduct paragraph. Even if we do A, B, C, D, E, F, G. It will not be utilized or construed that the party intended a gift to the other spouse. So, to try and do away with the analysis that was done with Hooker. - And we'll get a little bit more into prenuptial agreements, but for now, just to put a pin in this risk, that if you don't do proper planning and I leave $10 million to my daughter, despite her best efforts that may change in characterization over the course of the marriage. The second risk that we wanna talk about is we're gonna call it the offset risk. And that is the risk that the availability of non-marital assets of one spouse may mean that that spouse receives fewer assets on divorce. That, again, to use an example, my daughter, I leave my daughter $10 million, and she has that as a non-marital asset. And then she and her spouse together put together another $10 million. They get divorced and the court equitably divides the $10 million they put together during the marriage. And the division starts with a 50/50 division, but the judge can go a 100/0 or 0/100. And so the worst case scenario is the judge goes 0/100 and gives the entire 10 million marital property to the ex-spouse because my daughter has 10 million of non-marital property. And even though the non-marital property that I have given them, the inheritance has not been touched. Nevertheless, my daughter has now been deprived of $5 million of marital property that she likely would have received had the inheritance never happened. And again, since money is fungible. Do you wanna talk a little bit about the Levitan versus Rosen case in... - In Massachusetts. - In Massachusetts, or we can talk about it later. - Oh, sure. We can address it now. So, in Levitan versus Rosen, you had a wife who was the beneficiary of a discretionary trust, and it had a spendthrift provision. The trust was governed by Florida law. Wife's father passes away and her interest held in trust for the wife's lifetime. The wife's share is managed by two trustees, and she is one of the trustees. The other trustee was an independent trustee. So, this is like the perfect storm brewing. The trust provides a wife with an annual right to withdraw 5% of the principal of her share. And she also had a limited power of appointment, giving her the power to direct her principal and income for her share for the benefit of the grantor's issue. So, here the trial judge determined that the wife's withdrawal rights were part of the marital estate. The court construed Florida law and concluded that her annual right to withdraw that 5% from her share from a discretionary family trust was governed by the trust spendthrift provision, and her entire interest could be construed as marital. Even though it was assigned to the wife as part of equitable distribution, it was deemed marital, her withdrawal rights. - Right. So, the takeaway from that case, and we're gonna circle back to irrevocable trust. Is that on appeal, the interest in the inheritance essentially, which was in an irrevocable trust was admitted by the appeals court determined to be non-marital property. However, the court said, of course, "I'm sorry, it's marital property, right? And of course, because it's in an irrevocable trust, we can't give it to the husband. So, we give it to the wife." But it is nevertheless going to offset the amount that the wife would have received from other assets. And the same thing can happen, whether this is a marital asset or a non-marital asset, that you can still count the asset, even if it's non-marital, when determining the equitable division. - Right. And, Patrick, we haven't seen this particular factual scenario in Florida yet. - Right. But the point was, it was a Florida trust, even though it happened in Massachusetts, right? - Right. - And so when you prepare these documents, when you're advising your client, you have to assume the document you're preparing can be interpreted anywhere. The third risk that we're gonna talk about is alimony risk. And we've already talked a little bit about that. That alimony can be based on the history of available non-marital assets. So, effectively siphoning off a portion of the income from the inherited assets. And that can happen as Dolly mentioned, looking at the trustee fees that your descendant takes for being trustee of a trust, or at least in theory, though, I haven't seen this happen. Saying that you could be taking a trustee fee and you're not taking a trustee fee. So, you are intentionally decreasing the amount of income that is available for alimony, because you're doing the job of a trustee and trustees are entitled to fees and by not taking it, you're basically nevertheless should be dinged with that amount. But certainly as to any distributions, it's very clear that they will be taken into account. And regular distributions to the family can be taken into account for alimony. So, what do we do then as planners to counteract these three risks? What are the tools in our toolbox? And we've already mentioned the big ones, marital agreements and irrevocable trusts. And to get into those in a little more detail and why they work and what the limitations on them as tools are. So first, the descendant spouse, let's say again to say my daughter's spouse can waive rights by a prenuptial agreement or a postnuptial agreement. So, let's say for example, and this happens a lot in my practice. One of my client's children is getting married. The parents who are going to leave a substantial inheritance, go to their child before the wedding and say, "You are going to enter into a prenuptial agreement. And that prenuptial agreement is going to only one thing. It's going to take inherited assets off the table on divorce for all reasons. For property division and for alimony. And I don't care what else you do in the prenuptial agreement, but it is going to that." And the implicit threat of course saying, "And if you don't do that. Well, then maybe I won't leave this money to you." I think you would be sufficiently protective of these assets. And by a properly drafted prenuptial agreement and postnuptial agreement, the transmutation risk, the offset risk, the alimony risk. It can all be avoided. And prenuptial agreements can be prepared by family law attorneys, such as Dolly, by estate planning attorneys, such as myself, or sometimes by a combination for a particularly complicated case where you want the benefits of both points of view as to divorce and death and if there's trust involved and that kind of thing. So, Dolly you wanna talk a little bit about how a marital agreement can counteract these risks? Or how they can fail to counteract these risks? I should say how they can counteract the risks is good drafting. - Right. - But how can they fail not what's to achieve that goal? - Well, from the failure perspective, we have the transmutation risk that we had addressed. And if you, in my opinion, if you do not put language in the prenuptial agreement now that addresses conduct of the parties and not only addresses that in Hooker, but other factors that you could think of that would be pertinent to that particular couple, that the prenuptial agreement is being drafted for it. That's a big one, addressing conduct of the parties and addressing gifts during the marriage and how gifts will be given, so that conduct isn't necessarily a factor that the court takes into account. So, I've seen a lot of times where you have it said that in the prenuptial agreement, if it's going to be intended as a gift during the marriage, that there has to be a document, a separate document that is signed by both parties, sometimes under oath in order to counteract the gift giving provision. So, that if it is a gift, there's going to be a writing that will substantiate the fact that property that was given during the marriage was a gift, as opposed to having somebody rely upon conduct, especially when you have a long-term marriage where the court is more likely to take that into consideration. So, that would be one of the areas where a contract, if it doesn't address this would fail. - Right. - The transmutation risk. - And so basically if you look at that on a broader level, what we're saying is marital agreements can work if they're properly drafted and implemented, but they may not be properly drafted. - Or implemented. - Or implemented. - Excuse me, and especially this marital agreement idea works best for people who are not yet married, right? - Right. - It's one thing to say in the documents that I prepare for my client, that each beneficiary must have a prenuptial agreement or a postnuptial agreement. It's another thing when the descendant, when the client actually passes and the descendants had a 25 year marriage by that point. They're going to be extraordinarily unhappy with the idea that now they have to enter into a postnuptial agreement, which may require separate representation. You have had clients who refuse to do a postnuptial agreement, because they don't wanna disclose their assets. I've had clients who refuse to a postnuptial agreement because they feel like all of their assets are joint and they don't have an adversarial relationship with a spouse. So, if you don't catch them young so to speak, prior to the marriage, it can create a real issue. And even if we say for the sake of argument, I don't need to do any further planning for my client because his children all have good marital agreements. Who's to say they're not going to ignore the agreement in Dolly's point of not administering it correctly, or simply terminate it. I've had a number of clients come to me and say, they want to terminate their marital agreements. So, from the perspective of representing the parent generation or grandparent generation, agreements is an uncertain at best way to protect your assets, because you don't know what's gonna happen with those marital agreements. Even assuming that you've got a copy and decided that they're well drafted and sufficient for today. You can't be certain what's gonna happen in the future. Which leads us to the next strategy, which may be a little bit self-serving for an estate planner is to tell your client an irrevocable discretionary spendthrift trust can also counteract these risks. However, one of the reasons we wanted to do this speaking and the article we wrote is to make clear, I've heard a lot of attorneys tell clients that these trusts will counteract the risks. And I think the right way to phrase it is these trusts may counteract the risks. And when I do, you know, speaking to groups of attorneys on this, I get a lot of pushback from estate planning attorneys perhaps because in their state, the irrevocable discretionary spendthrift trust have been a hundred percent proof against these issues. But to understand, again, that's not necessarily true in other states. So, let's look at each of these three risks we've been discussing in the context of such a trust. So, first is the transmutation risk. Again, and that's the risk that an asset that was non-marital becomes marital. And we have probably avoided that because as long as the assets are in the trust and stay in the trust, we probably have not commingled them sufficiently to add them to the category of marital assets. I can imagine some circumstances where that line may be blurred. For example, if what's in the trust is a business that's being run by the beneficiary or some other situation where the beneficiary is the sole trustee, and has a lot of power over the trust. I can imagine circumstances where transmutation risk would still be an issue, but mostly it's not going to be. Then there's the offset risk. And offset risk, we talked about the case of Levitan v. Rosen, where even if you have a non-marital asset of one spouse, it can nevertheless be added to the spouse's share when you are dividing up the marital assets and counted against what the equitable division. Now, there's two recent cases, Merrill v. Merrill and Early v. Early, which are in New Hampshire, which of course shares a border with Massachusetts. And in both of those cases based on a New Hampshire statute, they explicitly rejected the Massachusetts type rule and said that they will not be taking into account an interest in a trust for the purposes of the equitable division. One of the cases actually specifically says, we're not in Massachusetts. But they do have a specific statute there, which [email protected] So again, because you don't know where your beneficiaries are going to live, and they may be living in Massachusetts. You can't be sure that the offset risk is not gonna be a factor. The third risk is the alimony risk, which we've talked a little bit about that alimony can still be awarded based on trust distribution. And here in Florida, those trust distributions can even be garnished. So to me, that's a very clear example of the inherited assets going straight to the ex-spouse. Do you wanna talk a little bit about the case of Baringer versus Castlebury? - Sure. In the Baringer case, and this was a Florida Second District case, there was a spendthrift trust that was subject to garnishment. There was an enforcement action for alimony. And in that case, the wife was not prohibited from obtaining a writ of garnishment against discretionary distributions made by a trustee. So, she was entitled to collect her alimony arrears from actual distributions that were made by the trustee from that trust. So, the big point here is that the writ of garnishment is limited to those disbursements that are due to be made or which are actually made by the trust. The spouse who has the writ of garnishment cannot go after the corpus or the trust assets that are inside the trust. They have to be dispersed. - Right. Which in this case, again, might be cold comfort. Again, if I leave $10 million to my daughter and it's in a trust and she and her spouse end up living off of that, those assets to some extent and get divorced. Then the stream of income that had been coming out, it then creates an alimony, could create an alimony entitlement in the non-descendant spouse. And then my daughter can't get any distributions until that alimony is paid because the garnished assets, as they come out are gonna flow over to the other spouse. So, my $10 million is now supporting an ex-spouse. And we're gonna talk a little bit about, later about how to beef up your trust to counteract these risks. But just for the moment to understand that they're not a panacea. So, the next strategy is to start combining strategies. And the most common historical combination is to put the trust and marital agreement. These, so you have an irrevocable discretionary spendthrift trust for the benefit of your descendants that requires that the descendant have a marital agreement. That way you have covered the weaknesses of the trust by the strengths of the marital agreement. And you have provided a mechanism trustee who can monitor the status of the marital agreement. Can take a look at the agreement make sure it's sufficient. Can take a look each time a distribution is made and make sure it's still in place. And this is the historical strongest position you can get to protect those assets, but it doesn't work for everyone. First of all, the burden on the trustee is enormous. And corporate trustees in particular don't necessarily want the responsibility to become experts on family law and have to review the prenuptial agreements and postnuptial agreements to see that they're valid and sufficient. They don't wanna have to get an affidavit every time they make a distribution to make sure they're still enforced. And as we alluded to before, it's tough for a child who's already married at the time the trust becomes effective to now have to go back and enter into a marital agreement. And so, I've had clients say, I do not want to be that invasive with my child who's been married a long time now, to force them to go and get this marital agreement. So, historically in that case, you've had to default to the maybe lesser protections of just a trust alone. Now, recently there's been proposed a different approach. And this was suggested by an attorney named Bruce Stone. He spoke about it a few years back at the Heckerling. And that strategy is to supplement the trust with a provision that requires that the beneficiary spouse execute a waiver directly to the trustee. And you can sort of draft this as you like as to how you're covering the risks that we discussed. But the one that I use is very explicit. It says no beneficiary will receive distributions other than for emergencies. Unless the beneficiary spouse delivers a waiver to the trustee saying that the trust assets will never be taken into account upon divorce, will never be taken into account on death. The distributions won't be garnished. They won't be taken into account that determine the amount of alimony, they won't be taken into account that determine the amount of equitable division. And the idea being this is not prenuptial agreement between the two spouses. This is a contract with the trustee and the non-beneficiary spouse that is supported by the consideration of allowing a more generous distribution schedule, once the waiver is signed, which then is available for the benefit of the family, and so as consideration to the non-beneficiary spouse. This is a promising strategy. I get phone calls from time to time saying, "I've heard you speak about this. Are there any cases yet?" There are not that I'm aware of. If any of you have come across any cases, please tell me. And so the idea of combining irrevocable discretionary spendthrift trust with a waiver is promising, but untested. So, what can we do then if we have a marital agreement, which is very strong protection, but doesn't work for everybody. A irrevocable discretionary spendthrift trust, which in some circumstances, Levitan v. Rosen in Massachusetts has failed to be protective. And the combination of the trust and the prenuptial and postnuptial agreement, which doesn't work for everybody. And the trust and the waiver, that is really great if it works. So what can we do to strengthen our hand with this drafting? And the answer is in the context of the irrevocable discretionary spendthrift trust. How you draft that trust is going to have a big impact on how this works out. So, we can look at it from different perspectives. The perspective of the drafter or of the trustee. If a trust that's already been created and it looks like one of the beneficiaries has a shaky marriage. Among the other questions is does the trustee in that circumstance have a fiduciary duty to try to protect the assets, including, for example, decanting or other modification to remove provisions where the beneficiary could have an enforceable right to withdraw assets. And the Levitan v. Rosen case we talked about, the beneficiaries spouse had a 5 and 5 withdrawal power. And ultimately the case did not in Massachusetts hinge on that right. I think in Florida with the right lawyers and the right judge, it could absolutely be seen differently than as being more likely to be subject to being counted. Because after all of the spouse has a right to take out five percentage here and doesn't do it, that that's going to be tough for a family law judge, who's trying to do equity to ignore. So, maybe you can't to take out a 5 or 5 power. Maybe you take out provisions that give the beneficiary a right to demand certain distributions, such as all income or even very common in everyone's documents, distributions for health educations, maintenance. Those distributions have been at least for the IRS purposes, they're called ascertainable standards because in theory, you know how much is there to be distributed. And if you are entitled to those distributions, then at least arguably that might make the trust more vulnerable. Also, if the trust gives the beneficiary the right to appoint creditors, appoint assets from the trust to creditors during life or on death, that might be taken into account. So, first you're gonna look through and try to make it as discretionary as possible in those circumstances. Now, you might also consider using a pot trust, so that the beneficiary does not have a vested right to any particular share of the trust. And again, there's some Massachusetts cases where they very much treated differently a trust that has seven beneficiaries and a trust that has one beneficiary because of the uncertainty of a trust with many beneficiaries as actually going to ever make a distribution. It's harder to allocate any particular amount to any particular beneficiary. Now, as a drafter, I hate pot trust because they're hard to administer. It puts a lot of pressure on the trustee to try to balance the interests of any number of beneficiaries. But in this context, it might be the right way to structure things. And again, now we're going off into issues which have less certain application. But maybe we avoid naming the beneficiary as a sole trustee, or you avoid you in a situation where the trust is already created, but the marriage shaky. Maybe you resigned from that position in advance of any divorce, so that there can't be a determinant that maybe the beneficiary acting as trustee increased the value of the trust assets, delayed distributions went without trustee fees. These are not issues that I'm aware of have been explicitly discussed very much in reported cases, but you can see how they would be. And in Levitan v. Rosen, for example, it is mentioned that the beneficiary spouse is a trustee. Maybe you also consider resigning as trustee to avoid the imputation of trustee fees. Again, I haven't seen this happen, but I can see how it could if I have a job, which is to be a trustee and I decide to do it for free, so that the assets remain in the trust for my own benefit. That sounds an awful lot like I am somehow adding assets to the trust, again, not for trust law purposes, not for tax purposes, but who's to say what a family law judge might look at that. Yeah. We also talked about that distributions to the beneficiary spouse might be taken into account for alimony or child support purposes. Again, we're not gonna talk about child support,. But maybe if we see a shaky marriage, we stop making distributions, right? Maybe we stop making distributions as soon as we see that divorce on the horizon, so that there's no history of distributions for a reasonable period of time. Dolly, how do you think that would play in a divorce court? - I honestly think that there's two sides to the coin. The spouse, who is not the recipient of the distributions is going to argue for an imputation of income and say, I mean, depending on how remote in time the distributions have stopped, they will say, "Judge, impute income of x, depending on the distributions that have been made." But as you made mentioned, Patrick, the more remote in time the distributions are the less likely that a judge would be to impute that income. But if it's maybe one or two years off, I could see a court potentially with the right set of facts and circumstances, imputing income even if the distributions have stopped. And at that point they probably put the trustee on the stand and start to question as to why it is that these distributions have stopped, to see if there's any ill, you know, any wrongdoing or the like. - Absolutely which I think, again, not that you're necessarily gonna have a sophisticated trust attorney or judge, but the best you can do maybe is to draft the trust or change the trust in advance, so that it's as discretionary as possible. Now, there's also in your drafting. It happens, though it's rare in my practice that the beneficiary spouse is named as a beneficiary. And if the beneficiary spouse is named as a beneficiary, this happens in my practice more with the Latin American clients, due to the way that inheritance works in their home countries, that they are more open to adding a descendant's spouse as a beneficiary than necessarily a lot of the other clients that I have. But it comes up with all sorts of different clients from different backgrounds. And so in that case, you want to be careful to make sure that a spouse that is referenced is a floating spouse provision. A provision which says the spouse from time to time is a beneficiary not named individual. I actually worked early in my career on a very well known famous family, when a trust beneficiary passed the next beneficiary was his ex-spouse that he had been divorced from for 50, it's five zero years. And nevertheless, she's still alive and happy to all of a sudden get this windfall of income from the trust because she was named individually as a successor beneficiary. And I can't see if that was ever contemplated or intended by the grantor, of course. He had been passed by 50 years at that point. So, if he's rolling over in his grave, it took a long time to come. Now, another option, and this has been done again up in Massachusetts. If anyone's listening from Massachusetts, we're not picking on you, it just happened to be maybe ahead of the curve on these matters. It is that you can choose where your trust has a situs, and you may move your trust to a jurisdiction that has thought about these issues, or has laws on these issues, such as New Hampshire does on the divorce side. But you're looking for a state that has different law, different statutes on the trust side to make the assets more protected on divorce. And there is a case, I don't have the citation for it, but it's one of the ones we cite in our materials, where the trustees actually did move a trust successfully to a different jurisdiction, it was Connecticut from Massachusetts, but I may be mistaken about that. And successfully reduced the ability to challenge the trust, but perhaps won the battle and lost the war because the assets could still be taken into account for the division of assets on the equitable division. So, one of the options that has been recommended is to have the trust agreement have a flee clause that in the case of a divorce, and it looks like the assets of the trust are going to, in some way, be taken into account. The trust automatically moves to another jurisdiction that is more protective on those points. Oh, and this is probably the case, it's coming up on the next slide I clicked, it's Ferri versus Powell-Ferri, I believe is the decanting issue. And so when we're talking about this, we have to keep in mind that both family law and trust law are constantly changing these days. They're very active areas of law. I actually think how foolish I was in law school that I thought how smart I was to get into an area of the law that's boring, like wills and trust, where there's not much going on. And I can learn the law once and have it stick with me. And of course that hasn't been the case in the modern times. But one of the recent things that's become more common is to have trust protectors, trust advisors. And so you may want to consider adding a trust protector to your trust documents, who has some role in moving the trust say or taking away rights in a way that protect against spouses, if that's important to your client. So, key takeaways are without inherited assets are at risk on the beneficiaries divorce. Prenuptial agreements, spends of trust waivers will be used proactively to protect assets. But even if you've missed all those opportunities, there's still time these days to work with an existing trust. - Patrick, so from the divorce attorney perspective, in terms of key takeaways, if I'm reviewing a trust agreement that has surfaced in discovery as part of a divorce action, these are the issues I'm gonna be looking at. I'm gonna be looking at whether the spouse is a beneficiary of the trust, and whether this beneficiary is also a trustee. And whether the trustee has the ability to exercise discretion. And whether there are withdrawal rights to the beneficiary spouse. And whether the beneficiary can compel distribution. So, I'm gonna be looking at those factors to augment my argument, to the extent that I'm making an argument on behalf of a spouse, that those trust assets should be part of the marital estate even if it's going to be placed on the beneficiary spouse's column for equitable distribution. From the income alimony perspective, I'm going to be looking at whether a beneficiary, whether a spouse that's a beneficiary is also a trustee and is earning trustee income. And obviously the distributions that the beneficiary receives would also be taken into account for income. And to the extent the trustee has been exercising discretionary power, if there has been a period of time where the trustee is no longer providing distributions to a beneficiary spouse. I'm going to be taking a look at the roadmap, and how long in time has it been and potentially deposing the trustee and the spouse to determine why it is that they are no longer receiving this distributions. Do you have anything else to add for divorce attorneys out there who are listening, or are going to listen to this recording, as to any tips on what they should be looking for? - I think we've got it. It's just to keep in mind that this is a changing area of the law and that you can't be expert in all 50 states. - Right. - And so to try to have some flexibility in your planning and not to over promise in terms of what you're trying to do. And with that, I hope you all enjoyed it. And again, my name is Patrick Lannon, attorney with Shutts and Bowen in Miami. And I'd love to hear from any of you who have insights that we can add for our next article.

Presenter(s)

Dolly Hernandez
Partner
Boyd Richards Parker & Colonnelli, P.L.
Patrick Lannon
Partner
Shutts & Bowen LLP

Credit information

Jurisdiction
Credits
Available until
Status
Alabama
    Pending
    Alaska
    • 1 voluntary
    Available
    Arizona
    • 1 general
    Available
    Arkansas
    • 1 general
    Approved
    California
    • 1 general
    Approved
    Colorado
    • 1 general
    Approved
    Connecticut
    • 1 general
    Available
    Delaware
      Pending
      Florida
      • 1 general
      Approved
      Georgia
      • 1 general
      Approved
      Guam
      • 1 general
      Available
      Hawaii
      • 1 general
      Approved
      Idaho
        Pending
        Illinois
        • 1 general
        Approved
        Indiana
          Pending
          Iowa
            Pending
            Kansas
              Pending
              Kentucky
                Pending
                Louisiana
                  Pending
                  Maine
                    Pending
                    Minnesota
                      Pending
                      Mississippi
                        Pending
                        Missouri
                        • 1 general
                        Available
                        Montana
                          Pending
                          Nebraska
                            Pending
                            Nevada
                            • 1 general
                            Approved
                            New Hampshire
                            • 1 general
                            Available
                            New Jersey
                            • 1 general
                            Approved
                            New Mexico
                              Pending
                              New York
                              • 1 areas of professional practice
                              Available
                              North Carolina
                              • 1 general
                              Approved
                              North Dakota
                              • 1 general
                              Available
                              Ohio
                              • 1 general
                              Approved
                              Oklahoma
                                Pending
                                Oregon
                                • 1 general
                                Approved
                                Pennsylvania
                                • 1 general
                                Approved
                                Puerto Rico
                                  Pending
                                  Rhode Island
                                    Pending
                                    South Carolina
                                      Pending
                                      Tennessee
                                      • 1 general
                                      Approved
                                      Texas
                                      • 1 general
                                      Approved
                                      Utah
                                        Pending
                                        Vermont
                                        • 1 general
                                        Approved
                                        Virginia
                                          Pending
                                          Virgin Islands
                                          • 1 general
                                          Available
                                          Washington
                                            Pending
                                            West Virginia
                                              Pending
                                              Wisconsin
                                                Pending
                                                Wyoming
                                                  Pending
                                                  Credits
                                                    Available until
                                                    Status
                                                    Pending
                                                    Credits
                                                    • 1 voluntary
                                                    Available until

                                                    Status
                                                    Available
                                                    Credits
                                                    • 1 general
                                                    Available until

                                                    Status
                                                    Available
                                                    Credits
                                                    • 1 general
                                                    Available until

                                                    Status
                                                    Approved
                                                    Credits
                                                    • 1 general
                                                    Available until

                                                    Status
                                                    Approved
                                                    Credits
                                                    • 1 general
                                                    Available until

                                                    Status
                                                    Approved
                                                    Credits
                                                    • 1 general
                                                    Available until

                                                    Status
                                                    Available
                                                    Credits
                                                      Available until
                                                      Status
                                                      Pending
                                                      Credits
                                                      • 1 general
                                                      Available until

                                                      Status
                                                      Approved
                                                      Credits
                                                      • 1 general
                                                      Available until

                                                      Status
                                                      Approved
                                                      Credits
                                                      • 1 general
                                                      Available until

                                                      Status
                                                      Available
                                                      Credits
                                                      • 1 general
                                                      Available until

                                                      Status
                                                      Approved
                                                      Credits
                                                        Available until
                                                        Status
                                                        Pending
                                                        Credits
                                                        • 1 general
                                                        Available until

                                                        Status
                                                        Approved
                                                        Credits
                                                          Available until
                                                          Status
                                                          Pending
                                                          Credits
                                                            Available until
                                                            Status
                                                            Pending
                                                            Credits
                                                              Available until
                                                              Status
                                                              Pending
                                                              Credits
                                                                Available until
                                                                Status
                                                                Pending
                                                                Credits
                                                                  Available until
                                                                  Status
                                                                  Pending
                                                                  Credits
                                                                    Available until
                                                                    Status
                                                                    Pending
                                                                    Credits
                                                                      Available until
                                                                      Status
                                                                      Pending
                                                                      Credits
                                                                        Available until
                                                                        Status
                                                                        Pending
                                                                        Credits
                                                                        • 1 general
                                                                        Available until

                                                                        Status
                                                                        Available
                                                                        Credits
                                                                          Available until
                                                                          Status
                                                                          Pending
                                                                          Credits
                                                                            Available until
                                                                            Status
                                                                            Pending
                                                                            Credits
                                                                            • 1 general
                                                                            Available until

                                                                            Status
                                                                            Approved
                                                                            Credits
                                                                            • 1 general
                                                                            Available until

                                                                            Status
                                                                            Available
                                                                            Credits
                                                                            • 1 general
                                                                            Available until

                                                                            Status
                                                                            Approved
                                                                            Credits
                                                                              Available until
                                                                              Status
                                                                              Pending
                                                                              Credits
                                                                              • 1 areas of professional practice
                                                                              Available until

                                                                              Status
                                                                              Available
                                                                              Credits
                                                                              • 1 general
                                                                              Available until

                                                                              Status
                                                                              Approved
                                                                              Credits
                                                                              • 1 general
                                                                              Available until

                                                                              Status
                                                                              Available
                                                                              Credits
                                                                              • 1 general
                                                                              Available until

                                                                              Status
                                                                              Approved
                                                                              Credits
                                                                                Available until
                                                                                Status
                                                                                Pending
                                                                                Credits
                                                                                • 1 general
                                                                                Available until

                                                                                Status
                                                                                Approved
                                                                                Credits
                                                                                • 1 general
                                                                                Available until

                                                                                Status
                                                                                Approved
                                                                                Credits
                                                                                  Available until
                                                                                  Status
                                                                                  Pending
                                                                                  Credits
                                                                                    Available until
                                                                                    Status
                                                                                    Pending
                                                                                    Credits
                                                                                      Available until
                                                                                      Status
                                                                                      Pending
                                                                                      Credits
                                                                                      • 1 general
                                                                                      Available until

                                                                                      Status
                                                                                      Approved
                                                                                      Credits
                                                                                      • 1 general
                                                                                      Available until

                                                                                      Status
                                                                                      Approved
                                                                                      Credits
                                                                                        Available until
                                                                                        Status
                                                                                        Pending
                                                                                        Credits
                                                                                        • 1 general
                                                                                        Available until

                                                                                        Status
                                                                                        Approved
                                                                                        Credits
                                                                                          Available until
                                                                                          Status
                                                                                          Pending
                                                                                          Credits
                                                                                          • 1 general
                                                                                          Available until

                                                                                          Status
                                                                                          Available
                                                                                          Credits
                                                                                            Available until
                                                                                            Status
                                                                                            Pending
                                                                                            Credits
                                                                                              Available until
                                                                                              Status
                                                                                              Pending
                                                                                              Credits
                                                                                                Available until
                                                                                                Status
                                                                                                Pending
                                                                                                Credits
                                                                                                  Available until
                                                                                                  Status
                                                                                                  Pending

                                                                                                  Become a Quimbee CLE presenter

                                                                                                  Quimbee partners with top attorneys nationwide. We offer course stipends, an in-house production team, and an unparalleled presenter experience. Apply to teach and show us what you've got.

                                                                                                  Become a Quimbee CLE presenter image