Pasternak & Fidis Reporter

July 18, 2019

Trusts and Divorce

Trusts are an important tool that families can use to protect assets and pass wealth to future generations. When the beneficiary of a trust is facing divorce, he or she will be concerned that the trust assets and income may be vulnerable to a spousal claim. Such a claim can include equitable division of property, spousal or child support, and an award of legal fees and costs.

Whether and to what extent a beneficiary’s interest in a trust can be subject to a spousal claim at divorce depends on:

  • Whether the trust is revocable or irrevocable;
  • Whether the divorcing spouse is the settlor (i.e., the creator) of the trust, or whether a third party established the trust;
  • Whether the spouse-settlor funded the trust with marital or nonmarital property, or some of each;
  • Whether the spouse has the power to compel distributions of trust assets or income;
  • Whether there is a history of distributions from the trust to the beneficiary-spouse; and
  • How the spouse used trust distributions after receipt.

Trusts in Property Division

Divorcing spouse as settlor of a revocable trust. If a spouse created and funded a revocable trust before marriage, and contributed no marital property after the parties’ marriage, the trust assets are his or her nonmarital property; nonmarital property is not divisible at divorce.

Courts treat assets in a revocable trust as if they are owned outright by the trust settlor. If the spouse created the revocable trust during the marriage with marital property, such as savings from employment, the assets are marital property and can be equitably divided as if owned outright.

Where a spouse-settlor funds his or her revocable trust with both marital and nonmarital property, the beneficiary’s ability to claim the nonmarital portion depends on whether he or she can clearly prove the identity of his or her nonmarital property contributions. If the assets are completely commingled and have become untraceable, the court may treat the entire trust as divisible marital property.

Revocable trust established by a third party. A divorcing spouse who is the remainder beneficiary of a revocable trust created by a third party, such as a parent or grandparent, has no property right in the trust assets. The third party-settlor is the owner of the assets; they do not belong to the divorcing spouse and are not included in the pool of divisible marital property.

Divorcing spouse as settlor of irrevocable trust. As a rule, a settlor has no power to terminate an irrevocable trust. After the settlor transfers marital (or nonmarital) property to the irrevocable trust, the trust is the owner of the property. Our courts have not wrestled with the question of their power to treat marital assets in an irrevocable trust as divisible property nor how a court can enforce an award against the trust itself. Courts in other states have ruled that a divorce court has power over an irrevocable trust only if the trust is a party to the lawsuit. A spouse who wants a court to take an action that directly affects the trust must sue the trust as an additional defendant in the divorce suit.

Irrevocable trust established by a third party. Like the assets of a revocable third-party trust, the assets of an irrevocable third-party trust are not marital property. A spouse who is the beneficiary of such a trust does not have property rights in the trust assets that a court can divide at divorce. However, under some circumstances, a court can consider the value of the trust in deciding division of the couple’s marital property. One of the criteria for deciding what is a fair division of marital property is the value of each party’s nonmarital property. Where one spouse has substantial wealth in a third-party trust, a judge could decide to award the other spouse more of the marital property.

The Fate of Trust Distributions

Actions a divorcing spouse takes after receiving distributions from a trust may affect division of property at divorce.

Spouse uses trust funds to purchase a home. A spouse who uses trust distributions to purchase a jointly titled family home has created a marital asset that a court will often decide should be divided equally at divorce. The beneficiary-spouse may ask the court for an unequal property award to compensate him or her for the contribution and the judge may or may not agree.

Spouse commingles trust distributions with marital money in an operating account. A trust beneficiary might deposit trust distributions into a bank account in his or her sole name that includes marital funds, such as paychecks. If the owner uses it as an operating account, there may be multiple transactions in and out of the account; the multitude of transactions will make it difficult to clearly establish the portion of the account that is nonmarital property, especially when some contributions into the account were consumed by payment of family expenses. The court may treat the entire account as marital property. In most cases the beneficiary-spouse should not expect a court to compensate him or her for voluntary contributions of nonmarital money that were combined with marital funds and used to enhance the lifestyle of the parties and their children.

Spouse transfers trust funds into a securities account. A spouse who combines trust money and marital money in an investment account titled in his or her name will have an easier time proving the nonmarital contribution as there are likely to be fewer transactions. However, in order to prove the value of the nonmarital share (including the original nonmarital contributions and the dividends, interest, appreciation, and shares acquired through sales and reinvestment) he or she must be able to produce account statements and other documents that show the source of all nonmarital contributions to the account and the entire history of the account from the date of marriage to the date of divorce.

Spouse combines trust distributions with marital money in a joint cash or securities account. A joint account, even one that contains only one party’s trust distributions, could be wholly marital property or part marital and part nonmarital property. A party who seeks to claim a portion as nonmarital must be able to prove it with documents. However, documents showing the source of funds may not be enough; the other spouse may argue the funds or securities were converted to marital property when they were jointly titled. The outcome of such a dispute is unpredictable.

Trusts and Post-Divorce Obligations

When making an award of spousal or child support, courts consider all financial resources available to each party, not just income from employment; the laws governing spousal and child support make no distinction between monies available from wages and monies from a nonmarital source, such as a third-party trust.

The court may consider a history of distributions from a trust, whether a beneficiary is a trustee of his or her own trust, and whether or not the terms of the trust permit the beneficiary to take distributions at will or to require the trustee to make distributions. The court may consider the family’s lifestyle prior to separation in deciding spousal and child support and the extent to which the wealthy spouse used trust assets to enhance the lifestyle. By contrast, if the re is no history of distributions from the trust, the court may ignore the trust in determining support and not speculate about what may happen in the future.

When a spouse has a history of receiving distributions, but they are suddenly cut off when the couple separates, a court may look back several years, average the distributions and set support as if distributions will resume after divorce based on the average.OK

 


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July 17, 2019

Section 529 College Savings Accounts and Divorce

Many couples establish savings for the college education of their children. A Section 529 account is an attractive vehicle for these savings, as discussed in Adam Swaim’s article. What happens to a 529 account if the parents divorce? The appeals courts of D.C., Maryland, and Virginia do not yet appear to have wrestled with a parental dispute about a 529 account in a divorce. Only a few cases from courts around the country have done so. They offer some guidance to parties and their lawyers as to how our courts may handle a dispute over a 529 account that arises between divorcing parents. More importantly, they point out issues that parties should address when negotiating a marital settlement agreement where they have a Section 529 account for a child.

Some key legal aspects of Section 529 accounts:

July 16, 2019

Saving to Pay for Education Expenses: The Basics of 529 Accounts

One of the largest expenses a family will incur is very likely the cost of a child’s education. In order to encourage early participation in saving for education expenses, Section 529 of the Internal Revenue Code permits states to provide tax-advantaged savings plans (“529 plans”). A 529 plan account may be used to help pay for a beneficiary’s tuition at an elementary or secondary public, private, or religious school (capped at $10,000 per year). It can also be used to pay higher education expenses, such as tuition, fees, books, supplies (including computers and related equipment), and room and board (on-campus and off-campus housing, with certain limitations), at an eligible higher education institution. An eligible higher education institution is generally any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program… MORE >

February 12, 2019

Books for Family Lawyers (Preview)

Parenting Plans: Meeting the Challenges with Facts and Analysis

After a separation or divorce, parents need to have a plan to raise their children. It can be particularly challenging to navigate a fundamentally cooperative undertaking after the parents’ relationship has ended. In Parenting Plans: Meeting the Challenges with Facts and Analysis (American Bar Association 2018), author Daniel Hynan, Ph.D., analyzes some of the issues a parenting plan should address. Dr. Hynan blends individual assessment with scientific studies in making his recommendations. Because nearly a quarter of all children of divorce suffer “significant adjustment problems,” it’s critical to make sure that each parenting plan fits the family. A well-constructed parenting plan can account for scheduling, decision-making, and other contingencies that might arise. Dr. Hynan provides guidance for lawyers, mediators, and other professionals who work with parents seeking to develop parenting plans… MORE >

February 8, 2019

Morriah Horani Talks about Estate and Trust Litigation

Morriah Horani, a partner in the firm, is an experienced trial lawyer who handles disputes about child custody, division of property at divorce, and child and spousal support. Several years ago, she decided to expand her litigation practice to include resolving disputes arising out of estates and trusts. It seemed like a natural expansion of her family law practice as these cases often involve family members at war with each other. For this article Morriah answered some questions about her estate and trust litigation practice.

What is fiduciary litigation or estate and trust litigation?

This is an umbrella term that encompasses disputes about trusts or the estate of a deceased person. Litigation may involve issues stemming from a will, a beneficiary designation, a power of attorney, or a trust. A will dispute, for example, may be about whether a document purporting to be a will… MORE >

February 4, 2019

Marital Agreements and Beneficiary Designations—Sometimes Friends and Sometimes Foes

A marital agreement can take the form of a premarital agreement, a postmarital agreement, or a separation agreement, i.e., an agreement that settles property rights (and other issues) between parties who intend to divorce. A marital agreement may provide for the disposition of assets at death; it may require one or both parties to provide for the other or a child at death after divorce; or it may waive rights at death. When the terms of a marital agreement and a beneficiary designation conflict with each other, the law will either validate or annul the designation, depending on the jurisdiction, the type of asset, and the language of the marital agreement.

The District of Columbia, Virginia, and Maryland all have laws that revoke at divorce either the entire will or the portions benefitting a… MORE >