Trusts for Asset Protection in Divorce Evaluating and Reaching Trust - - PowerPoint PPT Presentation

Trusts for Asset Protection in Divorce

Evaluating and Reaching Trust Assets and Ex Parte Trusts; Anticipating Discovery Tactics to Uncover Marital Assets

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WEDNESDAY, AUGUST 8, 2012

Presenting a live 90-minute webinar with interactive Q&A

James M. Kane, Shareholder, Chamberlain Hrdlicka White Williams & Aughtry, Atlanta Marvin L. Solomiany, Managing Partner, Kessler & Solomiany, Atlanta Jeff Vandrew, Jr., Attorney, Law Offices of Jeff Vandrew Jr., Egg Harbor Township, N.J.

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Trusts & Divorce: A Litigation Approach

Marvin L. Solomiany, Esq. Kessler & Solomiany, LLC 404.688.0098 msolomiany@ksfamilylaw.com James M. Kane, Esq. Chamberlain, Hrdlicka, White, Williams & Aughtry 404.658.5422 james.kane@chamberlainlaw.com Jeff Vandrew Jr., Esq. & CPA Law Offices of Jeff Vandrew Jr., Attorney-CPA http://www.vandrew.com 609.568.0109 jeffvandrewjr@vandrew.com

Trusts and a Divorcing Party

6

• The primary issue generally is where one party in

the divorce is seeking to shield both discovery and access to a trust in which the party has some manner of association

• We use the term “association” as the party can

have indirect interests or powers in the trust that are not readily apparent at first glance

• The trust may be designed purposely so that the

party is not a beneficiary; but there can be complex, indirect powers to get the property later back to the party. This is where sophisticated trusts require close scrutiny

The First Important Distinction for a Trust

7

• A self-settled trust is more typically an easier

target for attack in a divorce proceeding (and, particularly, may be subject to the confidential relationship doctrine between spouses, discussed later in this Outline). At common law, there generally is no protection for a self-settled trust.

• A third-party trust as a target is affected by the

distribution standards of the trustee (e.g., discretionary, ascertainable standards, etc.)

DAPTs

8

• Almost half of states override common law and

provide statutory asset protection for self-settled trusts (“domestic asset protection trusts”).

• In these states, the DAPT statutes have specific

requirements that must be met to override the common law of no protection and provide statutory exemptions.

9

• In a non-DAPT state divorce proceeding that

involves an out-of-state DAPT, there may also be issues as to which state law governs. Even if a divorce court wishes to apply its home state law and ignore the foreign state DAPT statute, the court may

• r may not have jurisdiction over the DAPT.
• See Hanson v. Denckla the post at

http://blog.law.vandrew.com/2012/06/domestic- asset-protection-trusts-in.html

• If you have such a case, you may end up famous for

making groundbreaking law

Divorce Attacks Against DAPTs

10

• UFTA
• DAPTs are creatures of statute, so check the statute

for fulfillment of the specific requirements of statute to override common law presumption of no protection

• Check statutory exceptions for wife/kids
• Check statutory exemption allowing equitable

distribution of property contributed after marriage

• If divorcing in a state without a DAPT statute, argue

that forum state law applies to trust, not DAPT law for state of trust’s stated situs

Trust Distribution Standards

11

The trustee distribution standard for a trust is key to beginning as assessment of the susceptibility of a trust to claims in a divorce or child support action:

• Mandatory Trust
• Discretionary Trust
• Support Trust with Ascertainable Standards
• Discretionary Trust with Ascertainable Standards

Mandatory Trusts

12

• Trustee “shall pay” to the beneficiary some amount
• f income or corpus
• Beneficiary has enforceable property right in the trust
• Mandatory payments likely are subject to claims for

alimony and/or child support

• The non-mandatory interest shouldn’t be subject to

equitable distribution in most states, unless previously distributed

Discretionary Trusts

13

• Trustee “may, in his discretion, distribute” to the

beneficiary trust income or corpus

• Traditional common law: beneficiary has no

enforceable property right in the trust

• Traditional common law: No trust assets or

distributions considered in alimony, child support, or equitable distribution

Discretionary Trusts Under the UTC

14

• Restatement (Third) of Trusts and UTC seek to

change rather than “restate” traditional common law

• NCCSL version of UTC 504(c) allows spouses and

children to compel distributions from discretionary trust if trustee has abused discretion

• “Abuse of discretion” can be very amorphous.

[Solution to this problem to follow.]

Discretionary Trusts Under the UTC (cont’d)

15

• Most states are trending toward rejecting the

Restatement (Third) (See, e.g., Tannen v. Tannen, 416 N.J. Super. 248 (2010), aff’d 208 N.J. 409 (2011))

• Many states adopting the UTC don’t adopt 504(c). If

in a UTC state, CHECK YOUR STATE’S VERSION OF UTC 504 to see if you have the NCCSL version

• f 504(c) or not

Support Trusts with Ascertainable Standards

16

• Trust distributions “shall” be made for the

beneficiary’s “health, education, maintenance, and support” or some other standard

• Key: standards are treated as objectively

determinable

• Beneficiary has property right in the objectively

determinable standard that may be reached by spouse and children

• Support trusts also expand the scope of other non-

beneficiary parties who have legal standing as to the

• trust. (Discretionary trusts are much more limited in

the regard.)

Discretionary Trusts with Ascertainable Standards

17

• A trust that provides trustee discretion (i.e.

trustee “may” rather than “shall” distribute), but stipulates that discretion can only be used for distributions for “health, education, maintenance, and support” or some other standard

• Whether spouse and children can force

distribution varies greatly state by state

• Check your state’s cases on point
• If your state has NCCSL-version UTC 504(c) or

adopts Restatement (Third), spouse and children can likely compel distributions subject to standard

Spendthrift Clauses

18

• Spendthrift clauses generally protect trust assets

even if distributions aren’t discretionary

• However, in the context of divorce / child support

actions, most state spendthrift statutes allow an exception for alimony and child-support

• This is why divorce cases rely on distribution

standards rather than spendthrift clauses.

I Live in a “Pure” UTC State or a Restatement (Third) State: How Can I Protect my Kids from Divorce?

19

• Leave inheritance and/or gift in trust rather than
• utright
• If in a NCCSL-version UTC State or Restatement

(Third) state, unfortunately trust assets can still be attached by spouse and children if discretion abused

• r standard not complied with
• Solution: reduce potential for judicial finding of

“abuse” by avoiding ascertainable standards and giving the trustee maximum discretion under the law

I Live in a “Pure” UTC State or a Restatement (Third) State: How Can I Protect my Kids from Divorce? (cont’d)

20

• Sample Language: “The trustee may distribute to the

beneficiaries so much income and principal of the trust as is necessary in his sole and absolute discretion, for any reason or no reason. It is the express intent of the Grantor that the discretion given the trustee be sufficient to prevent any beneficiary from having any enforceable property right in trust property. The relationship between the beneficiaries and trust property shall be a mere “expectation” rather than a property right. The Grantor desires that no enforceable property right be created that could be attached by a spouse or child of a beneficiary,

• r be used in any calculation of alimony or child support.”

I Live in a “Pure” UTC State or a Restatement (Third) State: How Can I Protect my Kids from Divorce? (cont’d)

21

• Because no HEMS limitation, beneficiary shouldn’t

be trustee (IRC 2041 issue)

• Even if not in a NCCSL-version UTC state, consider

this language as children may move to such a state,

• r a court in that jurisdiction could decide to adopt

the Restatement (Third) as the law applicable to the trust

• If worried about large degree of discretion, give

beneficiary power to hire and fire trustees at will

• Hire and fire powers are OK if replacement trustees

are Independent Trustees (not “related or subordinate” under IRC 672 (Rev. Rul. 95-58))

Dual-Purpose Trusts

22

• A dual-purpose trust, by default, is a fully

discretionary trust with an independent trustee (presumably protected from divorce)

• The trust provides include an express exception to

full discretion when a non-independent trustee is the trustee

• Using non-independent trustees (such as the

beneficiaries themselves) is typical and appropriate in many cases

• The dual purpose trust can fall-back to the default

fully-discretionary status with an independent trustee if later necessary, but:

23

• If a beneficiary resigns or removes a trustee and

puts into place an Independent Trustee, there must at all times thereafter be an Independent Trustee as to that beneficiary

• A beneficiary cannot thereafter flip back and forth

between a HEMS trustee and fully-discretionary

• trustee. Otherwise, this can create asset protection

and tax-inclusion problems.

Scenario of Trusts in Divorce

24

Applicability of Trusts in Divorce

25

• Trusts are normally

used for tax planning and asset protection

• However, Trusts are

also seen in situations where one spouse prior to a divorce transfers property to a Trust (whether or not under a pretext of asset protection or tax planning)

• Often, a spouse

(without the knowledge

• f the other) will

establish a Trust for the purpose of transferring funds out of the marital estate

• The goal is to limit the
• ther spouse’s ability to
• btain an equitable

division of such assets in a subsequent divorce action

Key Issues to Consider

26

• Use of Discovery to

determine true intention in the purpose of the formation of the Trust

• Determining what type
• f Trust exists
• Whether a spouse has

any interest in a Trust

• Whether that interest is

material enough to pursue in the divorce action

• Attacks that can be

made against the Trust

Discovery & Trusts

27

• Even if the spouse has no

interest in the Trust, a Trust to which the spouse has transferred property is important

• As such, if a spouse can

be tied to a trust in any fashion, that Trust will be relevant in the divorce proceeding

• ** OTHER PARTY WILL

OBJECT TO DISCOVERY!!!!

• Effective discovery

questions in this area will convey to the opposing party and the Court that the requesting party has credibility and expertise in seeking the information

• This will undoubtedly

increase the importance

• f allowing discovery

relating to the Trust

Discovery & Trusts

28

• Well-settled Georgia Law

permits that wide latitude be given under the discovery statute to make complete discovery possible

• OCGA 9-11-26: Parties

may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action . . .

• Thus, key is to be able to

argue the relevancy of the Trust to the underlying divorce action

• Issues relating to a Trust

established during the marriage are inherently relevant to the subject matter of a divorce action and objections to discovery relating to such issues, should fail

Defenses to Discovery

29

Ineffective Discovery Requests vs. More-Focused Discovery Requests

30

The Overused “Bare Expectancy” Discovery Defense

31

• As it relates to a Trust,

this defense is nothing more than a red herring.

• Why? The bare

expectancy objection should apply only when a potential interest is a yet to exist future interest in someone’s estate who has not yet died

• In other words, no

Trusts, powers or rights, are yet in place that can give rise to an interest in the property

• That scenario is

different from a Trust scenario where assets have been transferred away from the marital estate

Where the Trust Potentially Fits Within the Divorce Proceeding

32

Motion to Add Trust as a Party in the Divorce Action

33

• In a divorce action, it is

necessary for the Trust to be added as a party through a Motion

• Likely that such a

Motion will be filed simultaneously with the filing of an Amendment to a Complaint for Divorce

• Amendment would add

a count for fraudulent conveyance and seeking the equitable relief of setting aside the fraudulent transfers

• f assets to a Trust
• Main goal is to set aside

any transfer of assets made during the marriage to a Trust

Adding Trust as a Party . . .

34

• Well established law

that when one party alleges that the other party to the divorce fraudulently conveyed property from the parties’ estate to defeat the other party’s rights, joinder of additional parties is proper to facilitate a proper resolution

• DeGarmo v. DeGarmo

269 Ga. 480, 481 (1988)

• OCGA 9-11-19(a)(1)
• OCGA 9-11-18(a)

specifically allows a party to join a fraudulent conveyance claim to a divorce action and seek the equitable relief of setting aside the conveyance

Getting the Trust in Front of the Fact Finder

35

Doctrine of Confidential Relationship

36

• Under this doctrine, one spouse arguably

cannot transfer property to a trust ex parte

• utside of the marriage without informed

consent

• Red flags for violations of this duty exist

particularly where a spouse has obtained legal counsel alone for purposes of creating

• r funding trusts outside the reach of the
• ther spouse

Doctrine of Confidential Relationship

37

• Although there are few opinions in Georgia applying

this doctrine, the confidential relationship is a strong argument that goes to the fairness and candor elements in a marriage

• Plenty of cases discuss the confidential relationship

enjoyed by spouses, so argument can be made to protect the excluded spouse who otherwise is unable to get sufficient information about these trusts which were unilaterally created by spouse

Doctrine of Confidential Relationship

38

• Doctrine particularly

effective where during the marriage one spouse obtains Trust or Estate Planning alone without the informed consent or knowledge

• f the other spouse
• The goal is to set aside

the transfers and bring back the property into the marital pot

• Other jurisdictions have

applied this principle

• Papson v. Papson (NY):

transfer violated public policy and ordered the husband to terminate the trust

Using the Doctrine of a Confidential Relationship

39

• When considering this doctrine, ask during discovery

whether the married couple previously met together with their joint attorney for preparing their respective Last Will and Testaments or other estate planning

• This will provide an effective contrast against the

spouse who thereafter – alone- created or transferred property to trusts allegedly created for estate planning or asset protection

Using the Doctrine of a Confidential Relationship

40

• Principle has been used in Florida to the extent that

Court required, under the crime-fraud exception to the attorney client privilege, husband’s attorneys to answer interrogatories relating to the purpose of creating the Trust

• Principle is not limited to Trusts. It can apply to any

ex parte transfer; and irrespective of whether property was arguably marital or separate

“Lerching” a Trust

41

• Argument under Lerch v. Lerch
• Focus is to argue that a spouse’s transfer of alleged

separate property to a Trust in which some or all members of the family are beneficiaries results in the property losing its separate component and thus becoming marital property

• Some will obviously view this argument as
• verreaching. . . . but can be combined with the

confidential relationship argument previously discussed

Examples of Actual Trust Discovery Objections

42

Digging into the Trust Analysis

43

• Who Transferred Property to the Trust?
• Grantor/Settlor not indicative of who transferred

property into the Trust

• Settlor can be the person who provides the

consideration or property to the Trust, as compared to the nominee settlor

Revocable Trusts

44

• One that a person can revoke, amend, change

and/or revise

• Essentially an alter-ego for the person who has

these powers

• In divorce proceedings, can easily argue that the

spouse has the power to bring back the assets into the estate

• Argument applies even if another person is the

Trustee of the spouse’s revocable Trust

Irrevocable Trust

45

• One that a person cannot revoke or amend
• Rights and powers are set forth under the terms of

the Trust in a more permanent manner than a revocable Trust

• Because an Irrevocable Trust cannot be revoked,

more work and effort is required to find out what rights and benefits a spouse has

• These rights and benefits are called “interests”

Bottom Line: You can assume

that any Trust with a material value, revocable or irrevocable, where a spouse has any power, rights or benefits is arguably discoverable as part of the divorce proceeding

46

Is the Trustee a Friendly Trustee?

47

• Most people do not wish to give up total control over

their property, even if such property is transferred to a Trust

• As such, rather than using a corporate trustee (such

as a bank trust department), they will use a friendly trustee (often a friend/relative)

• Although this is not by itself a controlling factor, it

helps when making the argument that the transfers into a Trust were not made in an “arms’ length arrangement”

Does the Spouse Have Any Interest in the Trust: Either Direct or Indirect?

48

Fraudulent Transfers

49

• Fraudulent Transfer can be argued along the

Confidential Relationship Doctrine

• Issues to Consider:
• Fraudulent Transfer is generally the situation where a

person transfers assets out of reach of known creditors

• Asset protection must be implemented before claims arise

Targeting the Attorney in a Fraudulent Transfer Situation

50

• Aggressive Approach
• 2 important points to consider:
• (1): Is the lawyer the transferee by virtue of holding

title to the transferred property (i.e., is the attorney the trustee)

• If yes, the lawyer will likely lose the attorney/client privilege

defense and will be treated in the matter as any other transferee

Targeting the Attorney in a Fraudulent Transfer Situation

51

• (2): Did the attorney engage in any actions that could

arguably be deemed fraudulent

• False records
• False financial statements
• Knowledge that was being done for the purpose of excluding

wife from claim??