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Irrevocable Trusts and Divorce: Equitable Distribution of the Marital Assets

Posted on: March 15, 2017 at 6:13 am, in

Irrevocable Trusts, such as our trademarked – Ultra Trust®, can be a very powerful device in divorce. If an Irrevocable Trust is drafted and implemented correctly, assets transferred to the Irrevocable Trust (Ultra Trust®) are the property of the Ultra Trust® and is not “marital property” subject to equitable distribution between the divorcing parties. The Irrevocable Trust is considered to be a third party independent owner of assets titled to the Trust without regard of its creators. Courts cannot force equitable distribution of assets held by an independent third party in cases of divorce.
Community states like Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are considered to be “common law” states thus assets are considered to “marital assets” subject to equitable division between the divorcing spouses. Title to property in a community property state are deemed to be owned together by both spouses without regard to who purchased the asset. As a general rule, most property acquired by either spouse during the marriage and while domiciled in the community property state, is deemed to be community property and owned jointly by each spouse and therefore not held by a third party. Third party property is not divisible by the common law state. Generally there are a few exceptions, but you need to consult with each Community State. These exceptions are:
  1. Property received by one spouse through gift or inheritance.
  2. Property received through separate property owned by the spouse outside the community property rules, i.e. rents on separate investment real estate.
  3. Through ownership by some other legal entity: Partnership, Corporation, or Limited Liability Company.
An Irrevocable Trust like our Ultra Trust® with an independent Trustee avoids common law disposition in a community property state. If your Irrevocable Trust is the legitimate title holder / legal owner of the property, such third party property held by the Irrevocable Trust is not a marital asset, therefore, not subject to the equitable division of property by the divorcing spouses.
Without regard to your state’s recognition of the marital asset category of separate and non-separate marital property, assets owned by a third party cannot be divided upon divorce even if your state endorses any type of ownership such as Joint Tenancy, Joint Tenancy with the Right of Survivorship, Tenants in Common, Tenancy by the Entirety, or Community Property.
The law of equitable distribution is not exactly a 50/50 split of assets. It takes in consideration other non-direct factors, such as: the length of the marriage, the income capacity of each spouse, the standard of living acquired and required, the contribution of each spouse during the marriage, health, age, and other factors the “court” considers “relevant” which can be anything as trivial as who owns the pets. You don’t want to be in front of a judge who’s not having a good hair day. The Uniform Marriage and Divorce Act 307 (UMDA 307) is a puzzle still being interpreted by the courts. Under these circumstances, when you are in front of a judge, their “relevant consideration” is always “equitable distribution.” If you don’t like the judge’s decision, the judge says “sue me,” take my decision to the appeals court, and spend your money proving me wrong. In other words, judges legislate from the bench. So good planning is to never be in front of a judge.
The rule against the division of third-party property means that: property owned and controlled by a third party cannot be divided upon divorce because the title of the property is not a marital asset but a rather distinct category of assets falling outside the definition of marital property and is property acquired as a separate property outside the ownership consequences of either spouse and cannot be assumed to be owned by either spouse as long as the ownership and control is by a third party. There are many litigated cases: Elkins v. Elkins, 763 N.E.2d 482,486 (Ind. Ct. App. 2002). The presumption that the equitable title is with the owner of the legal title. 73 C.J.S.PP.36 (2003; Morales v. Coca-Cola Co., 813 So. 2d 162, 167 n.2 (Fla. Dist. Ct. App. 2002; Ritter v. Ritter, 920 S. W. 2d 151, 158 (Mo. Ct. App. 1996); and other similar cases.
The third party (irrevocable Trust) ownership not subject to marital property is further strengthened if the property is owned by an additional independent legal entity i.e. LLC, C Corporation, Sub S Corporation, or the Irrevocable Trust is the General Partner of a Limited Partnership.
Third party: is our Ultra Trust® with an Independent Trustee, and we have added an Independent Trust Protector for additional impenetrable asset protection and healthy checks and balances between the Trustee, the Grantors, and Beneficiaries. Please note that all Trusts are not created equal. The key emphasis of an Irrevocable Trust is that the third party must be independent, the Trustee must be an unrelated person and cannot be related to the Grantor by blood or marriage. For more information about who makes a good independent Trustee follow this link: Selecting a Trustee and : What’s a Trust Protector?
Here’s the strongest asset protection device in cases of divorce:

Irrevocable Trust Asset Protection relationship diagram of variouas assets

Irrevocable Trusts vs. Revocable Trusts

I am often asked about Revocable Trusts and to differentiate between revocable and irrevocable. Revocable Trusts are a totally different concept because the “owners” do NOT want to “divorce themselves” from their money. Revocable means, that the original owner(s) created a “Halloween” type mask (Revocable Trust) pretending to be someone else for the purpose of “masking” the ownership of the underlying assets held by the Revocable Trust. The original owners retain the affective control masked by retaining ownership through electing themselves as Trustee, retain powers to revoke or change Trust assets, retaining power to change Trustees, Beneficiaries, or change the terms of the Trust rendering the legal entity a total sham or the alter-ego of the creator. Assets of a Revocable Trust are marital assets because the original owners (Grantors) have retained too much power and control over Trust assets, i.e. “revocable” like looking in the mirror and pretending not to recognize yourself. Imagine being in front of a judge claiming that you have no control over the Revocable Trust and that you cannot be compelled to make distributions. For further reading of Revocable v. Irrevocable Trusts.
This author is of the opinion that: Revocable Trusts are not worth the paper it’s written on and will not take any assignments using the Revocable Trust, even if the client insists, and is willing to pay an outrageous price. I will not do it.
Repeatedly I have stated that: third party property is not part of the marital assets available for equitable distribution in divorce situations, but there are three exceptions to the third party rule:
The first major exception is the underlying problem of “fraudulent conveyance.” Under the Uniform Fraudulent Transfer Act you would be committing a crime, see Section 19.40.041
… (a) a transfer made or obligation incurred by a debtor is fraudulent as to a creditor whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation: (1) with actual intent to hinder, delay, or defraud any creditor of the debtor.”…
Fraudulent conveyance has to do with transferring assets at less than the “fair cash value” thereby defrauding a potential creditor, in this case the spouse, or the “intentional divesting of assets” which would have been available for satisfaction of his creditor claim, eg. your spouse in divorce. This intentional disregard, can become a sticky-wicky, for a judge who does not like to be undermined in his court-room. This problem can be cured by making sure there’s a fair exchange of value for what’s given-up for what is received by the person or entity transferring the underlying asset.
The second major exception to the rule against the division of third-party property is when the courts decide to divide such property because one or both spouses retained an equitable interest in the underlying assets, i.e. retain the right to an income stream derived from the underlying assets if it’s stocks and bonds, or rental income. You can avoid this exception by not retaining any rights to the underlying assets of the Trust, i.e. borrow from the Trust instead.
The third exception is moving assets in anticipation of divorce. So when do you start thinking about Irrevocable Trusts? The first place is to start with your parents. Good planning starts with assets you are going to inherit from your parents. If your parents have an Irrevocable Trust where you are the eventual beneficiary, the best planning is for your parents to reposition your inheritance within an Irrevocable Trust engineered for distributions to occur only when the seas are calm or the Trust retain ownership for the enjoyment of all Beneficiaries.

Conclusion

An Irrevocable Trust with an independent Trustee is regarded to be the third party owner / title holder of assets for which courts cannot interpret as marital property to be split between divorcing parties. When an Irrevocable Trust like our Ultra Trust® properly drafted and engineered with an truly independent Trustee and in our case we encourage a Trust protector, legally implemented in a timely fashion with due care in avoiding fraudulent transfers, will be valid in 99% of situations ending in divorce. The best Ultra Trust® planning starts with your parents. If you are going to become the recipient of a large inheritance, talk to your parents about a proper drafting of an Irrevocable Trust to avoid inheritance taxes, avoid probate, and asset protection and of course eliminate the marital asset problem of divorce.
© Copyright 2012, Estate Street Partners, LLC
“In Hollywood, an equitable divorce settlement means each party getting 50% (fifty percent) of publicity.” – Lauren Bacall

Parallel Irrevocable Trusts in Marriage & Divorce

Posted on: March 15, 2017 at 6:06 am, in

In re Marriage of Epperson: Facts

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An interesting Montana case contains a very fascinating application of the second major exception to the division of third-party property rule and outlines the wrong way to implement an irrevocable trust strategy. The case is In re Marriage of Epperson, 2005 MT 46, 2005 WL 419605 (Mont. 2005).
The couple married in 1975. During the course of their 30 year marriage, they had seven children and four of the seven children were emancipated when Mrs. Epperson filed for divorce.
The couple executed parallel irrevocable trusts in 1999. The purpose of the irrevocable trusts was to minimize the estate and gift taxes on their assets to be passed to the children. Both spouses were named as trustees of the trust. The assets put into the trusts included the marital home, the land upon which it was built, and all personal property owned by the parties, including the tools used in the husband’s business. The beneficiaries of the two trusts were the seven children. “Both trusts contained a ‘purpose’ provision which stated: ‘The grantors established this trust for their family, consisting of the persons identified below, because they have contributed substantially and materially to the process of acquiring the property and are, therefore, the equitable owners thereof.'” 2005 WL 419605, at *1, 10.
In 2002, the wife filed for divorce. Due to the fact that her relationship with her children was positive and her relationship with her husband was negative, she argued that the property held in the two irrevocable trusts were not divisible upon divorce, and that the parties accordingly had a very limited marital estate to split. The husband’s argument was that the court should terminate the trusts. The trial court agreed with the husband because the husband and wife were trustee’s of each trust and thus they maintained control of the trust assets and therefore they could be forced by the court to adhere to the courts direction, thus terminating the trusts, and dividing the trust assets. If an independent trustee was in place with the proper spendthrift provisions, this would not have occurred. The wife appealed to the Montana Supreme Court. Continue reading re Marriage of Epperson: Holding: Irrevocable Trust Assets: Montana Rules re. Property & Asset Ownership
Rocco Beatrice, CPA, MST, MBA, Managing Director, Estate Street Partners, LLC.
Mr. Beatrice is an asset protection award winning trust and estate planning expert.

Irrevocable Trust Divorce & Equitable Distribution

Posted on: March 15, 2017 at 6:04 am, in

The court cannot divide assets owned by an irrevocable trust with an independent trustee.

Irrevocable Trusts can be very powerful in divorce if drafted and implemented correctly because regardless of a particular state’s recognition of the concept of separate or non-marital property, assets which are owned by a third party cannot be divided upon divorce. That is, even if your state endorses any type of ownership: Joint Tenancy, Joint Tenancy with right of survivorship, Tenants in Common, Tenancy by the Entirety, or Community Property; the law of equitable distribution applies only to property which is owned by one or both spouses. “The kinds of property subject to division, as set out in the statute, all share a common characteristic: they are owned by the parties, either jointly or separately.” Elkins v. Elkins, 763 N.E.2d 482, 486 (Ind. Ct. App. 2002).
The rule against the division of third-party property applies not only to property owned by third-party individuals, but also to property owned by legally independent entities. Thus, the court cannot divide assets owned by a corporation or partnership. E.g., Chen v. Li, 986 S.W.2d 927 (Mo. Ct. App. 1999) (corporation); In re Marriage of Werries, 247 Ill. App. 3d 639, 616 N.E.2d 1379 (1993) (partnership). But cf. Coleberd v. Coleberd, 933 S.W.2d 863 (Mo. Ct. App. 1996) (under unique Missouri partnership statutes a partnership is not an independent entity). However, the shares of the company are subject to division if they are in either spouse’s name. On a side note: however, if the shares of the legal entity (C-Corp or LLC) are owned by an irrevocable trust, the legal entity is, by definition, not in either spouse’s name and thus qualifies as being part of the trust and not part of the marital estate.
The court cannot divide assets owned by an irrevocable trust with an independent trustee. Review McGinn v. McGinn, 273 Ga. 292, 540 S.E.2d 604 (2001); Findlen v. Findlen, 695 A.2d 1216 (Me. 1997); Mikhail v. Mikhail, 124 Ohio Misc. 2d 5, 791 N.E.2d 468 (C.P. 2003); In re Marriage of Jones, 159 Or. App. 377, 981 P.2d 338 (1999); Endrody v. Endrody, 914 P.2d 1166 (Utah Ct. App. 1996). The court can, of course, divide any interest owned by the parties in the trust itself, but this would represent a poorly drafted irrevocable trust. E.g., Heinrich v. Heinrich, 609 So. 2d 94 (Fla. Dist. Ct. App. 1992). But cf., e.g., Williams v. Massa, 431 Mass. 619, 728 N.E.2d 932, 940-41 (2000) (remainder interest cannot be divided if it is unduly speculative; suggesting that most contingent remainders may be unduly speculative).
Revocable trusts are completely different because of the ability of the grantor to revoke or change the trust and thus assets within the revocable trust can be treated as marital property. E.g., In re Marriage of Seewald, 22 P.3d 580 (Colo. Ct. App. 2001); Wortman v. Wortman, 308 A.D.2d 486, 764 N.Y.S.2d 282 (2003); Dorn v. Heritage Trust Co., 24 P.3d 886 (Okla. Civ. App. 2001). Continue reading: Division of Assets or Property in Divorce
Rocco Beatrice, CPA, MST, MBA, Managing Director, Estate Street Partners, LLC.
Mr. Beatrice is an asset protection award winning trust and estate planning expert.

Irrevocable Trust Divorce

Posted on: March 15, 2017 at 6:02 am, in

By setting up a special needs irrevocable trust, parents of these children can create an account that will contain assets to be used to care for the special needs child after the parents pass away. One of the most beneficial ways to fund these accounts is through life insurance, using death benefits upon the passing of the parent to fund the trust for the child.

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Here is an example of woman who was married for 14 years. She has been having troubling concerns about her husband who filed for bankruptcy. Her husband has had a trust for a number of years on major assets such as their rental real estate and automobiles. He has chosen to refinance his loans at a lower interest rate. Then he plans on creating an irrevocable trust to protect the major assets. The wife has serious concerns if she will receive anything if they divorce since nothing is in her name. Neither the trust nor the bankruptcy is in her name. They have two kids which she has cared for and she has also provided administrative duties to the business and the family affairs. She feels she needs to seek an attorney and feels overwhelmed at all the financial decisions and at the emotional roller coaster ride her husband has dragged her through. The husband has cheated on her but they have been seeking counseling. She feels uncertain about her future now.
Trust law depends on many factors and there are a myriad of regulations and laws concerning their outcome. The irrevocable trust the husband wishes to create does not ensure that all irrevocable trusts are equal and the same. What I mean when I state that not all irrevocable trusts are the same is that there are no standards for quality of an irrevocable trust. An irrevocable trust written by an amateur (one written by someone with little experience) is not the same as one written by an expert whose irrevocable trusts have been time tested and endured the judicial scrutiny – even though BOTH are called irrevocable trusts. When purchasing an irrevocable trust you are not buying the trust by itself, you are buying the knowledge and expertise of the writer being able to anticipate landmines that will invariably arise.
Since irrevocable trusts are complicated a review of the trust needs to be completed before a legitimate answer can be made for the husband who wishes to create an irrevocable trust. One of the major factors when setting up a trust is where one resides and where the property is located (i.e. in what state).

Community State and Irrevocable Trusts

For instance, California is a community state and, thus, the title of the property is deemed to be owned by both spouses despite who purchased the home or real estate until the spouses divorce or separate. The governing laws regarding the entitlement holdings of the Community property is largely determined by the Community state in which the husband and wife are living in during their marriage. Most Community states will deem a community property as jointly held when either spouse has purchased the property and they are domiciled in that Community state. There are some exceptions to this general Community property rule and each state needs to be examined separately. The exceptions to this jointly held ruling on Community property is as follows:
  1. When a property is acquired by a spouse via gift or inheritance.
  2. Property acquired by separate property of one of the spouses which is outside one of the Community states. For example, rents on separate investment of properties.
  3. Property acquired by a legal entity such as the following:
    1. Trust
    2. Corporation
    3. Partnership
    4. LLC (Limited Liability Company
The Community states are as follows:
  1. Arizona
  2. California
  3. Idaho
  4. Louisiana
  5. Nevada

Fraudulent Conveyance with gifted assets transferred and asset transferred less than four years

Another critical question to ask is how will the assets be transferred to the irrevocable trust. The husband could be in danger of fraudulent conveyance if the assets were transferred by gifting and the irrevocable trust could be annuled by a judge, by the wife or even a creditor. Fraudulent conveyance could be charged especially if the transfer was done less than four years ago. The stature of limitation on transfer of assets is four years in most states, but there are a handful of cases of a California judge ruling that revoked an irrevocable trust as far back as eight years!

Grantor and wife’s beneficiary benefits to assets

One of the questions the wife should ask is if she will be a beneficiary of the irrevocable trust. If the grantor does not revoke the wife’s beneficiary privileges then she will have access to the assets. As a general rule, the grantor will have the right to change the beneficiary benefits to the assets. However, the irrevocable trust is regarded as one of the best and most powerful ways to protect one’s assets – provided the irrevocable trust is set up with all the precautions in place. Please read Not all irrevocable trusts are the same. Because of the nature of the irrevocable trust, if the wife’s name is not written in the trust then it will be very difficult or near impossible to have access to any of the assets.
Rocco Beatrice, CPA, MST, MBA, Managing Director, Estate Street Partners, LLC.
Mr. Beatrice is an asset protection award winning trust and estate planning expert.
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Although a trust can be created solely by verbal agreement it is normal for a written document to be prepared which evidences the creation of the trust (the Trust Deed) which sets out the terms and conditions upon which the trust assets are held by the Trustees and outlines the rights of the Beneficiaries. In essence, a Trust is not dissimilar to a will except that assets are transferred to Trustees during lifetime rather than those assets being transferred to executors on death. The Trust Deed is analogous to the deed of will.

The three elements to a Trust Document:

  1. Grantor
  2. Trustee
  3. Beneficiaries

The Grantor of a Trust

The Grantor in a Trust is the person with the bucks. In other words, the Grantor of a Trust contract is the owner of the asset(s) which could be any asset from personal residential real estate to stock accounts to business or partnership assets and anything else of monetary value. The Grantor’s motivation is to get asset(s) out of his name for either some or all of the following:
  • Asset protection and wealth preservation
  • Reduce potential frivolous lawsuits
  • Elimination of the “probate jail process” (see definition, below)
  • Elimination of estate taxes
  • To gain some tax benefit or some other tax deferral benefit
If the Grantor initiates the Trust (contract), it’s called a Grantor Trust; otherwise it’s called a Non-Grantor Trust. To me, it’s just legal garbage so lawyers can charge you more.
If the Grantor wants to retain certain control over his asset(s), it’s called a Revocable Trust; otherwise, it’s an Irrevocable Trust.
Revocable Trusts and Irrevocable Trusts have significant asset protection and tax differences. One can think of a Revocable Trust like the kid next door that brings the ball to play basketball with the other kids. Everything is fine, as long as he makes the rules, and he makes the rules as he goes along. If you don’t agree, he takes the ball and goes home. The ball game is over. In the Revocable Trust, he has control and hence the name “Revocable.”

Grantor retains control in Living Revocable Trusts

Since the Grantor retains control in the Living Revocable Trust, it can destroy your estate in the event of a lawsuit, serious illness or elderly care. The Living Revocable Trust is also known as the Living Trust. From the Grantor’s perspective, the sole purpose of the Living Revocable Trust is to eliminate the probate process.
  • Assets in a trust, avoids probate
  • Assets NOT in a trust goes to probate with or without a will
However, the Grantor may or may not realize the Living Revocable Trust is outright dangerous for asset protection, wealth preservation, and estate tax elimination. The Living Trust is obsolete for assets greater than $675,000. With the Living Trust the Grantor (i.e. owner of the assets) retains significant power over his wealth and will not insulate assets from the lawsuit explosion. There’s absolutely no tax benefit, no asset protection and no wealth preservation benefits with the Living Revocable Trust to the Grantor. I do not recommend the Living Revocable Trust for the Grantor.
Personally, I think the Living Revocable Trust is a sham perpetrated on the Grantor by shameless professionals out to extract more than just one fee. Every time the Grantor needs or wishes to change the Trust Deed, he needs to speak with his lawyer. The lawyer just garnered another fee. So I recommend to my clients, “Don’t just walk. Run!”

For the Grantor: Note on Estate Taxes

Various tax proposals are being bandied about, including House Ways and Means Chairman Bill Archer who says that he’s “pushing” to “g r a d u a l l y phaseout” the death tax within the next 10 years. “Death by itself should not trigger a tax” says Chairman Archer. Currently, estate taxes vary from 37% to 55%. Only Japan has a higher rate of 70%. Germany takes a maximum of 40%, while Australia and Canada, take nothing.
When you add up your federal, state, probate, legal fees, accounting fees, appraisal fees, administrative and executor fees, and every other fee, it could easily cost you 70 to 80% of your estate. You can avoid these unwanted results with the Ultra Trust® the Medallion Trust®.
NOTE: The new 2001 tax phase-in for estate taxes, changes absolutely nothing. The estate tax is the only voluntary tax. The new laws have added confusion. You can avoid the voluntary estate tax by simply engineering an Irrevocable Trust.
Grammar notations: please note that I have capitalized words such as Grantor, Revocable Living Trust, Trust, Beneficiary, Trustee for easier reading and emphasis on these words. Grammatically, they should be in lower case.