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Equitable Distribution Case: Termination of an Irrevocable Trust

Can trust laws pierce the corporate veil? (Material Purpose Doctrine)

About material purpose doctrine and termination of an irrevocable trust

The Epperson case is the first equitable distribution case, to the author's knowledge, to apply a provision in the law of trusts permitting termination of a trust when the harm caused by enforcing it is greater than the benefit of accomplishing its purpose – this would not have happened if the trustee was an independent person. Some might conclude that the rule appears to function as the trust law equivalent of piercing the corporate veil, allowing the court to ignore the independent legal status of the trust or indeed to terminate the trust itself where extraordinary facts so require, but this is not so. The key problem with this scenario was the fact that the Epperson's retained control of the assets as the trustee and there was no true independence. Since the court can pierce the corporate veil (i.e. C-Corp, S-Corp, or LLC) in a divorce case if the spouse owns the shares of stock, e.g., Medlock v. Medlock, 263 Neb. 666, 642 N.W.2d 113 (2002), it seems logical that a divorce court could have power to apply a conceptually similar remedy to an irrevocable trust if the spouses retain control of the assets by remaining the fiduciary of the trust and the assets within it. If a corporation, S-Corp, or LLC is owned by an irrevocable trust with an independent trustee, Medlock v. Medlock would have had a completely different outcome similar to the Epperson case.
It is important to note that the material purpose doctrine, like the court's power to pierce the corporate veil, is an extraordinary remedy intended for use only in extraordinary cases. In future cases with less extreme facts, the material purpose doctrine is likely to be employed extremely cautiously. The vast majority of irrevocable trusts involved in divorce cases will continue to be valid and hold up in 99% of situations if they are drafted and implemented correctly with in independent trustee and the correct provisions to minimize the risks involved with the Epperson and Medlock cases.
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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