As I previously wrote here, irrevocable dynasty trusts are all the rage in estate planning circles, and for good reason. They’re good tax planning and offer excellent asset protection benefits. Although a rouge plaintiff’s lawyer is the boogeyman most people think about when they hear asset protection, the real threat to family wealth is divorce. The odds of your children or grandchildren getting targeted by some frivolous lawsuit are maybe 1 in a 1,000, the odds of them getting divorced: 50/50.

So how secure are assets held by irrevocable dynasty trusts in the event of a Florida divorce?

Most estate planners would answer that question by focusing on whether the trust can be pierced to pay post-divorce judgments for alimony or child support. In other words, ex-spouses would be viewed as creditors. From this perspective the answer is relatively clear: under F.S. § 736.0503(3) a claim against an irrevocable trust by a beneficiary’s child, spouse, or former spouse is permitted only as a last resort upon a showing that traditional methods of enforcing the claim are insufficient. The “last resort” requirement can be traced directly to Bacardi v. White, 463 So. 2d 218 (Fla. 1985), the 1985 Florida Supreme Court decision that has defined this area of the law in Florida ever since.

But what about equitable distribution?

Could a fully discretionary, spendthrift-protected irrevocable trust funded with non-marital assets by a beneficiary’s parent (or grandparent or great-grandparent) that is otherwise valid in all respects be counted as part of the beneficiary’s marital estate for equitable distribution purpose? Florida’s Trust Code doesn’t address this question, and as far as I can tell it’s never been dealt with directly by a Florida appellate court.

For lawyers (especially estate planners!), uncertainty is a bad thing. Which is why I found a recent New Hampshire case reported on in the Wills, Trusts & Estates Prof Blog so interesting. In this blog post Prof. Beyer discusses the outcome of the New Hampshire Supreme Court case In re Goodlander, 20 A.3d 199 (N.H. 2011). In that case the court considered whether a beneficiary’s interest in a discretionary irrevocable trust created and funded for her benefit by her father should be considered a marital asset subject to division. Both the trial court and the supreme court said NO. Why? Because the beneficiary didn’t have a property right in any future trust distributions, all she had was a “mere expectancy.” The New Hampshire Supreme Court based its holding largely on a provision of that state’s trust code, RSA 564-B:8-814(b), that statutorily excludes a beneficiary’s interest in a discretionary irrevocable trust from the definition of “property”:

. . . if a distribution to or for the benefit of a beneficiary is subject to the exercise of the trustee’s discretion, whether or not the terms of a trust include a standard to guide the trustee in making distribution decisions, then the beneficiary’s interest is neither a property interest nor an enforceable right, but a mere expectancy.

Based on this statute, the New Hampshire Supreme Court ruled as follows in In re Goodlander, 20 A.3d 199 (N.H. 2011):

Because the trustee of the EMT Trust has the sole discretion to distribute funds to the beneficiaries, including Tamposi, any interest Tamposi has in future distributions fits squarely within the definition provided by the UTC for a “mere expectancy.” RSA 564-B:8-814(b). That is, any distribution to or for the benefit of Tamposi “is subject to the exercise of the trustee’s discretion, whether or not the terms of a trust include a standard to guide the trustee in making distribution decisions.” Id. Accordingly, Tamposi’s interest in future distributions of the EMT Trust “is neither a property interest nor an enforceable right, but a mere expectancy.” Id.

POSTSCRIPT: The “aha!! insight” 

“All-property” States (such as NH) vs. “Marital Property” States (such as FL) & Why it Matters in this Case:

This blog post generated a good amount of interest. One careful reader, Leonard J. Adler, a Florida-licensed attorney and Managing Director at Bessemer Trust in Palm Beach, suggested that the key to understanding the NH court’s ruling is to NOT focus on the “mere expectancy” clause in that state’s trust code, but to instead focus on the fact that NH law makes no distinction between marital and nonmarital assets in divorce proceedings.

“Property,” for purposes of equitable distribution under NH law (RSA 458:16-a), includes all property — regardless of how titled or when or how acquired (including gifts and inheritances). That is why the determination that the interest in the NH trust was a “mere expectancy” and thus not “property” was crucial in In re Goodlander, 20 A.3d 199 (N.H. 2011). The fact that assets are acquired by gift, devise or descent, is but 1 of 15 factors for a NH divorce court to consider under RSA 458:16-a when determining if a divorcing couple’s assets should be divided unequally, but all such assets are still subject to division. A Florida court would not have to make this determination because uner F.S. 61.075(6)(b)2 assets acquired by gift, devise, or descent (and assets acquired in exchange for such assets) are statutorily excluded from the definition of marital property, and thus not subject to division.

Mr. Adler was also kind enough to point me to a 2004 NH Bar Journal article entitled Division of the Pre-Marital Trust or Inheritance, which does a good job of explaining how assets inherited in trust are treated very differently in divorce proceedings litigated in “all-property” states like NH vs. “marital property” states like FL:

An outstanding yet difficult issue to be confronted under New Hampshire divorce law is how to apportion a multi-million dollar inheritance, trust or business that pre-exists a long-term marriage. . . .

In fashioning property settlements in divorce, states are divided into three main categories: [1] “community property” states, [2] “marital property” states [like FL] and [3] “all-property states.” New Hampshire is an “all-property” state that gives the court the authority to divide all property of the parties (however or whenever acquired) in an equitable manner. A court is required to view the parties’ property as a whole and then make an equitable distribution. Whether property is individually or jointly owned, it is still considered a marital asset.

  • Carlos A. Rodriguez
  • Juan,

    Nice article.

    There is no reported Fla decision of which I am aware regarding parent or grandparent trusts and the ability to reach them for alimony /child support and asset allocation.

    Some years ago I testified at trial as an expert witness on this aspect. The trial judge ruled that the spendthrift provisions were a sham as (although the wording of the trust appeared totally discretionary) an uncle of the husband was the trustee and basically disbursed whatever was necessary to support the couple’s lifestyle while they were a “happy couple”.

    That changed after the wife filed for divorce.

    The trial judge ruled that the trust was reachable to determine alimony and child support.

    Thus, the reasoning was that, inspite of the words of the trust, there was no budget historically submitted to the trustee and the management was as if there was an “inside deal”. There was an appeal but no 4th DCA decision as the case was settled. As a result, I have cautioned my clients that form is as important (at times) as substance.

    The trial was prior to the enactment of Ch 736.

    Quite frankly , the judge probably should not have even received the testimony of the competing experts( as the opposition had their own expert).

    Interesting area of trust law and your article and comments caused my recollection.

    Best regards,

    BILL

  • Thanks Bill.

    By the way, I am sure your expert testimony was very helpful to the judge and such testimony is perfectly acceptable. See Guy v. Kight, 431 So.2d 653 (Fla. 5th DCA 1983), which provides as follows:

    “Section 90.703, Florida Statutes (1981) provides that ‘[t]estimony in the form of an opinion or inference otherwise admissible is not objectionable because it includes an ultimate issue to be decided by the trier of fact.’ Additionally, it has been held that there is no error in permitting an attorney to testify as an expert witness at trial as to substantive and procedural Florida law. Warwick, Paul & Warwick v. Dotter, 190 So.2d 596 (Fla. 4th DCA 1966).”

    Lawyers testifying as expert witnesses is also addressed in ABA Formal Ethics Opinon 97-407 (Lawyer as Expert Witness or Expert Consultant).

    Regards. Juan