Using Trusts in a Divorce

As part of estate and tax planning, individuals can place their assets in a trust. These include joint assets acquired during a marriage, pre-marital assets, or marital assets in one party's name. There are personal trusts for designated purposes, for example a trust imposed over real estate, such as a Qualified Personal Residence Trust (QPRT). A married couple could use a QPRT to place a jointly owned home in a trust and name the wife as the beneficiary and the child as a contingent beneficiary. Other trusts can serve as mechanisms for sheltering assets from taxation or can serve as a way to exclude assets from an estate or to protect assets. In a divorce case where a trust exists, it is possible to terminate the trust, with the agreement of all the parties, to utilize the proceeds to meet the needs of the parties in effectuating equitable distribution. Bear in mind that the termination of a trust can only be achieved by agreement and therefore such a goal cannot be achieved in a litigated matter. As part of a divorce settlement, certain types of trusts can be created for funding education expenses or covering medical expenses. These trusts would provide a mechanism for meeting support obligations.

During the negotiations in a matrimonial case, it may be beneficial to your client to utilize the asset or assets that were placed in a trust as part of the final equitable distribution plan. For example, if a husband owns a business and owes money to the wife as and for equitable distribution of her interest in the business, and a QPRT was created for the house, the value of the house in a QPRT may be able to be used to satisfy the spouse's equitable distribution claim. If the trust is terminated, the asset could be turned over to the wife, rather than utilizing notes, security and a payment plan to satisfy the equitable distribution obligation. The husband would then be able to receive the business outright without having it encumbered to satisfy his equitable distribution obligation to his wife.

Terminating a QPRT

Efforts to terminate a QPRT and distribute the residence held in trust require the agreement of all the participants, including the grantor, the beneficiaries and the trustee of the trust. In addition, you may need to retain an attorney for the child if the child's rights are impacted. In effect, utilizing an asset that might otherwise pass to the child or in which the child would have a future interest requires that the child be represented to make sure that his or her best interests are protected. Even if counsel is involved in such a situation, it is necessary under certain circumstances to provide security so that if the child later brings an action to reinstate the trust or to receive the full benefit that the trust had provided to him/her and prevails, the parties and counsel are not liable.

For example, assume a house had been placed in a QPRT for the benefit of the child; the trust was terminated and the house was distributed to the wife. Years later, if the child contested the termination of the trust, the wife could potentially be forced to transfer the value of the house to the child. In such a case, security must be provided by the husband so the wife is protected.

A separate document reflecting the consent to terminate the trust and releasing and indemnifying the trustees must be prepared and annexed to the Matrimonial Settlement Agreement. The trustee(s) must be protected as well from further future litigation. The caption of this independent agreement needs to reflect that it relates to the trust and not the matrimonial matter. Therefore, the caption should read, “In the Matter of the Trust Created by Agreement dated __________ By and Between ____________, Grantor and __________________, Trustee”. The Agreement must recite the Grantor or Grantor's names, the beneficiary or beneficiaries, and the trustee and any named successor trustees. If the child is the contingent beneficiary, separate counsel should be authorized by the court to consent on behalf of the child. The Husband and the Wife must release and indemnify the Trustee who is consenting to the transfer, as well as the counsel for the child. The following is an example of a format that can be used:

Example 1

In the Matter of the Trust Created

CONSENT TO TERMINATE AND By Agreement Dated ______________ : RELEASE & INDEMNIFICATION

By and Between _______________, Grantor: OF TRUSTEES OF THE _____

And _____________, Trustee:TRUST

_________________________________ “The Wife”, individually, (hereinafter referred to as “Grantor and the current beneficiary”), and “The Husband” and the Grantor's child, __________ (hereinafter referred to as “the contingent remainder beneficiary”), all under a certain Trust Agreement dated _____________, by and between “The Wife,” Grantor and ____________, as the initial Trustee, and _______________as the successor Trustee, (hereinafter said Trust Agreement shall be referred to as “the ______ Trust”), hereby on this _____ day of __________________, consent to terminate the ______ Trust. Additionally, by this Agreement, “The Husband” also agrees to release and indemnify the Trustee of the _______ Trust and his successors, including the successor Trustee, _______________, as hereinafter provided:

RECITALS

WHEREAS, “The Wife” (hereinafter referred to as “the Grantor”), established the ______ Trust, which was referred to as the “_____________ Qualified Personal Residence Trust” on _________________; and

WHEREAS, _______________is the successor Trustee to the ______ Trust; and

WHEREAS, the Trust provides that the Trustee of the _____ Trust has the power to execute and deliver all documents, contracts and instruments necessary or advisable in connection with the administration of the Trust created hereunder; and

WHEREAS, “The Wife” is the current beneficiary of the _______ Trust for the term specified in such Trust and the issue of “The Wife” and her spouse, “The Husband”, are the contingent remainder beneficiaries of the _______ Trust; and

WHEREAS, the Grantor and her spouse, “The Husband”, are finalizing a divorce and the parties desire to terminate such Trust; and

WHEREAS, the guardian ad litem, (or counsel) _____________, on behalf of the minor child, after consultation with the Court does consent to the termination of such Trust as being in the child's best interests; and

WHEREAS, “The Husband” and _________________, as guardian ad litem, (or counsel) on behalf of the Grantor's issue, have both expressed their preference, as contingent remainder beneficiaries, after being given an opportunity to review the books and records of the _______ Trust, to waive all accountings with respect to the ______ Trust in order to minimize delays and other inconveniences of such an accounting and any other judicial proceeding; and

WHEREAS, “The Husband” has been advised of his right to separate counsel with regard to the aforementioned indemnifications and by signing this Agreement waives that right.

CONSENT TO TERMINATE AND RELEASE AND INDEMNIFICATION

The Grantor and current beneficiary and the contingent remainder beneficiaries of the ______ Trust hereby consent to the termination of the ______ Trust of which the sole asset is the real property located at ____________________________, in the State of ________________, which shall be transferred to “The Wife.”

“The Husband” does further agree to indemnify and hold harmless the successor Trustee of the ______ Trust and the Guardian Ad Litem, (or counsel) _________________, from any and all liabilities, claims and demands whatsoever, that may arise by reason of the termination of the ______ Trust and as to the successor trustee by reason of his acts, transactions and omissions, if any, while he was serving as Trustee of the ______ Trusts.

“The Husband” releases and forever discharges the successor Trustee of the ______ Trust, from all liabilities, claims and demands whatsoever, in law or in equity, on account of any acts, transmissions or omissions in respect of the ______ Trust, specifically the termination of such Trust and the distribution of real estate to the Grantor; and the current beneficiary and the contingent remainder beneficiaries of the ______ Trust do further covenant and agree that they will not, at any time, request or demand any other or further accounting whether in or out of Court, or in any jurisdiction, relating in any way to the ______ Trust, or of any of the acts, transactions or proceedings of the Trustee in connection therewith.

Pursuant to the above waiver of accounting, the execution of this Consent to Termination and Release and Indemnification of Trustee shall constitute notice to_____________, the Trustee.

This Consent to Termination and Release and Indemnification of Trustee shall be deemed effective as of ________________.

This Consent to Termination and Release and Indemnification

of Trustee shall be governed by the laws of the State of ____________________.

In case any one or more of the provisions contained in this Agreement shall be determined by a Court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby.

* * *

Tax Issues

Tax issues surrounding the termination of a trust are very complicated and a tax professional must be consulted. Any time that a family law attorney deals with a case where it is advantageous to terminate a trust, tax counsel and/or a trust and estate counsel should be utilized. As can be seen from the necessary documents, this is a sophisticated, complex approach to effectuating equitable distribution. Attorneys with expertise in this area will be equipped to handle the termination of the trust and the transfer properly. There may be adverse tax consequences, including gift tax consequences, on the termination of the trust that must be considered.

The Matrimonial Settlement Agreement resolving the issues in the case must address the utilization of the trust proceeds. It should be referenced throughout the Agreement in both the initial “Whereas” clauses as well as substantively in the body of the Agreement. For example, the body of the Agreement should contain a provision such as the following:

Example 2

Distribution of Real Property

The parties acknowledge that the Wife and child reside at the marital residence located at _________ ______________________________ and same is owned by a QPRT. Pursuant to the Agreement annexed hereto as Exhibit D, the parties, the Trustee of the QPRT, ____________, and the Guardian Ad Litem _______________, agree that the QPRT shall be immediately terminated as it relates to the property located at ______________________ and ownership of same shall be transferred to the Wife. The parties further acknowledge that pursuant to the terms of the QPRT, at the end of the Trust term in _______, the property could have been transferred to the Husband and/or the child at the Trustee's sole discretion. The parties agree that _____________ may act on behalf of the child with respect to the dissolution of the QPRT. (If the case is a New Jersey case, the next sentence should be added to waive a potential conflict by the guardian ad litem serving an additional role if the attorney representing the child in the termination of the trust is also the guardian ad litem for the child. “The parties acknowledge that the terms of Isaacson v. Isaacson, 348 N.J. Super. 560 (App. Div. 2002) are not being violated by the provisions set forth in this section.”) The Husband shall prepare the Deed and related documents to transfer the _____________ property to the Wife. The parties acknowledge and agree that in the event the termination of the QPRT is invalidated for any reason and the Wife loses the value of this asset, equitable distribution will be re-opened so that the Wife will receive from the Husband the correct amount to which she was entitled.

In order to secure this potential obligation to the Wife, the Husband shall pledge as collateral, [by way of example: retirement assets equal to $__________] for a period of what would have been the duration of the Trust, or less if agreed by the parties. The Husband has the right to substitute other assets as collateral, with the Wife's consent, which shall not unreasonably be withheld. The Husband shall execute within ten (10) days a security agreement to be prepared by the Wife's attorney. If it is not possible for some reason to use the retirement assets as collateral, the Husband shall secure this obligation with other assets.

* * *

Support Obligations

Trusts can also be utilized to address support obligations that would otherwise be the obligation of the breadwinner party. For example, if funds have already been earmarked for college and are in trust for that purpose, those funds will be utilized to meet an obligation that would otherwise be satisfied with other assets or cash flow. If a trust had not been established with these proceeds, the obligations would have been divided between the parties and the breadwinner could have been made responsible for college or in very significant part, particularly, if the breadwinner is a significant earner. Such trust planning can also have significant future impact if there are extraordinary medical needs for either a child or a spouse.

Assets cannot be placed into a trust on the eve of divorce. In fact, it must be established that the trust was not created to gain a benefit in the matrimonial action. Counsel must be able to establish the trusts were established for bona fide purposes benefiting the family. A trust conceived to deprive equitable distribution may be deemed fraudulent and set aside.

Sometimes parties create a trust to insulate assets in the event of a lawsuit. If the trust corpus can be utilized to satisfy equitable distribution obligations, an agreement may need to be created akin to that for the termination of the QPRT, as well as a recitation in the Matrimonial Settlement Agreement. If the trust is remaining intact, but certain proceeds of the trust are being utilized, the Agreement must clearly recite how the proceeds are being utilized. If, for example the trust proceeds are being utilized to meet obligations that would otherwise be the obligation of the primary earner, protections must be built into the agreement in the event the trust proceeds are depleted.

Conclusion

Do not be intimidated by the existence of a trust. Under certain circumstances, with advice from experts, the utilization of assets otherwise beyond the reach of the parties can be used creatively to resolve issues of equitable distribution and to satisfy other family obligations.

As part of estate and tax planning, individuals can place their assets in a trust. These include joint assets acquired during a marriage, pre-marital assets, or marital assets in one party's name. There are personal trusts for designated purposes, for example a trust imposed over real estate, such as a Qualified Personal Residence Trust (QPRT). A married couple could use a QPRT to place a jointly owned home in a trust and name the wife as the beneficiary and the child as a contingent beneficiary. Other trusts can serve as mechanisms for sheltering assets from taxation or can serve as a way to exclude assets from an estate or to protect assets. In a divorce case where a trust exists, it is possible to terminate the trust, with the agreement of all the parties, to utilize the proceeds to meet the needs of the parties in effectuating equitable distribution. Bear in mind that the termination of a trust can only be achieved by agreement and therefore such a goal cannot be achieved in a litigated matter. As part of a divorce settlement, certain types of trusts can be created for funding education expenses or covering medical expenses. These trusts would provide a mechanism for meeting support obligations.

During the negotiations in a matrimonial case, it may be beneficial to your client to utilize the asset or assets that were placed in a trust as part of the final equitable distribution plan. For example, if a husband owns a business and owes money to the wife as and for equitable distribution of her interest in the business, and a QPRT was created for the house, the value of the house in a QPRT may be able to be used to satisfy the spouse's equitable distribution claim. If the trust is terminated, the asset could be turned over to the wife, rather than utilizing notes, security and a payment plan to satisfy the equitable distribution obligation. The husband would then be able to receive the business outright without having it encumbered to satisfy his equitable distribution obligation to his wife.

Terminating a QPRT

Efforts to terminate a QPRT and distribute the residence held in trust require the agreement of all the participants, including the grantor, the beneficiaries and the trustee of the trust. In addition, you may need to retain an attorney for the child if the child's rights are impacted. In effect, utilizing an asset that might otherwise pass to the child or in which the child would have a future interest requires that the child be represented to make sure that his or her best interests are protected. Even if counsel is involved in such a situation, it is necessary under certain circumstances to provide security so that if the child later brings an action to reinstate the trust or to receive the full benefit that the trust had provided to him/her and prevails, the parties and counsel are not liable.

For example, assume a house had been placed in a QPRT for the benefit of the child; the trust was terminated and the house was distributed to the wife. Years later, if the child contested the termination of the trust, the wife could potentially be forced to transfer the value of the house to the child. In such a case, security must be provided by the husband so the wife is protected.

A separate document reflecting the consent to terminate the trust and releasing and indemnifying the trustees must be prepared and annexed to the Matrimonial Settlement Agreement. The trustee(s) must be protected as well from further future litigation. The caption of this independent agreement needs to reflect that it relates to the trust and not the matrimonial matter. Therefore, the caption should read, “In the Matter of the Trust Created by Agreement dated __________ By and Between ____________, Grantor and __________________, Trustee”. The Agreement must recite the Grantor or Grantor's names, the beneficiary or beneficiaries, and the trustee and any named successor trustees. If the child is the contingent beneficiary, separate counsel should be authorized by the court to consent on behalf of the child. The Husband and the Wife must release and indemnify the Trustee who is consenting to the transfer, as well as the counsel for the child. The following is an example of a format that can be used:

Example 1

In the Matter of the Trust Created

CONSENT TO TERMINATE AND By Agreement Dated ______________ : RELEASE & INDEMNIFICATION

By and Between _______________, Grantor: OF TRUSTEES OF THE _____

And _____________, Trustee:TRUST

_________________________________ “The Wife”, individually, (hereinafter referred to as “Grantor and the current beneficiary”), and “The Husband” and the Grantor's child, __________ (hereinafter referred to as “the contingent remainder beneficiary”), all under a certain Trust Agreement dated _____________, by and between “The Wife,” Grantor and ____________, as the initial Trustee, and _______________as the successor Trustee, (hereinafter said Trust Agreement shall be referred to as “the ______ Trust”), hereby on this _____ day of __________________, consent to terminate the ______ Trust. Additionally, by this Agreement, “The Husband” also agrees to release and indemnify the Trustee of the _______ Trust and his successors, including the successor Trustee, _______________, as hereinafter provided:

RECITALS

WHEREAS, “The Wife” (hereinafter referred to as “the Grantor”), established the ______ Trust, which was referred to as the “_____________ Qualified Personal Residence Trust” on _________________; and

WHEREAS, _______________is the successor Trustee to the ______ Trust; and

WHEREAS, the Trust provides that the Trustee of the _____ Trust has the power to execute and deliver all documents, contracts and instruments necessary or advisable in connection with the administration of the Trust created hereunder; and

WHEREAS, “The Wife” is the current beneficiary of the _______ Trust for the term specified in such Trust and the issue of “The Wife” and her spouse, “The Husband”, are the contingent remainder beneficiaries of the _______ Trust; and

WHEREAS, the Grantor and her spouse, “The Husband”, are finalizing a divorce and the parties desire to terminate such Trust; and

WHEREAS, the guardian ad litem, (or counsel) _____________, on behalf of the minor child, after consultation with the Court does consent to the termination of such Trust as being in the child's best interests; and

WHEREAS, “The Husband” and _________________, as guardian ad litem, (or counsel) on behalf of the Grantor's issue, have both expressed their preference, as contingent remainder beneficiaries, after being given an opportunity to review the books and records of the _______ Trust, to waive all accountings with respect to the ______ Trust in order to minimize delays and other inconveniences of such an accounting and any other judicial proceeding; and

WHEREAS, “The Husband” has been advised of his right to separate counsel with regard to the aforementioned indemnifications and by signing this Agreement waives that right.

CONSENT TO TERMINATE AND RELEASE AND INDEMNIFICATION

The Grantor and current beneficiary and the contingent remainder beneficiaries of the ______ Trust hereby consent to the termination of the ______ Trust of which the sole asset is the real property located at ____________________________, in the State of ________________, which shall be transferred to “The Wife.”

“The Husband” does further agree to indemnify and hold harmless the successor Trustee of the ______ Trust and the Guardian Ad Litem, (or counsel) _________________, from any and all liabilities, claims and demands whatsoever, that may arise by reason of the termination of the ______ Trust and as to the successor trustee by reason of his acts, transactions and omissions, if any, while he was serving as Trustee of the ______ Trusts.

“The Husband” releases and forever discharges the successor Trustee of the ______ Trust, from all liabilities, claims and demands whatsoever, in law or in equity, on account of any acts, transmissions or omissions in respect of the ______ Trust, specifically the termination of such Trust and the distribution of real estate to the Grantor; and the current beneficiary and the contingent remainder beneficiaries of the ______ Trust do further covenant and agree that they will not, at any time, request or demand any other or further accounting whether in or out of Court, or in any jurisdiction, relating in any way to the ______ Trust, or of any of the acts, transactions or proceedings of the Trustee in connection therewith.

Pursuant to the above waiver of accounting, the execution of this Consent to Termination and Release and Indemnification of Trustee shall constitute notice to_____________, the Trustee.

This Consent to Termination and Release and Indemnification of Trustee shall be deemed effective as of ________________.

This Consent to Termination and Release and Indemnification

of Trustee shall be governed by the laws of the State of ____________________.

In case any one or more of the provisions contained in this Agreement shall be determined by a Court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby.

* * *

Tax Issues

Tax issues surrounding the termination of a trust are very complicated and a tax professional must be consulted. Any time that a family law attorney deals with a case where it is advantageous to terminate a trust, tax counsel and/or a trust and estate counsel should be utilized. As can be seen from the necessary documents, this is a sophisticated, complex approach to effectuating equitable distribution. Attorneys with expertise in this area will be equipped to handle the termination of the trust and the transfer properly. There may be adverse tax consequences, including gift tax consequences, on the termination of the trust that must be considered.

The Matrimonial Settlement Agreement resolving the issues in the case must address the utilization of the trust proceeds. It should be referenced throughout the Agreement in both the initial “Whereas” clauses as well as substantively in the body of the Agreement. For example, the body of the Agreement should contain a provision such as the following:

Example 2

Distribution of Real Property

The parties acknowledge that the Wife and child reside at the marital residence located at _________ ______________________________ and same is owned by a QPRT. Pursuant to the Agreement annexed hereto as Exhibit D, the parties, the Trustee of the QPRT, ____________, and the Guardian Ad Litem _______________, agree that the QPRT shall be immediately terminated as it relates to the property located at ______________________ and ownership of same shall be transferred to the Wife. The parties further acknowledge that pursuant to the terms of the QPRT, at the end of the Trust term in _______, the property could have been transferred to the Husband and/or the child at the Trustee's sole discretion. The parties agree that _____________ may act on behalf of the child with respect to the dissolution of the QPRT. (If the case is a New Jersey case, the next sentence should be added to waive a potential conflict by the guardian ad litem serving an additional role if the attorney representing the child in the termination of the trust is also the guardian ad litem for the child. “The parties acknowledge that the terms of Isaacson v. Isaacson, 348 N.J. Super. 560 (App. Div. 2002) are not being violated by the provisions set forth in this section.”) The Husband shall prepare the Deed and related documents to transfer the _____________ property to the Wife. The parties acknowledge and agree that in the event the termination of the QPRT is invalidated for any reason and the Wife loses the value of this asset, equitable distribution will be re-opened so that the Wife will receive from the Husband the correct amount to which she was entitled.

In order to secure this potential obligation to the Wife, the Husband shall pledge as collateral, [by way of example: retirement assets equal to $__________] for a period of what would have been the duration of the Trust, or less if agreed by the parties. The Husband has the right to substitute other assets as collateral, with the Wife's consent, which shall not unreasonably be withheld. The Husband shall execute within ten (10) days a security agreement to be prepared by the Wife's attorney. If it is not possible for some reason to use the retirement assets as collateral, the Husband shall secure this obligation with other assets.

* * *

Support Obligations

Trusts can also be utilized to address support obligations that would otherwise be the obligation of the breadwinner party. For example, if funds have already been earmarked for college and are in trust for that purpose, those funds will be utilized to meet an obligation that would otherwise be satisfied with other assets or cash flow. If a trust had not been established with these proceeds, the obligations would have been divided between the parties and the breadwinner could have been made responsible for college or in very significant part, particularly, if the breadwinner is a significant earner. Such trust planning can also have significant future impact if there are extraordinary medical needs for either a child or a spouse.

Assets cannot be placed into a trust on the eve of divorce. In fact, it must be established that the trust was not created to gain a benefit in the matrimonial action. Counsel must be able to establish the trusts were established for bona fide purposes benefiting the family. A trust conceived to deprive equitable distribution may be deemed fraudulent and set aside.

Sometimes parties create a trust to insulate assets in the event of a lawsuit. If the trust corpus can be utilized to satisfy equitable distribution obligations, an agreement may need to be created akin to that for the termination of the QPRT, as well as a recitation in the Matrimonial Settlement Agreement. If the trust is remaining intact, but certain proceeds of the trust are being utilized, the Agreement must clearly recite how the proceeds are being utilized. If, for example the trust proceeds are being utilized to meet obligations that would otherwise be the obligation of the primary earner, protections must be built into the agreement in the event the trust proceeds are depleted.

Conclusion

Do not be intimidated by the existence of a trust. Under certain circumstances, with advice from experts, the utilization of assets otherwise beyond the reach of the parties can be used creatively to resolve issues of equitable distribution and to satisfy other family obligations.