Trust Issues: Pre- and Post-Nuptial Clauses

Marital agreements might define the term “fiduciary” or “fiduciaries.” However, a one-size-fits-all definition should not be utilized; rather, the definition should be tailored to address the particular circumstances of each case. Caution should be exercised: If defined too narrowly, the term “fiduciary” may avoid coverage of positions that are intended; if defined too broadly, it may affect positions that are not intended.

A typical agreement might define “fiduciary” as a party's heirs, executors, administrators, trustees, custodians, conservators, guardians, attorneys-in-fact and other legal representatives. In the context used, consider whether including trustees of the various trusts is problematic and whether, instead, trustees or certain fiduciary positions should be expressly excluded.

Practitioners should also consider the array of positions that a modern trust might encompass. A position that is becoming more routine is that of a trust protector. The term “trust protector” is quite vague and could mean a plethora of different things. The status of a person serving as trust protector, as a fiduciary or non-fiduciary, will also vary. Approximately 20 states have statutes addressing protectors. Depending on state law and the governing instrument, a protector may or may not be a fiduciary. Therefore, the use of the term “fiduciary” in an agreement might not assuredly cover the person or role intended; or, conversely, it might include a person or position that is not intended. For example, a common role of a trust protector is to remove and replace trustees. If a former spouse is a trust protector, take heed: Clients generally want to avoid the situation where their former spouse is in a position to remove trustees.

Another commonly designated position in modern trusts is a person — perhaps called a “loan director” — who might have authority to loan trust money, or even assets, to your client. That person is unlikely to be acting in a fiduciary capacity, so the definition of “fiduciary” under the agreement might not include the loan director. However, that person's ability to loan trust assets back to your client as grantor might be a matter to address in a marital agreement.

Accountings and Notices

The Uniform Trust Code Sec. 813 requires keeping qualified beneficiaries reasonably informed. Section 105(b)(8) prohibits waiver of the duty to inform qualified beneficiaries who are over 25 years of age. Many clients find surprising the entire idea of having to notify beneficiaries of a trust. Further, practitioners should not assume that their clients are even aware of these possible requirements.

Some states, however, have enacted laws permitting silent trusts. If the trust at issue is formed in such a jurisdiction, and the trust instrument includes the required language, there may be no requirement for notice of any type.

The possibility of notification is often not addressed in marital agreements, but the better practice is to do so. For example, if the divorcing couple has minor children, might your client's soon-to-be ex-spouse assert rights to receive notice on behalf of those minor children to a family trust of your client's? Consider the following agreement provision: “Neither party shall request any information, including but not limited to an informal or formal accounting, whether on behalf of himself, the children, or otherwise, from any Family Trust.” If the children are minors, you want to be sure that the first spouse cannot demand information from the second spouse's trusts on behalf of minor children, thereby circumventing a limitation on his or her right to directly obtain that information.

Also, bear in mind that the notice is likely to include a copy of the governing trust instrument, any amendments or actions modifying it, and a full financial statement.

Trusts Excluded from Claims

When drafting a marital agreement, practitioners may have the other spouse expressly disclaim any rights or interests in various trusts that might benefit the client. With modern trust drafting, it may be impossible to identify every trust the client may be a beneficiary in or have other rights to. For example, modern trust drafting often embodies a range of provisions and mechanisms to provide flexibility. A common technique is the power of appointment, which might grant the client or another person the right to designate who might benefit from the trust property. Illustratively, another family member may have the right to designate if a class of persons — which might include your client — could receive any portion or all of the trust assets at some future event or point in time. The language in the marital agreement, if appropriate, should be broad enough to encompass these future trust interests as well. For example:

All actual, constructive or beneficial interests [Client Name] now has or may come to have in any family trust, including any and all actual, constructive or beneficial interests the client now has or may come to have in any trust she or a family member of her has or will create, whether as a current beneficiary, remainder beneficiary, contingent beneficiary, power holder, fiduciary, or in a non-fiduciary position (including by way of example and not limitation serving as a trust protector, loan director, person empowered to add a charitable beneficiary, or otherwise). A trust for her or their benefit, including but not limited to, each trust listed in the following paragraph, shall constitute the client's Family Trusts. The client's Family Trusts include but are not limited to:
1: Smith Family Irrevocable Life Insurance 2009 Trust 10/3/09.
2: Joan Smith 2010 Irrevocable Trust 9/6/10.
3: Sam Smith Irrevocable Trust 9/6/13.
4: Joan Smith 2012 DAPT 2/22/2012.
5: And all trusts established after the execution of this agreement by [List Family Members] except to the extent that such trust holds marital property.

Earnings and Trust Distributions Excluded From Marital Claims
In agreements, clients sometimes elect to have a more narrow definition of “marital property” than would otherwise exist under the applicable law. For example, under the terms of an agreement, certain types of income might be excluded as marital property and instead be treated as a party's separate property. These provisions should also address the various types of income, as well as distributions, which may not be encompassed in a typical definition of “income from trusts.”

Below is sample language defining income, including income derived from trusts, and providing for an expansive definition of separate property.

All of [Wife's/Husband's] income, earnings, and compensation, including, but not limited to, rent, wages, base salary, bonuses, commissions, fees, royalties, dividends, revenues, profits, draws, trustee or other fiduciary fees (including but not limited to fees as a trustee, executor, trust protector or paid in any fiduciary or non-fiduciary capacity as a result of serving in a fiduciary or non-fiduciary capacity for any Family Trust), or fees for serving the client or the Family Trust in a fiduciary or non-fiduciary capacity, or other sources of earned income or compensation derived from employment or self-employment, and perquisites, from before, during, or after the parties' marriage shall remain [Wife's/Husband's] Separate Property. [Wife's/Husband's] income, earnings, and compensation, including, but not limited to, from the Family Trusts, shall remain [Wife's/Husband's] Separate Property regardless of whether any such payment is re-characterized by any tax authority as constituting something other than compensation or any income. Any distributions or benefits from any family trust including, but not limited, to the trusts listed above (“the Family Trusts”) shall remain the recipient's Separate Property. This shall include by way of example and not limitation: any distribution of income or principal, any direct or indirect benefit from the client's exercise or non-exercise of any power of appointment, or any direct or indirect benefit from any other person, family or not exercising a power of appointment under a client Family Trust, proceeds of a loan from any such trust, any tax reimbursement from such trust, the use or benefit of personal use property held in any such trust, or otherwise.

Waiver of Fiduciary Appointments

Traditional trusts often name a trustee. If an institutional or corporate trustee was named, it was often named without provisions to remove and replace the trustee. Modern trusts often take a different approach and provide a plethora of mechanisms to remove and replace trustees and other fiduciaries. Thus, it can be important to include a waiver by the client's spouse of any appointments in any fiduciary capacity, to avoid any inadvertent appointment or pressure by the other spouse to gain such a position. Language to accomplish this could state:

Each party does hereby agrees not to petition, apply for, or seek appointment or designation as conservator, committee, custodian, guardian, personal representative, executor, administrator, trustee, trust protector, loan director, or any other similar position with respect to the Family Trust of the [Wife/Husband], the person, the Property or the estate of the other party in any jurisdiction even if appointed to such a position by the other party after the date hereof.

The authors will continue their discussion in next month's issue.

*****
Martin M. Shenkman, CPA, MBA, PFS, AEP, JD, a member of this newsletter's Board of Editors, is an attorney in private practice in Paramus, NJ, and New York City. He concentrates on estate and closely held business planning, tax planning, and estate administration. Rebecca A. Provder is a partner in the Matrimonial and Family Law practice group at Moses & Singer LLP.

Pre-nuptial and post-nuptial agreements are ubiquitous in matrimonial practice, and to achieve optimum results for clients, it helps to use an interdisciplinary approach. A key area in which cross-disciplinary concerns should be at the forefront is with respect to trusts and how they may be impacted by marital agreements.

As modern trust practice has evolved, there has been significant growth in the array of provisions in agreements that might need to be added or modified to address a variety of trust planning issues. This article explores common provisions used in these agreements and suggest how standard language might be modified to protect a client's rights or interests in trusts he or she formed before the marriage, or that family members formed naming him or her in various capacities.

Fiduciaries

Marital agreements might define the term “fiduciary” or “fiduciaries.” However, a one-size-fits-all definition should not be utilized; rather, the definition should be tailored to address the particular circumstances of each case. Caution should be exercised: If defined too narrowly, the term “fiduciary” may avoid coverage of positions that are intended; if defined too broadly, it may affect positions that are not intended.

A typical agreement might define “fiduciary” as a party's heirs, executors, administrators, trustees, custodians, conservators, guardians, attorneys-in-fact and other legal representatives. In the context used, consider whether including trustees of the various trusts is problematic and whether, instead, trustees or certain fiduciary positions should be expressly excluded.

Practitioners should also consider the array of positions that a modern trust might encompass. A position that is becoming more routine is that of a trust protector. The term “trust protector” is quite vague and could mean a plethora of different things. The status of a person serving as trust protector, as a fiduciary or non-fiduciary, will also vary. Approximately 20 states have statutes addressing protectors. Depending on state law and the governing instrument, a protector may or may not be a fiduciary. Therefore, the use of the term “fiduciary” in an agreement might not assuredly cover the person or role intended; or, conversely, it might include a person or position that is not intended. For example, a common role of a trust protector is to remove and replace trustees. If a former spouse is a trust protector, take heed: Clients generally want to avoid the situation where their former spouse is in a position to remove trustees.

Another commonly designated position in modern trusts is a person — perhaps called a “loan director” — who might have authority to loan trust money, or even assets, to your client. That person is unlikely to be acting in a fiduciary capacity, so the definition of “fiduciary” under the agreement might not include the loan director. However, that person's ability to loan trust assets back to your client as grantor might be a matter to address in a marital agreement.

Accountings and Notices

The Uniform Trust Code Sec. 813 requires keeping qualified beneficiaries reasonably informed. Section 105(b)(8) prohibits waiver of the duty to inform qualified beneficiaries who are over 25 years of age. Many clients find surprising the entire idea of having to notify beneficiaries of a trust. Further, practitioners should not assume that their clients are even aware of these possible requirements.

Some states, however, have enacted laws permitting silent trusts. If the trust at issue is formed in such a jurisdiction, and the trust instrument includes the required language, there may be no requirement for notice of any type.

The possibility of notification is often not addressed in marital agreements, but the better practice is to do so. For example, if the divorcing couple has minor children, might your client's soon-to-be ex-spouse assert rights to receive notice on behalf of those minor children to a family trust of your client's? Consider the following agreement provision: “Neither party shall request any information, including but not limited to an informal or formal accounting, whether on behalf of himself, the children, or otherwise, from any Family Trust.” If the children are minors, you want to be sure that the first spouse cannot demand information from the second spouse's trusts on behalf of minor children, thereby circumventing a limitation on his or her right to directly obtain that information.

Also, bear in mind that the notice is likely to include a copy of the governing trust instrument, any amendments or actions modifying it, and a full financial statement.

Trusts Excluded from Claims

When drafting a marital agreement, practitioners may have the other spouse expressly disclaim any rights or interests in various trusts that might benefit the client. With modern trust drafting, it may be impossible to identify every trust the client may be a beneficiary in or have other rights to. For example, modern trust drafting often embodies a range of provisions and mechanisms to provide flexibility. A common technique is the power of appointment, which might grant the client or another person the right to designate who might benefit from the trust property. Illustratively, another family member may have the right to designate if a class of persons — which might include your client — could receive any portion or all of the trust assets at some future event or point in time. The language in the marital agreement, if appropriate, should be broad enough to encompass these future trust interests as well. For example:

All actual, constructive or beneficial interests [Client Name] now has or may come to have in any family trust, including any and all actual, constructive or beneficial interests the client now has or may come to have in any trust she or a family member of her has or will create, whether as a current beneficiary, remainder beneficiary, contingent beneficiary, power holder, fiduciary, or in a non-fiduciary position (including by way of example and not limitation serving as a trust protector, loan director, person empowered to add a charitable beneficiary, or otherwise). A trust for her or their benefit, including but not limited to, each trust listed in the following paragraph, shall constitute the client's Family Trusts. The client's Family Trusts include but are not limited to:
1: Smith Family Irrevocable Life Insurance 2009 Trust 10/3/09.
2: Joan Smith 2010 Irrevocable Trust 9/6/10.
3: Sam Smith Irrevocable Trust 9/6/13.
4: Joan Smith 2012 DAPT 2/22/2012.
5: And all trusts established after the execution of this agreement by [List Family Members] except to the extent that such trust holds marital property.

Earnings and Trust Distributions Excluded From Marital Claims
In agreements, clients sometimes elect to have a more narrow definition of “marital property” than would otherwise exist under the applicable law. For example, under the terms of an agreement, certain types of income might be excluded as marital property and instead be treated as a party's separate property. These provisions should also address the various types of income, as well as distributions, which may not be encompassed in a typical definition of “income from trusts.”

Below is sample language defining income, including income derived from trusts, and providing for an expansive definition of separate property.

All of [Wife's/Husband's] income, earnings, and compensation, including, but not limited to, rent, wages, base salary, bonuses, commissions, fees, royalties, dividends, revenues, profits, draws, trustee or other fiduciary fees (including but not limited to fees as a trustee, executor, trust protector or paid in any fiduciary or non-fiduciary capacity as a result of serving in a fiduciary or non-fiduciary capacity for any Family Trust), or fees for serving the client or the Family Trust in a fiduciary or non-fiduciary capacity, or other sources of earned income or compensation derived from employment or self-employment, and perquisites, from before, during, or after the parties' marriage shall remain [Wife's/Husband's] Separate Property. [Wife's/Husband's] income, earnings, and compensation, including, but not limited to, from the Family Trusts, shall remain [Wife's/Husband's] Separate Property regardless of whether any such payment is re-characterized by any tax authority as constituting something other than compensation or any income. Any distributions or benefits from any family trust including, but not limited, to the trusts listed above (“the Family Trusts”) shall remain the recipient's Separate Property. This shall include by way of example and not limitation: any distribution of income or principal, any direct or indirect benefit from the client's exercise or non-exercise of any power of appointment, or any direct or indirect benefit from any other person, family or not exercising a power of appointment under a client Family Trust, proceeds of a loan from any such trust, any tax reimbursement from such trust, the use or benefit of personal use property held in any such trust, or otherwise.

Waiver of Fiduciary Appointments

Traditional trusts often name a trustee. If an institutional or corporate trustee was named, it was often named without provisions to remove and replace the trustee. Modern trusts often take a different approach and provide a plethora of mechanisms to remove and replace trustees and other fiduciaries. Thus, it can be important to include a waiver by the client's spouse of any appointments in any fiduciary capacity, to avoid any inadvertent appointment or pressure by the other spouse to gain such a position. Language to accomplish this could state:

Each party does hereby agrees not to petition, apply for, or seek appointment or designation as conservator, committee, custodian, guardian, personal representative, executor, administrator, trustee, trust protector, loan director, or any other similar position with respect to the Family Trust of the [Wife/Husband], the person, the Property or the estate of the other party in any jurisdiction even if appointed to such a position by the other party after the date hereof.

The authors will continue their discussion in next month's issue.

*****
Martin M. Shenkman, CPA, MBA, PFS, AEP, JD, a member of this newsletter's Board of Editors, is an attorney in private practice in Paramus, NJ, and New York City. He concentrates on estate and closely held business planning, tax planning, and estate administration. Rebecca A. Provder is a partner in the Matrimonial and Family Law practice group at Moses & Singer LLP.