Trust Drafting Tips: How to Make Trusts Harder to Reach in Divorce

“Trust protector” is a position that is being used more frequently in trust drafting, but is still rather uncommon in most estate plans. For clients concerned about protecting trust assets from the reach of a later divorce claim, trust protectors should be considered in new trusts (or trusts modified by decanting). A trust protector is still a relatively new concept and although about 20 states now have statutes addressing the position, the laws vary considerably and the case law is still quite limited. The roles that a trust protector can play can differ based not only on state law, but also on the provisions of the governing instrument. (Caution should be exercised in that some attorneys use the term “trust protector” quite loosely, to include a range of other power holders (e.g., a person who might have the right to add a beneficiary to the trust). In this context, we are referring to a person named in the trust who has certain specified powers — typically including the right to remove or replace a trustee, change the situs and governing law of the trust and, in some instances, other powers.)

In this author's view, the person acting as a trust protector as described above should act in a fiduciary capacity. Anyone holding a power to remove and replace the trustee — the ultimate fiduciary position — would seem to need to act in a fiduciary capacity. Some commentators appear to disagree. As a result, some trusts will specify whether or not the protector is serving in a fiduciary capacity.

Why might incorporating a protector position be valuable to providing better protection to the beneficiary from future divorce risk? Let's suppose a mother sets up a trust for her daughter and names the daughter as trustee. In such a case, the daughter's powers to distribute to herself must be limited to an ascertainable standard to avoid having trust assets reachable by the daughter's creditors and to avoid having trust assets included in the daughter's estate. Depending on state law, this distribution standard might expose trust assets to the daughter's later divorce. Now, if the daughter perceives her marriage as becoming uncertain, she might resign as trustee and her brother, who is named successor, could take over. But if this was done one month prior to the divorce, how might the court view the resignation? What if, instead of the divorcing daughter resigning, an independent trust protector removed her?

Such removal would no longer be due to the daughter's action, which might be viewed as pre-divorce planning. Further, instead of the brother — who has a similar trust over which the daughter is trustee — taking over, the trust protector acts to name a bank as successor. Obviously, the bank is independent. In contrast, the brother, who is dependent on the sister's actions as trustee of his trust, may not be viewed by a court as particularly independent. Clearly, the inclusion of a trust protection in the trust might provide valuable matrimonial protection.

Change of Situs Clause

Traditionally, trusts were created in, and governed by, the law of the client's home state. But there is no reason to restrict trust administration to the settlor's home state. While more practitioners are considering the state income tax impact of trust situs, the matrimonial implications of trust situs could also be significant.

Using our mother/daughter example, let's suppose the mother created the trust for the daughter in her home state, which home state law protected interests in a trust from a later divorce even if the trust was a support trust (i.e., it permitted distributions in accordance with an ascertainable standard for the beneficiary's health, education, maintenance and support or “HEMS.”). If the law in the home state changes (e.g., case law evolves) so that such a trust may be reachable, the trust might be moved immediately and not wait for the possibility of a later divorce. But if the governing instrument does not include a change-of-situs and governing-law mechanism, the change might be challenging (e.g., require a decanting) or might be impossible to achieve.

What if a trust protector is in place? Perhaps the protector may opt to name a trustee based in Alaska, use her authority as protector to change governing law and situs from an east-coast state to Alaska, and name a trust company in Alaska. How might that raise the cost and difficulty of the ex-husband pursuing the trust? If the home-state law where the mother/settlor created the trust makes the trust accessible in divorce as a support trust, will moving the trust to a state whose laws do not make a support trust reachable suffice to mitigate that risk? Will, instead, the home-state court argue that it has a material interest in the trust and that the move of the trust was merely a subterfuge to frustrate the husband's rights? Whatever the eventual outcome, crafting trusts from inception with the flexibility a protector can afford may prove advisable.

There are several means by which to facilitate a change in situs and governing law. The trustee could be empowered to make such a change. But bear in mind that this might require a change of trustees to effect the “move.” Alternatively, a trust protector could be empowered to change situs and governing law. It may be advisable to include some mechanism in every trust to facilitate a change in the situs of administration of the trust and governing law.

Floating Spouse Clause

It has become de rigueur to find means of infusing flexibility into irrevocable trusts. It is not uncommon for a client to create an irrevocable trust and name as beneficiary whomever he happens to be married to at any given time. This potentially rotating spousal definition has been called a “floating spouse” clause because the identification of who will benefit will “float” through each successive marriage. Such clauses can have important and surprising impacts on matrimonial planning. If the current husband is a beneficiary, he may be entitled to a distribution from the trust with such a clause, which might be useful in the matrimonial settlement process. However, once he is divorced, his rights as a beneficiary would be cut off and he may no longer be entitled to a distribution. Thus, the timing of divorce settlement actions may be critical to the ability to access such a trust. In a prenuptial context, if the client/settlor of such a trust wants to limit rights of a new spouse under a floating spouse clause, it may be feasible to do so in the prenuptial agreement. Finally, if the client remarries, she may be able to access trust benefits indirectly through her new husband becoming a beneficiary.

Tax Reimbursement

Many, if not most, irrevocable trusts have been crafted to be characterized as grantor trusts for income tax purposes. This means that all the income of the trust is taxed to the settlor of the trust. While the client/settlor is in an intact marriage, that characterization might provide several valuable tax benefits. However, in the harsher economic realities post-divorce, that settlor might suffer because of the burden of bearing that tax cost.

There are several options. One is for the trust's grantor trust status to be turned off. This may be feasible by the settlor surrendering a power that created that characterization. That option is not, however, always optimal. Another option — and one that should be considered from inception if state law permits (and if state law does not permit, perhaps you should have the trust formed in a state that does) — is to include in the governing instrument a right of an independent trustee to reimburse the settlor for the tax costs. If that right does not exist, it may be possible to add a reimbursement clause by decanting the existing trust into a new trust that incorporates that power.

The IRS has held that the modification of an irrevocable trust to include a tax reimbursement clause did not cause adverse tax consequences. Private Letter Ruling (PLR) 201647001. This PLR stated: “Due to unforeseen and unanticipated circumstances, payment by the Grantors of the income taxes on Trust's income has become unduly burdensome. … Under Statute, the court may modify the administrative terms of a trust if continuation of the trust on its existing terms would be impracticable or wasteful or impair the trust's administration, or if, because of circumstances not anticipated by the settlor, modification will further the settlor's stated purpose or, if there is no stated purpose, the settlor's probable intention.” The PLR discussed Rev. Rul. 2004-64 concerning the tax reimbursement clause added to the trust. The PLR concluded that assuming there is no express or implied understanding between the grantor and the independent trustee regarding the Independent trustee's exercise of discretion to reimburse the grantor for income taxes paid on trust income, adding the power would not cause the inclusion of the trust in grantor's estate.

Practitioners should bear in mind that rectification of this issue may not always be feasible if it is not addressed in the divorce settlement process. Also, the hardships of grantor trust status could be surprising.

Consider the case of a husband who created an irrevocable life insurance trust to own life insurance on his life. A primary purpose of this trust was to fund the payment of future estate taxes, but it was set up when the estate tax exemption was only $1 million. The wife was named as trustee. The trust was drafted to assure grantor trust income status as to the husband, as this would imbue planning flexibility if the insurance plan changed. The plan did change, but in ways no one anticipated when the trust was created. The estate tax exemption grew to $10 million (inflation adjusted) for the couple, and they canceled the life insurance policy. The value of the insurance policy was retained in the trust and invested in several speculative stocks — and one hit a home run. The value in the trust was in excess of $1 million when the stock was sold, generating a $250,000 capital gain. The now ex-wife and the children are the beneficiaries of the trust, but the husband must bear the entire state and federal capital gains tax cost.

Until this sale, there had never been any prior income tax costs associated with the trust, and the husband was completely blindsided by this unexpected and large tax cost. Had matrimonial counsel addressed the grantor trust income tax status of the trust during the matrimonial litigation, the trustee could have been made a party, and perhaps a tax reimbursement clause could have been added or the grantor trust status terminated.

Swap Power

Another common power that has been used to cause trusts to be characterized as grantor trusts for tax purposes and to provide planning flexibility is the “swap” or “substitution” power. This gives the settlor the right to swap assets of equivalent value for assets in the trust. Depending on the circumstances, this could be a valuable tool for flexibility, or a nettlesome problem.

To illustrate, let's say that a wife started a widget manufacturing company and gifted 20% of the stock to an irrevocable trust for the children. The husband was named trustee. The business grew substantially. In the maelstrom of the divorce, the status of the trust was overlooked. Post-divorce, the wife wanted to reclaim her stock, since a 20% minority interest in the business out of her control would be an impediment to her selling the company. So, she attempted to swap a personal note to the trust in exchange for the stock. The now ex-husband, who remained the trustee, refused to honor the transaction. So, while a swap power could have been an important tool for flexibility had the issues been addressed during the pendency of the divorce (and perhaps on that basis including swap powers in trusts might be advantageous in some later matrimonial actions), it may prove elusive, at best, in this hypothetical.

A similar fact pattern arose in the recent case of Schinazi v. Eden, 2016 WL 5867215. There, the trustee was the wife and mother of the daughter of the marriage who was the beneficiary of trust. The couple divorced. The ex-husband tried to exercise swap power and the now ex-wife trustee refused. He tried to swap in a note and the ex-wife/trustee objected, saying it was not of equivalent value, as required by the trust instrument. In the divorce, the issue of trustee and trust actions should have been addressed. It may have been preferable for all involved to have had the ex-wife resign as trustee in favor of an independent, and ideally an institutional, trustee.

If a swap power is added to a trust, consider naming an independent trustee to make the equivalency trust. If a spouse is trustee for a trust with a swap power, as part of the divorce, consider naming an independent trustee to prevent the ex-spouses from feuding over the exercise of a swap or other powers.

Ancillary Considerations

CRTs and Divorce: Charitable remainder trusts (CRTs) are a common charitable planning tool. If a married couple funds such a trust in exchange for their receiving a joint annuity, what happens with the CRT post-divorce? The IRS has issued favorable rulings permitting the division of a charitable remainder unitrust into two separate trusts in connection with the taxpayers' divorce. PLR 201648007.

QPRTs: Qualified Personal Residence Trusts (QPRTs) are a specific type of irrevocable trust that have been used to leverage a gift or a residence out of the settlor's estate. The significant increase in the gift and estate tax exemption ($5M inflation indexed) in recent years has obviated QPRT planning for most wealthy clients. However, given the prevalence of this planning in prior years, matrimonial practitioners will continue to encounter these trusts in divorce cases for years to come. With a QPRT, the settlor transfers some portion or all of the equity of a personal residence into the irrevocable trust, retaining a right to live in that residence for a specified period of years.

In many, but not all, cases, each spouse transfers an interest in the residence to a separate QPRT with each retaining a right to reside in the residence for a period of years, which is often a different term (e.g., husband reserves the right to live in the house for seven years and wife for 10). Practitioners must deal with untangling the relative rights of one or both spouses in the context of a divorce. Using a QPRT as an affirmative planning tool prior to a second or later marriage may also be an effective tool to protect the equity value in that residence.

Here is an example: Homeowner has been divorced and is aware of the high rate of divorce in second and later marriages. Homeowner contemplates remarriage and, in addition to a prenuptial agreement, transfers all interests in a valuable mortgage-free home to a QPRT, reserving a 15-year right to reside in the residence. While there are no tax benefits, because homeowner's estate is under the current federal exemption amount, homeowner views this as a means of protecting that equity and assuring that it will pass to children from a prior marriage regardless of the outcome of the forthcoming marriage.

Gift vs. Loan: An issue that arises in many trust and related planning transactions is whether a transfer is a gift or a loan. The consequences of this determination can have a profound impact on the matrimonial results of the transactions in question. For example, a client may be contemplating marriage. She has an existing irrevocable trust and transfers $1 million to the trust. If that transfer is a gift, and that gift was consummated before the marriage, that $1 million may more likely be removed from the marital estate, but also may be removed from consideration as an available resource to the client. However, if the transfer to the trust was more correctly characterized as a loan, then the $1 million value of that loan might be viewed as a resource available to the client in the event of a later divorce. The fact patterns and issues become intricately complex and difficult to decipher. Many of the situations become quite fact-intensive.

Consider a husband and wife who are still married. Husband has a failing business and wife's parents provide funding to that business. The characterization of that cash infusion as a gift might mean that the wife and her parents have no recourse upon divorce. The characterization of that cash infusion as a loan to the husband and/or to his business could have substantially different consequences. March 16, 2017, J.D. v. A.D., [Index Number Redacted by Court], NYLJ 1202780893018.

Conclusion

Modern trust drafting includes a wide array of clauses and planning strategies that are much more complex than traditional trust drafting. Practitioners who affirmatively use these tools can better protect clients currently going through a divorce, or who might go through one (or more) in future.

*****
Martin M. Shenkman, CPA, MBA, PFS, AEP, JD, a member of this newsletter's Board of Editors, is an attorney in private practice in Fort Lee, NJ, and New York City. He concentrates on estate and closely held business planning, tax planning, and estate administration.

Part One of this article in last month's issue addressed perhaps a dozen trust provisions and evaluated how to strengthen them to provide greater protection for a future divorce of a beneficiary. We conclude this discussion herein.

Trust Clauses: Improving on Less Protective Approaches

Trust Protector

“Trust protector” is a position that is being used more frequently in trust drafting, but is still rather uncommon in most estate plans. For clients concerned about protecting trust assets from the reach of a later divorce claim, trust protectors should be considered in new trusts (or trusts modified by decanting). A trust protector is still a relatively new concept and although about 20 states now have statutes addressing the position, the laws vary considerably and the case law is still quite limited. The roles that a trust protector can play can differ based not only on state law, but also on the provisions of the governing instrument. (Caution should be exercised in that some attorneys use the term “trust protector” quite loosely, to include a range of other power holders (e.g., a person who might have the right to add a beneficiary to the trust). In this context, we are referring to a person named in the trust who has certain specified powers — typically including the right to remove or replace a trustee, change the situs and governing law of the trust and, in some instances, other powers.)

In this author's view, the person acting as a trust protector as described above should act in a fiduciary capacity. Anyone holding a power to remove and replace the trustee — the ultimate fiduciary position — would seem to need to act in a fiduciary capacity. Some commentators appear to disagree. As a result, some trusts will specify whether or not the protector is serving in a fiduciary capacity.

Why might incorporating a protector position be valuable to providing better protection to the beneficiary from future divorce risk? Let's suppose a mother sets up a trust for her daughter and names the daughter as trustee. In such a case, the daughter's powers to distribute to herself must be limited to an ascertainable standard to avoid having trust assets reachable by the daughter's creditors and to avoid having trust assets included in the daughter's estate. Depending on state law, this distribution standard might expose trust assets to the daughter's later divorce. Now, if the daughter perceives her marriage as becoming uncertain, she might resign as trustee and her brother, who is named successor, could take over. But if this was done one month prior to the divorce, how might the court view the resignation? What if, instead of the divorcing daughter resigning, an independent trust protector removed her?

Such removal would no longer be due to the daughter's action, which might be viewed as pre-divorce planning. Further, instead of the brother — who has a similar trust over which the daughter is trustee — taking over, the trust protector acts to name a bank as successor. Obviously, the bank is independent. In contrast, the brother, who is dependent on the sister's actions as trustee of his trust, may not be viewed by a court as particularly independent. Clearly, the inclusion of a trust protection in the trust might provide valuable matrimonial protection.

Change of Situs Clause

Traditionally, trusts were created in, and governed by, the law of the client's home state. But there is no reason to restrict trust administration to the settlor's home state. While more practitioners are considering the state income tax impact of trust situs, the matrimonial implications of trust situs could also be significant.

Using our mother/daughter example, let's suppose the mother created the trust for the daughter in her home state, which home state law protected interests in a trust from a later divorce even if the trust was a support trust (i.e., it permitted distributions in accordance with an ascertainable standard for the beneficiary's health, education, maintenance and support or “HEMS.”). If the law in the home state changes (e.g., case law evolves) so that such a trust may be reachable, the trust might be moved immediately and not wait for the possibility of a later divorce. But if the governing instrument does not include a change-of-situs and governing-law mechanism, the change might be challenging (e.g., require a decanting) or might be impossible to achieve.

What if a trust protector is in place? Perhaps the protector may opt to name a trustee based in Alaska, use her authority as protector to change governing law and situs from an east-coast state to Alaska, and name a trust company in Alaska. How might that raise the cost and difficulty of the ex-husband pursuing the trust? If the home-state law where the mother/settlor created the trust makes the trust accessible in divorce as a support trust, will moving the trust to a state whose laws do not make a support trust reachable suffice to mitigate that risk? Will, instead, the home-state court argue that it has a material interest in the trust and that the move of the trust was merely a subterfuge to frustrate the husband's rights? Whatever the eventual outcome, crafting trusts from inception with the flexibility a protector can afford may prove advisable.

There are several means by which to facilitate a change in situs and governing law. The trustee could be empowered to make such a change. But bear in mind that this might require a change of trustees to effect the “move.” Alternatively, a trust protector could be empowered to change situs and governing law. It may be advisable to include some mechanism in every trust to facilitate a change in the situs of administration of the trust and governing law.

Floating Spouse Clause

It has become de rigueur to find means of infusing flexibility into irrevocable trusts. It is not uncommon for a client to create an irrevocable trust and name as beneficiary whomever he happens to be married to at any given time. This potentially rotating spousal definition has been called a “floating spouse” clause because the identification of who will benefit will “float” through each successive marriage. Such clauses can have important and surprising impacts on matrimonial planning. If the current husband is a beneficiary, he may be entitled to a distribution from the trust with such a clause, which might be useful in the matrimonial settlement process. However, once he is divorced, his rights as a beneficiary would be cut off and he may no longer be entitled to a distribution. Thus, the timing of divorce settlement actions may be critical to the ability to access such a trust. In a prenuptial context, if the client/settlor of such a trust wants to limit rights of a new spouse under a floating spouse clause, it may be feasible to do so in the prenuptial agreement. Finally, if the client remarries, she may be able to access trust benefits indirectly through her new husband becoming a beneficiary.

Tax Reimbursement

Many, if not most, irrevocable trusts have been crafted to be characterized as grantor trusts for income tax purposes. This means that all the income of the trust is taxed to the settlor of the trust. While the client/settlor is in an intact marriage, that characterization might provide several valuable tax benefits. However, in the harsher economic realities post-divorce, that settlor might suffer because of the burden of bearing that tax cost.

There are several options. One is for the trust's grantor trust status to be turned off. This may be feasible by the settlor surrendering a power that created that characterization. That option is not, however, always optimal. Another option — and one that should be considered from inception if state law permits (and if state law does not permit, perhaps you should have the trust formed in a state that does) — is to include in the governing instrument a right of an independent trustee to reimburse the settlor for the tax costs. If that right does not exist, it may be possible to add a reimbursement clause by decanting the existing trust into a new trust that incorporates that power.

The IRS has held that the modification of an irrevocable trust to include a tax reimbursement clause did not cause adverse tax consequences. Private Letter Ruling (PLR) 201647001. This PLR stated: “Due to unforeseen and unanticipated circumstances, payment by the Grantors of the income taxes on Trust's income has become unduly burdensome. … Under Statute, the court may modify the administrative terms of a trust if continuation of the trust on its existing terms would be impracticable or wasteful or impair the trust's administration, or if, because of circumstances not anticipated by the settlor, modification will further the settlor's stated purpose or, if there is no stated purpose, the settlor's probable intention.” The PLR discussed Rev. Rul. 2004-64 concerning the tax reimbursement clause added to the trust. The PLR concluded that assuming there is no express or implied understanding between the grantor and the independent trustee regarding the Independent trustee's exercise of discretion to reimburse the grantor for income taxes paid on trust income, adding the power would not cause the inclusion of the trust in grantor's estate.

Practitioners should bear in mind that rectification of this issue may not always be feasible if it is not addressed in the divorce settlement process. Also, the hardships of grantor trust status could be surprising.

Consider the case of a husband who created an irrevocable life insurance trust to own life insurance on his life. A primary purpose of this trust was to fund the payment of future estate taxes, but it was set up when the estate tax exemption was only $1 million. The wife was named as trustee. The trust was drafted to assure grantor trust income status as to the husband, as this would imbue planning flexibility if the insurance plan changed. The plan did change, but in ways no one anticipated when the trust was created. The estate tax exemption grew to $10 million (inflation adjusted) for the couple, and they canceled the life insurance policy. The value of the insurance policy was retained in the trust and invested in several speculative stocks — and one hit a home run. The value in the trust was in excess of $1 million when the stock was sold, generating a $250,000 capital gain. The now ex-wife and the children are the beneficiaries of the trust, but the husband must bear the entire state and federal capital gains tax cost.

Until this sale, there had never been any prior income tax costs associated with the trust, and the husband was completely blindsided by this unexpected and large tax cost. Had matrimonial counsel addressed the grantor trust income tax status of the trust during the matrimonial litigation, the trustee could have been made a party, and perhaps a tax reimbursement clause could have been added or the grantor trust status terminated.

Swap Power

Another common power that has been used to cause trusts to be characterized as grantor trusts for tax purposes and to provide planning flexibility is the “swap” or “substitution” power. This gives the settlor the right to swap assets of equivalent value for assets in the trust. Depending on the circumstances, this could be a valuable tool for flexibility, or a nettlesome problem.

To illustrate, let's say that a wife started a widget manufacturing company and gifted 20% of the stock to an irrevocable trust for the children. The husband was named trustee. The business grew substantially. In the maelstrom of the divorce, the status of the trust was overlooked. Post-divorce, the wife wanted to reclaim her stock, since a 20% minority interest in the business out of her control would be an impediment to her selling the company. So, she attempted to swap a personal note to the trust in exchange for the stock. The now ex-husband, who remained the trustee, refused to honor the transaction. So, while a swap power could have been an important tool for flexibility had the issues been addressed during the pendency of the divorce (and perhaps on that basis including swap powers in trusts might be advantageous in some later matrimonial actions), it may prove elusive, at best, in this hypothetical.

A similar fact pattern arose in the recent case of Schinazi v. Eden, 2016 WL 5867215. There, the trustee was the wife and mother of the daughter of the marriage who was the beneficiary of trust. The couple divorced. The ex-husband tried to exercise swap power and the now ex-wife trustee refused. He tried to swap in a note and the ex-wife/trustee objected, saying it was not of equivalent value, as required by the trust instrument. In the divorce, the issue of trustee and trust actions should have been addressed. It may have been preferable for all involved to have had the ex-wife resign as trustee in favor of an independent, and ideally an institutional, trustee.

If a swap power is added to a trust, consider naming an independent trustee to make the equivalency trust. If a spouse is trustee for a trust with a swap power, as part of the divorce, consider naming an independent trustee to prevent the ex-spouses from feuding over the exercise of a swap or other powers.

Ancillary Considerations

CRTs and Divorce: Charitable remainder trusts (CRTs) are a common charitable planning tool. If a married couple funds such a trust in exchange for their receiving a joint annuity, what happens with the CRT post-divorce? The IRS has issued favorable rulings permitting the division of a charitable remainder unitrust into two separate trusts in connection with the taxpayers' divorce. PLR 201648007.

QPRTs: Qualified Personal Residence Trusts (QPRTs) are a specific type of irrevocable trust that have been used to leverage a gift or a residence out of the settlor's estate. The significant increase in the gift and estate tax exemption ($5M inflation indexed) in recent years has obviated QPRT planning for most wealthy clients. However, given the prevalence of this planning in prior years, matrimonial practitioners will continue to encounter these trusts in divorce cases for years to come. With a QPRT, the settlor transfers some portion or all of the equity of a personal residence into the irrevocable trust, retaining a right to live in that residence for a specified period of years.

In many, but not all, cases, each spouse transfers an interest in the residence to a separate QPRT with each retaining a right to reside in the residence for a period of years, which is often a different term (e.g., husband reserves the right to live in the house for seven years and wife for 10). Practitioners must deal with untangling the relative rights of one or both spouses in the context of a divorce. Using a QPRT as an affirmative planning tool prior to a second or later marriage may also be an effective tool to protect the equity value in that residence.

Here is an example: Homeowner has been divorced and is aware of the high rate of divorce in second and later marriages. Homeowner contemplates remarriage and, in addition to a prenuptial agreement, transfers all interests in a valuable mortgage-free home to a QPRT, reserving a 15-year right to reside in the residence. While there are no tax benefits, because homeowner's estate is under the current federal exemption amount, homeowner views this as a means of protecting that equity and assuring that it will pass to children from a prior marriage regardless of the outcome of the forthcoming marriage.

Gift vs. Loan: An issue that arises in many trust and related planning transactions is whether a transfer is a gift or a loan. The consequences of this determination can have a profound impact on the matrimonial results of the transactions in question. For example, a client may be contemplating marriage. She has an existing irrevocable trust and transfers $1 million to the trust. If that transfer is a gift, and that gift was consummated before the marriage, that $1 million may more likely be removed from the marital estate, but also may be removed from consideration as an available resource to the client. However, if the transfer to the trust was more correctly characterized as a loan, then the $1 million value of that loan might be viewed as a resource available to the client in the event of a later divorce. The fact patterns and issues become intricately complex and difficult to decipher. Many of the situations become quite fact-intensive.

Consider a husband and wife who are still married. Husband has a failing business and wife's parents provide funding to that business. The characterization of that cash infusion as a gift might mean that the wife and her parents have no recourse upon divorce. The characterization of that cash infusion as a loan to the husband and/or to his business could have substantially different consequences. March 16, 2017, J.D. v. A.D., [Index Number Redacted by Court], NYLJ 1202780893018.

Conclusion

Modern trust drafting includes a wide array of clauses and planning strategies that are much more complex than traditional trust drafting. Practitioners who affirmatively use these tools can better protect clients currently going through a divorce, or who might go through one (or more) in future.

*****
Martin M. Shenkman, CPA, MBA, PFS, AEP, JD, a member of this newsletter's Board of Editors, is an attorney in private practice in Fort Lee, NJ, and New York City. He concentrates on estate and closely held business planning, tax planning, and estate administration.