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Friday, April 1, 2011

What will happen to Trust assets in my Divorce?

According to this recent Daily Mail article, Athelstan Whaley, a millionaire hotel tycoon will be left practically penniless by a UK divorce court's order. Whaley claims that the main source of his wealth, a family trust, cannot be accessed to pay for his divorce settlement, despite the fact that the Judge took the trust into account when calculating the divorce payout. In order to pay the settlement, he will have to use all of his liquid assets including selling his house, and claims that this will make him homeless. While it's hard to feel bad for a millionaire, a family trust could put any divorcing spouse in this position.

In Massachusetts the division of marital property in a divorce case is controlled by M.G.L. Chapter 208 Section 34, which states in pertinent part:

"In addition to or in lieu of a judgment to pay alimony, the court may assign to either husband or wife all or any part of the estate of the other, including but not limited to, all vested and nonvested benefits, rights and funds accrued during the marriage and which shall include, but not be limited to, retirement benefits, military retirement benefits if qualified under and to the extent provided by federal law, pension, profit-sharing, annuity, deferred compensation and insurance."

This means that the Judge in a divorce case can consider how to divide all property that is in the name of either person, and this includes property held in trusts. Whether or not a trust is divisible as a marital asset depends on the type of trust and how it may have been used during the marriage.

In Ruml v. Ruml the court indicated that a trust could be martial property, especially if it was accessed during the marriage. Ruml v. Ruml, 50 Mass. App. Ct. 500, 512 (2000). In Ruml, the court elaborated that “trust assets where a spouse holds powers, such as the power of appointment of trustees, are subject to equitable distribution pursuant to M.G.L. c. 208 §34. Id.

In some instances, though, the beneficiary does not have any powers, and it is completely up to the trustees to decide how and when the property will be distributed. These are called spendthrift trusts and they may be protected in a divorce if the trust truly has been treated as a spendthrift trust.

"Trusts containing spendthrift provisions of the type under consideration in this case are recognized as valid in Massachusetts." Pemberton v. Pemberton, 9 Mass. App. Ct. 9, 19 (1980) "Moreover, in Massachusetts the settlor's intent to deny creditors of a beneficiary recovery against trust assets or recovery against the trustee's wishes has been accorded particular deference, even in the face of strong public policy arguments favoring such a recovery.’ Id. at 20. Although some scholars suggest limited authority to allow wife and dependents to pierce a spendthrift clause, there is little authority which allows a court to order a trustee to do so over the objection of the trustee. Id. See footnote 10 and 11.

The Judge in a divorce case could award other assets to offset the value of trust proceeds to one spouse, but according to Pemberton if the trust hasn't been invaded during the marriage and is a spendthrift trust than a Judge cannot order the trustees to pay assets to the beneficiary's spouse against the intent of the trust.

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