Bar News - March 22, 2013
Elder, Estate Planning & Probate Law: Get Out of My Will: Estate Planning and Divorce
By: Jan P. Myskowski
For the individual anticipating, in the midst of, or emerging from divorce proceedings, estate planning presents special challenges. In particular, the interplay of spousal statutory inheritance rights and the limitations of anti-hypothecation orders need to be considered.
Planning falls into three broad categories: planning prior to the filing of the petition; planning during the pendency of divorce; and planning following the finality of divorce. The objectives within each category are generally the same: How do I prevent my alienated spouse from inheriting my property if I die? And how do I prevent my alienated spouse from controlling my life if I become incapacitated?
Prior to the Petition
Ideally, planning occurs prior to the filing of a petition for divorce, when a thorough review of the interplay between estate composition, statutory inheritance rights, and the impact of documents, such as prenuptial agreements, can occur. In addition, planning during this phase is free of the limitations imposed by anti-hypothecation orders (discussed in more detail below).
During this phase, a client can readily revise durable powers of attorney to revoke those that nominate the alienated spouse as agent, revise wills and revocable trusts to omit the alienated spouse as beneficiary, change beneficiary designations of life insurance policies and other contract assets (except those covered by ERISA, for which spousal consent is required), and sever joint tenancies.
Among the foregoing actions, perhaps changing the agents under durable powers of attorney is the most important. Revoking the nomination of a spouse as agent is indisputably effective, given that a spouse has no statutory right to be named as agent under either a durable general power of attorney or health care advance directive.
The effectiveness of efforts to disinherit the alienated spouse is limited, both by statutory inheritance rights and by case law interpreting those statutes. Should the planning individual die prior to the finality of divorce proceedings, his or her alienated spouse can elect against a will that fully disinherits the spouse and receive a fraction of the estate under RSA 560:10 (generally one-third to one-half, depending on the composition of the decedent’s family). However, a fraction of the estate is likely preferable to leaving the entirety to the alienated spouse.
Caution is advised with regard to retitling assets. Revising the terms of an already-funded revocable trust is usually an effective way to limit an alienated spouse’s inheritance rights, but transferring assets to such an amended trust for the first time on the eve of divorce will probably add little to the effectiveness of such planning.
The New Hampshire Supreme Court ruled in Hanke v. Hanke that transfers to such a trust made for the purpose of defeating elective share rights will not be effective. Hanke v. Hanke, 123 N.H. 175 (1983). Simply changing the scheme of distribution of a will and/or revocable trust will limit the alienated spouse to his or her elective share rights and will avoid the tactical disadvantages associated with last-minute changes in title.
The possible exception to this principal is the severing of joint tenancies with survivorship rights. Arguably, the severance of such joint tenancies causes no change in economic position while the parties are alive, and the author is not aware of any statutory or common law protection of simple survivorship rights. Keep in mind, however, that the alienated spouse will continue to have elective share rights in the planning spouse’s interest in the formerly joint assets.
Last, but not least, in this pre-petition phase of planning, is the changing of beneficiary designations. Again, the author is not aware of statutory or common law protection of a spouse’s right to be named as beneficiary of contract assets other than retirement assets covered by ERISA.
During Divorce Proceedings
The planning objectives and approaches are the same during this phase as during the pre-petition phase. However, the planning spouse must take into account two additional factors when planning is undertaken after the petition for divorce has been filed: the impact of anti-hypothecation orders and the impact of fault on statutory inheritance rights.
RSA 458:16-b provides that upon the filing of a petition for divorce, the court “shall issue an order restraining each party from selling, transferring, encumbering, hypothecating, concealing, or in any manner whatsoever disposing of any property,… ”
Historically, many estate planning and family law attorneys have taken the position that these orders, commonly referred to as anti-hypothecation orders, prevent either party from engaging in any estate planning while a divorce is pending. However, this position was not supported by any judicial interpretation of the statute or by a 2012 opinion issued by the NH Supreme Court. The opinion instead supported the argument that anti-hypothecation orders do not restrain actions that do not effect a change in ownership of property while the parties are alive, such as changing durable powers of attorney, amending the dispositive schemes of wills and revocable trusts, and changing the beneficiary designations of life insurance policies and other contact assets.
In Elter-Nodvin v. Nodvin, following the filing of a petition for divorce and the entry of an anti-hypothecation order, the husband changed the beneficiary designations of his life insurance and retirement accounts to name his daughters as beneficiaries instead of his estranged wife, and then died. 163 N.H. 678 (2012). The Court found that the wife’s status as designated beneficiary did not constitute a property interest while husband was alive, and, as a result, the changing of the beneficiary designations did not violate the anti-hypothecation order. Id.
The reasoning of Nodvin would seem to readily extend to the changing of the schemes of distribution of wills and revocable trusts. Omitting a spouse from these schemes of distribution will, at the very least, limit the estranged spouse to his or her elective share rights. However, if the estranged spouse has engaged in conduct that would give rise to a fault-based divorce, omitting the estranged spouse may permit the divorcing individual’s estate representative to argue that the estranged spouse forfeited his or her elective share rights.
RSA 560:19 provides that a surviving spouse can receive no more than what is given to that spouse by the deceased spouse’s will, if the parties were living apart because of the surviving spouse’s fault-creating conduct. RSA 560:18 contains similar provisions with respect to abandonment.
Following the Finality of Divorce
Many practitioners are aware that under RSA 551:13, divorce has the effect of revoking provisions in a will or revocable trust in favor of a former spouse. However, durable powers of attorney and beneficiary designations under life policies, retirement accounts and other contract assets clearly fall outside the scope of RSA 551:13.
Failure to change these documents can result in a former spouse holding authority as attorney-in-fact or health care agent, or inheriting the proceeds of contract assets. See, e.g., Kennedy v. Plan Administrator for DuPont Savings & Inv. Plan, in which the US Supreme Court held that a former wife was entitled to the proceeds of a decedent’s retirement plan because she remained the designated beneficiary at the time of the plan participant’s death.
Most of the foregoing discussion has focused on planning geared toward the potential death or disability of a divorcing individual. Of equal importance for family law practitioners crossing paths with trusts and estate issues is an understanding of the extent to which assets held in trust are susceptible to claims of a divorcing spouse.
Here, the divorcing individual is the beneficiary of a trust, and the task is to evaluate the extent to which the individual’s entitlement to distributions of income or principal from the trust may cause his or her interest to be divisible as a marital asset or reachable to satisfy support or alimony obligations.
Trusts fall into two broad categories: (i) revocable trusts funded with the assets of a grantor who will himself or herself remain as the beneficiary and have plenary control over the trust assets during his or her lifetime; and (ii) irrevocable trusts, where the assets are usually held in trust for the benefit of someone other than the grantor; e.g., assets placed in trust by a parent for the benefit of a child (but see the discussion of domestic asset protection trusts below).
The analysis for revocable trusts is simple, if a divorce litigant has established and funded a revocable trust for his or her own benefit. Because the divorcing individual has complete control over and access to those trust assets, the assets will constitute marital property subject to division under RSA 458:16-a, and are fully reachable to satisfy any orders for child support or alimony.
For the most common type of irrevocable trust, where assets have been placed in trust by a parent for the benefit of a child under terms that cannot be modified (at least not without onerous procedures), practitioners must carefully analyze the trustee’s power or obligation to make distributions of income and principal to the child/beneficiary who is getting divorced.
The questions to be considered can be summarized (and somewhat oversimplified) as follows: (i) is the beneficiary’s interest in the trust sufficiently vested to render the assets of the trust marital property for purposes of RSA 458:16-a; (ii) if yes, is the beneficiary’s interest protected by a spendthrift clause that would prohibit the trustee from paying trust property directly to the beneficiary’s creditors such as a divorcing spouse, and (iii) if yes, has the court issued the types of orders for child support or alimony that can overcome the spendthrift protection on a statutory basis?
With respect to the first issue question, whether a beneficial interest in a trust constitutes marital property in a New Hampshire divorce proceeding, the controlling authority is In re Goodlander, 161 N.H. 490 (2011).
Goodlander construed RSA 564-B:8-814(b), which governs the question of whether a beneficial interest is sufficiently vested to constitute a property interest. RSA 564-B:8-814(b) provides, in part,“… 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” (emphasis added).
Goodlander applied this statutory definition of vesting in the context of a divorce proceeding for the purpose of determining whether an interest in trust constitutes marital property subject to division pursuant to RSA 458:16-a. Id. at 495.
In Goodlander, the trust in question provided the trustee with the discretion to distribute among members of a class comprised of the wife and her descendants “such amounts from the net income and principal of the [sub-]trust and in such proportions among them as the trustee considers necessary for [a beneficiary’s] education and maintenance in health and reasonable comfort.” Id. at 493.
In construing this trust language, the Court determined that, “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.’” Id. at 497.
In short, Goodlander stands for the proposition that, in order for an interest in a trust to rise to the level of vesting sufficient to constitute marital property subject to division pursuant to RSA 458:16-a, the trustee must be mandated to make distributions. Any discretion to withhold distributions, whether subject to a standard or not, will reduce the beneficiary’s interest to a mere expectancy not constituting property subject to division.
In addition to ruling that an interest constituting a mere expectancy is not subject to division, the Goodlander Court also held that such an interest may not be taken into account when dividing other marital property held by the trust beneficiary outside the trust. Id. at 504-505.
In those cases where the beneficiary’s interest would be sufficiently vested under the Goodlander standard to constitute marital property, a secondary analysis must be conducted, focusing on the question of whether the interest is protected by a spendthrift provision in the trust instrument.
In those cases where the beneficiary’s interest is marital property, but is protected by a spendthrift clause, the author’s opinion is that the value of the trust assets can be taken into account when dividing other marital property held outside the trust, but that the trustee of such a trust cannot be ordered to pay trust property directly to the divorcing spouse except in two limited circumstances discussed below.
While the Goodlander court did not have to reach this question, RSA 564-B:5-502(c) provides that the creditors of a trust beneficiary may not reach a beneficiary’s interest in a spendthrift trust prior to a distribution having been made to the beneficiary.
In other words, the trustee cannot be ordered to make a distribution to someone other than the beneficiary. If the analysis has reached this level, it is likely that the trustee has an obligation to make mandatory distributions of income or principal (i.e., the interest is more than a mere expectancy).
The presence of a spendthrift clause would not defeat the trustee’s obligation to make those distributions to the beneficiary, and would not defeat a divorcing spouse’s ability to reach those current distributions in the hands of the beneficiary. However, the divorcing spouse should not be able to reach the beneficiary’s interest in future distributions until they have actually been made to the beneficiary.
As discussed above, there are two narrow exceptions. Under RSA 564-B:5-503(b)(1) and (2), a spendthrift clause cannot be enforced against a trust beneficiary’s child whom the beneficiary has been ordered to provide support, and a spendthrift clause cannot be enforced against a trust beneficiary’s spouse or former spouse whom the beneficiary has been ordered to pay alimony (but in the case of alimony, the spendthrift protection is abrogated only to the extent the order identifies the amount of the alimony attributable to the most basic food, shelter and medical needs of the spouse or former spouse).
All of the foregoing discussion of irrevocable trusts focuses on the most common type, in which a third party, such as a parent, establishes the trust for the benefit of someone other than the owner of the property being used to fund the trust, such as a child. However, there is a type of irrevocable trust referred to as a self-settled trust, in which a person gives property to a trustee on an irrevocable basis, but that person whose property will be held in trust is also the primary beneficiary of the trust.
The general rule is that the creditors of a grantor/beneficiary who establishes a self-settled irrevocable trust may reach the trust assets to the maximum extent that trust assets can be distributed to the grantor/beneficiary. RSA 564-B:505(a)(2) (note the exception to this rule for special needs trusts).
The general rule, however, is abrogated in the context of a self-settled, irrevocable trust that is formed under the prescriptions of New Hampshire’s domestic asset protection trust statute, RSA 564-D, the Qualified Dispositions in Trust Act.
A full discussion of this topic is beyond the scope of this article, but practitioners should be aware of the provisions of RSA 564-D:15(a), which provides that creditor protection under the Act is not enforceable against “any person to whom the transferor is indebted on account of an ante-nuptial agreement or an agreement or order of court for the payment of support or alimony in favor of such transferor’s spouse, former spouse, or children, or for a division or distribution of property in favor of such transferor’s spouse or former spouse, but only to the extent of such debt.”
Practitioners should also be aware of the definitions of “spouse” and “former spouse” under the Act, which do not include a spouse to whom the transferor was married after the date of the transfer otherwise protected under the Act. Some commentators have begun suggesting the use of domestic asset protection trusts in lieu of ante-nuptial agreements, since creditor protection under the Act does seem to be enforceable against future spouses.
While that seems to be the clear purpose behind the manner in which the Act defines the spousal terminology, most commentators are concerned about the general utility of domestic asset protection trusts, given the lack of precedent, jurisdictional issues, and interplay with other insolvency and creditors’ rights laws. Therefore, the author recommends reliance on ante-nuptial agreements, either in addition to or in lieu of a domestic asset protection trust, if marital planning is the primary motive for establishing such a trust.
Jan P. Myskowski is a shareholder at Gallagher, Callahan & Gartrell. He has practiced in the area of trusts and estates for more than 20 years and is a Fellow of the American College of Trust and Estate Counsel.