How a Divorcing Spouse Can be Caught by Surprise by the Impact that Gifts Made Prior to a Divorce Can Have.

July 5, 2017

Think twice before making gifts from one spouse to the other if there is any likelihood a divorce could follow someday. In the case of Nelson v Nelson, decided on December 16, 2016 by the District Court of Appeal of Florida Second District, the husband and wife’s California home was transferred into a marital trust for the wife. The wife also served as the trustee. When a divorce ensued, the assets of both spouses were subject to division between the spouses.

The general rule is that the “marital property” that the unhappy couple had accumulated is to be placed into one pot with each spouse walking away with some percentage (assume 50% here) of the value of that pot. Since this pot of marital property does not include any of the spouses’ respective “separate property,” such as gifts they received, assets they had already owned before the marriage or inheritances they may have received, each spouse gets to walk away with 50% of the marital property in addition to all of his or her separate property.

The wife argued that the residence in the marital trust is not marital property. The husband wanted it to be marital property so that its value would be counted as part of her half of the marital asset pot, leaving more of the remaining marital pot to be allocated to him. He further argued that the gift to the trust was done for asset protection and estate planning reasons, which no longer operate to carry out the originally intended purpose, and therefore should be restored as marital property, just as it was before. The court; however, took the wife’s side, concluding that the residence is not marital property. In fact, it was not either spouse’s property at all, separate or otherwise. It was trust property instead, which is beyond the reach of the parties in this divorce matter. The wife therefore gets to continue to fully enjoy the exclusive use of the residence on top of receiving her half of all the marital assets.

This case has relevance also to situations in which one spouse creates and funds a trust for the children (to the exclusion of the other spouse). Based on the Nelson case just discussed, these assets also would not be marital assets, meaning that the assets in the children’s trust would have no impact on the division of assets in the parents’ divorce, even if the children of the trust were from another marriage of the parent who created the children’s trust.

Take for example the Supreme Court of Georgia case of Gibson v. Gibson decided June 5, 2017. The husband transferred $3.2 million to two trusts for his wife (so long as she stayed married to him) and his daughter without his wife’s permission. In a later divorce action, she argued that the trust assets should be marital property. She also argued that the transfers to the trusts were fraudulent transfers because he intended those transfers to hinder her ability to get to those assets in a divorce. He argued that yes, he made the transfer for asset protection reasons, but for the benefit of his daughter to insure her inheritance (although he had told his wife the trusts were for tax reasons). In essence, his position was that he did not make the transfers in anticipation of getting a divorce or to defeat marital property division rights of his wife (notwithstanding that he and his wife had been sleeping in separate bedrooms and she had repeatedly threatened divorce, none of which the husband took seriously). The court believed the husband (partly because the husband had truly relinquished control over the trust asset, as he was neither a trustee nor a beneficiary of the trusts), so no fraudulent transfers were deemed to have occurred. Therefore, the wife could not revert the transfers to the trusts back into the marital property camp. However, there was $1.3 million in some Schwab accounts that did not effectively make it into the trusts because of an error that showed the accounts still being in the husband’s name as trustee of the trusts (although he was not the trustee). Therefore, to the extent of that $1.3 million, those accounts did remain marital property.

So before engaging in certain gifting strategies such as a SLAT (spousal lifetime access trust) or an inter vivos (i.e., lifetime) QTIP trust, or other marital trusts such as these, or even outright gifts to a spouse, think about what happens if there is a divorce someday.

By Edward D. Brown, Esq., LLM. CPA

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