September 27, 2017
The trial court in Ohio, and the appellate court, both agreed after some well-thought out analysis, that a beneficiary’s interest in a third-party trust set up by his father was not marital property, and therefore not subject to division in that beneficiary’s divorce. This trust is what some refer to as a “business opportunity trust” in that the creator of the trust (the “grantor”) funded the trust with some seed money, allowing the trust to then enter into a leveraged purchase of assets (through loans obtained by the trust) that have promising appreciation potential.
The courts held intact the asset protection aspects of the trust that was the subject of this litigation, even though the beneficiary was otherwise criticized for failing to comply with certain discovery requests for information. He was assessed $300,000 in penalties for such delay tactics. Nevertheless, even if the courts did not especially have any sympathy for the beneficiary, the ruling was driven by a proper application of the law, resulting in the beneficiary retaining his interest in the trust corpus, undiminished by the divorce.
By way of some background, after being married since 1992, and three children later, Bridget and Mark Guagenti were going through a divorce. Bridget believed that the (approximately) sixteen million dollars in an irrevocable trust created and initially funded with $10,000 in seed money by Mark’s father in 2008 should be viewed as marital property, and therefore subject to division between the spouses in this divorce. Her arguments included the fact that the value of the trust assets that the trust acquired (with the assistance of a $3 million loan from a bank) in the form of stock that grew to almost sixteen million in value was marital property that should be shared with her. The corporate stock inside the trust related to a company, which increased in value through (per Bridget’s arguments) Mark’s efforts as a management-level employee and officer.
Bridget therefore took the position that since the growth of the company, which she believed increased in value during their marriage through the efforts of her husband Mark, made that increase in value marital property to which she was now entitled to share. In Ohio, marital property includes the income and growth in value of separate property (such as a gift from one’s parent) that occurred during the marriage due to the efforts of either spouse.
One problem with Bridget’s argument was that it was not clear that Mark’s efforts translated to the increased value of the company. He was a non-owner salaried employee of the company.
That aside, the courts turned their attention to the “purpose” of the trust in their determination of whether the trust assets could be marital property. The trust named Mark and Mark’s and Bridget’s common children, as beneficiaries. This is relevant in that it showed the trust had a purpose broader than just to benefit Mark (and it was to benefit at least two generations).
The purpose of the trust was to have the assets pass as Mark’s father would have wanted. This was also relevant in that no trust purpose was established that suggested the trust principal was to be accessible by Mark at his whim at any time he could show it was intended that he receive principal distributions. The trust agreement stated that the purpose of the trust was simply to “effectuate a plan for the orderly business like administration of the Trust Estate for the benefit of the Grantor’s descendants, especially for the Grantor’s son and the Grantor’s son’s children.”
Also, Mark had no control over making principal distributions to himself because the trust agreement stated that only an independent trustee (so, not Mark) could make principal distributions. An independent trustee was also the only person who could make income distributions beyond the health, education and support standards expressed in the trust agreement.
The courts looked at just how much control Mark really had as trustee of the trust. Mark had the authority to distribute only the trust income to himself and to his children to the extent necessary to provide for their health, education and support. The fact that he had such control over the income did allow for that income to be treated as marital property (which may have been avoided if that power had instead been a purely discretionary power held by a third-party trustee who was neither related nor subordinate to Mark). Nevertheless, he could not distribute any principal from the trust without the consent of protectors, who were comprised of individuals independent of Mark (specifically, anyone who was not: a beneficiary; Mark’s father; or any one later appointed by Mark or his father.)
Based on these facts, the courts concluded that the trust assets were not marital property, but instead property belonging to someone else altogether (i.e., the trust) and therefore immune from division in this divorce. This case highlights the importance of the skills of the attorney who is involved in the trust design and drafting.
Cite: Guagenti v Guagenti, 2017-Ohio-2706 (decided May 8, 2017).
By Edward D. Brown, Esq., LLM. CPA