Court Rulings Highlight Divorce Planning Loopholes
Two recent court cases illustrate why carefully drafting and monitoring estate documents is essential to avoid undesirable outcomes, particularly when divorce is involved, said Sharon Klein, president of the Tri-State Region for Wilmington Trust.
One involved decanting, the process whereby the trustee of an otherwise irrevocable trust can transfer trust assets into a new trust with different terms. The Connecticut Supreme Court authorized decanting in the divorce action, though “its use extends far beyond the divorce context,” Klein said.
In the case, a divorcing husband was the beneficiary of a 1983 trust set up by his father. The trustees transferred the assets into a new trust in 2011 to prevent the wife from reaching the assets. The new trust extinguished his right to request trust assets, and made distributions solely discretionary with the trustees.
The Connecticut court asked the Supreme Judicial Court of Massachusetts, where the trusts were settled, to determine whether the trustees’ action was a valid exercise of their powers under the 1983 trust. The Massachusetts court said the decanting was authorized, and the Connecticut court adopted that opinion. It also ruled that although it could have divided the assets, as requested by the wife, while they were in the 1983 trust, it could not reach them once they had been moved into the 2011 trust.
In other words, the decanting succeeded in preventing the assets from being divided in the divorce settlement. “Decanting can be a tremendous tool for dealing with changed circumstances, correcting mistakes, facilitating tax benefits or optimizing a trust’s administration,” Klein said.
In-Laws As Trustees
In a New York case, a deceased woman’s will named her husband as her beneficiary and executor and her father-in-law as the alternate executor and beneficiary. The couple was divorced at the time of her death, and under New York state law, the ex-husband was disqualified from serving as executor and beneficiary. However, the disqualification did not extend to his father, who, it was presumed, would leave the inherited assets to his son. The court acknowledged this end run around the statute, but ruled that the statute did not revoke bequests to relatives of ex-spouses.
Klein noted that the law in some states revokes dispositions to, and executor/trustee nominations of, both a former spouse and his or her relatives. Such a law would have prevented the harsh result in the New York case. However, it might also prevent a decedent’s intent from being realized in cases where bequests to relatives of an ex-spouse are still intended despite a divorce.
Proposed legislation introduced in the New York state legislature this year would address both situations. It would continue to revoke dispositions to divorced spouses. Those to relatives of ex-spouses would be presumed to be revoked, though the proposal would allow the possibility to introduce evidence showing that the decedent intended those dispositions to take effect, even in light of the divorce.
Klein said spouses who are still in the process of getting divorced would not be able to rely on state default law to revoke bequests to an ex-spouse. “In order for a statutory presumption to apply, there must be a formal decree or judgment ending the marital relationship,” she said. That’s one reason why clients should ensure their planning documents reflect their intent, she added.
—Michael S. Fischer
Foundation Portfolios Grew In 2016
Foundations saw positive growth in 2016, picking up $200 million in value compared with 2015, according to Foundation Source. Overall, 2016 portfolio performance was more robust across all foundation sizes.
The largest foundations in Foundation Source’s study saw the highest net gain of 6.8%, while foundations of $1 million to $10 million had an overall net gain of 5.5%. Average assets declined slightly for smaller foundations because they disbursed a greater percentage of their assets in grants and expenses.
Clients holding less than $50 million in assets were included in the data and represent 98% of all private foundations in the U.S.
According to IRS data, of the more than 82,000 foundations in existence, 88% have assets under $5 million and 66% have under $1 million. More than half of U.S. foundations were created in the last 12 years, while 54% have been around fewer than 10 years.
Data in the report are sourced from the actual transactions of the foundations: grants, investment returns, asset balances and the charitable administrative expenses that they disbursed.
—Heidi P. Werner
The Rise Of Green Bonds
Ethical debt instruments are catching investors’ attentions and appetites.
The number of green bonds issued hit a record high in the third quarter, up nearly 50% as compared to last year’s issuance.
Green bonds underwrite sustainable energy and environmental programs, among other earth-friendly initiatives.
Moody’s, the credit rating agency that tracks these bond types, reports that some $95 billion worth of green bonds was issued over the first three-quarters of the year, and estimates another $25 billion will be added the last quarter, bringing total volume above $120 billion for the first time.
China and France were the lead issuers of green bonds, followed by the U.S.
Standard & Poor’s, another credit rating agency, notes countries that have ratified the Paris climate agreement—which the U.S. famously backed out of—need to spend $5.3 trillion to live up to the agreement’s commitments to combat climate change.
Increasingly, private investors are lapping up the mechanisms that help make the planet more sustainable, such as clean energy, and which make communities more resilient, such as seawalls and floodgates that defend against rising sea levels and wicked weather.
Still, some issuers are taking advantage of the interest in green bonds and are “greenwashing” debt instruments that do not live up to sustainable missions. Greenwashing means faking environmental friendliness, and as there is no universal definition for a green bond, it’s not so difficult to do. Instead, investors must rely on certifications that help constitute what makes certain debt instruments “green.”
Both Moody’s and S&P say there are greenwashing issues to be addressed, but these do not taint the majority of green bonds issued.
Meanwhile, the earth is growing further into debt. Which in this case is a very good thing for the planet.
—Thomas M. Kostigen
Paul Newman Rolex Watch Sells For Record $17.6 Million
Paul Newman’s Rolex Daytona watch—one of the most sought-after timepieces in the world among horologists—was sold at auction in October for $17.8 million.
The New York City auction house Phillips sold the watch, which was given to Newman by his wife, Joanne Woodward, in 1968 during the filming of the racing movie Winning. The back is inscribed with “Drive Carefully, Me.”
The price paid by an anonymous buyer set the record for any wristwatch sold at auction anywhere in the world.
The owner of the watch was a former boyfriend of Newman’s daughter, Nell Newman. The actor gave him the watch as a gift in 1984.
Several factors led to the recording-breaking price for a watch, including the fact that the sale was announced in June and was highly anticipated by collectors, which drove the price up.
But Paul Newman also holds a special place in many people’s hearts as an actor, said David Lehn, a partner at the law firm of Withers Bergman, which specializes in representing high-net-worth clients.
“Besides being an actor and being married so long to the same person, he was a competitive race car driver, a philanthropist and had many other facets to his life” that made the watch more valuable, Lehn said. “He was also involved in the local community in Westport, Conn., and in the local theater, Westport Playhouse.”
The auction house put the watch’s value at $1 million, but that mark was shattered shortly after it started taking bids, when a bidder opened with a $10 million offer.
“Following a 12-minute bidding war that opened at $10 million, the watch sold to a bidder on the phone. Watch enthusiasts from around the world followed this historic moment online, over the phone and in a packed salesroom of more than 700 people,” the auction house said.
Phillips described the atmosphere as electric through the sale of the Paul Newman watch and 49 other iconic watches from the 20th century, including rare and important models from Omega, Heuer, Audemars Piguet, Cartier and other leading watchmakers.
The Paul Newman watch is described as an “understated piece with an exotic dial. Crafted in stainless steel, it features a cream-colored dial with black subdials and the word ‘Daytona’ written in red. Its three colors make it unusual.”
Bacs & Russo, which is the watch department at Phillips auction house, sold a Patek Philippe stainless steel watch last November for $11 million and a Rolex “Bao Dai” for $5 million, which until Thursday was the highest sale price for any Rolex.
The house has two more watch sales, one in Hong Kong and one in Geneva, in November.
—Karen DeMasters