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.