The 2017 Gibson Opinion. Divorce? Squirreling Away Assets in Trust?

This blog post is about whether the 2017 Georgia Supreme Court opinion in Gibson now opens the door wider for one spouse more easily – while married — to squirrel away his or her assets in a trust, and then later use that trust as a shield in a divorce proceeding. It does not.

In Gibson,the husband during his marriage funded two trusts with $3.2 million of property; the husband prevailed in keeping the $3.2 million out of his divorce proceeding without the trust assets being subject to equitable division. This is $3.2 million that otherwise would likely have been marital property in the divorce, absent the trust planning. Click here for a copy of Gibson v. Gibson, 801 S.E.2d 40, 301 Ga. 622 (2017).

The key factual distinction laying the foundation for the husband to prevail in Gibson was the lower trial court’s conclusion that the husband retained no interest in the trusts, including no interest as a trustee or beneficiary.  As I touch on again below, my experience is that most spouses who unilaterally create and fund a trust during marriage do retain interests in the trust, albeit as part of the purposeful, stealth design of certain opaque, highly-technical trust provisions.

Back to the Gibson opinion. My sense in talking with other lawyers is that some have an over-optimism leading them to conclude Gibson opens the door wider now enabling one spouse to keep his or her trust out of the divorce arena. For the reasons I state below, I disagree. The backdrop to this misplaced optimism is the following portion of the Gibson opinion:

This is not an issue of first impression for our Court, which has permitted property placed in certain types of trusts to be exempt from equitable division.  . .  . Therefore, property that has been conveyed to a third party is not subject to equitable division absent a showing of fraudulent transfer. See id. If a spouse places property in a trust of which he is the sole beneficiary, that property may be subject to equitable division. See Speed v. Speed , 263 Ga. 166, 430 S.E.2d 348 (1993). But if a spouse is not the sole beneficiary of a trust, the corpus of the trust is not subject to the other spouse’s claim of distribution. See McGinn v. McGinn, 273 Ga. 292, 292, 540 S.E.2d 604 (2001).

Excerpt from the Gibson opinion (I added the bolding and underlining).

The optimists read Gibson (and the “sole beneficiary” excerpt above) to support the notion that a spouse who funds a trust – where that spouse is not a sole beneficiary of the trust –  can now exclude the trust from claims in a divorce. This is a misreading of the above Gibson reference to sole beneficiary.

This sole beneficiary reference is merely a passing remark by the Georgia Supreme Court (what lawyers call obiter dictum) in stating the Gibson case was not a case of first impression on the question of how a trust created during marriage fares later in a divorce action. This sole beneficiary element also was not a fact for consideration as to the Gibson husband’s trusts and not part of the holding in Gibson.  [I have not seen the Gibson trust documents.]

Here are my broader Gibson points for this blog post:

One. I am called upon from time to time to assist divorce lawyers with attacking a trust in a divorce proceeding. My job is to help attack the trust and keep it in the divorce proceeding. My attack at times is directed at the deficiency and shortcomings in the trust document itself, where the drafter failed to cross the “t”s and dot the “i”s. My attack also gets into the various quasi-hidden, stealth trust powers purposely built into the design and framework of the trust that do not easily – merely on the face of the trust document – alert a non-trust lawyer to the existence of continuing powers and potential benefits the spouse retained in the trust (such as powers of appointment held by a friend or other family member; powers to decant the trust to another trust; using someone other than the spouse as the purported settlor of the trust document giving the diversionary appearance the spouse did not create the trust, etc.).

One might ask “Why would a spouse hold these stealth ties to the trust?” The answer, in my experience, is that it is a rare instance where one spouse creates and funds a trust during marriage without making sure he or she still possesses indirect options either to get back the property after the divorce situation ends or ultimately later control the property for that spouse’s own benefit.  Thus, arguably most unilateral trusts are not third-party trusts.  I use the term unilateral for when one spouse puts this trust planning in place without the knowledge of the other spouse.

Two. Whether a trust is or is not a third-party trust is not merely an easy simple ‘yes’ / ‘no’ question. The status and nature of any trust depends in most cases (divorce and non-divorce cases) on the effect of the opaque, stealth technical provisions in the trust document, as part of the purposeful design of the trust. This opaque-stealth question, in my opinion, is where the heart of the fight lies when dealing with a trust in a divorce setting.

Three.  When the trust at issue in a divorce is a third party trust (as in Gibson), that trust under the Gibson opinion will still be subject to a fraudulent transfer analysis in the divorce proceeding, as is the case with virtually any other third-party transfer of property prior to divorce.

The procedural rub is that the law requires, as generally in any fraudulent transfer attack, that the opposing party (the non-trust spouse in a divorce) bears the burden of proof for the fraudulent transfer attack.

Four. But, by contrast, I read Gibson as not changing the existing law or theories in divorce proceedings for trusts that are not third-party trusts. Those trusts are still subject to attack, but without the non-trust spouse bearing the burden of proof under a fraudulent transfer attack.  Here the burden is on the spouse who created the trust — during the marriage – to prove the trust is not marital property.

Horribly Annoying Music; Supreme Court Justice Felix Frankfurter

In restaurants, waiting rooms, dentist offices, airports, grocery stores, phone-hold, ad nauseam, we are bombarded persistently with music and television content, not of our own choosing.  This is akin to someone forcing a book or other reading material three inches away from our face with the admonition “READ THIS”.

U. S. Supreme Court Justice Felix Frankfurter and I would have likely agreed fully with one another. While reading a recent The New Yorker magazine, my wife ran across a short comment about Justice Frankfurter having recused [removed] himself from the following 1952 case.  Click here for a link to the supreme court opinion in Public Utilities Comm’n v. Pollak, 343 U.S. 451 (1952).

What triggered my interest was Justice Frankfurter’s spot-on reaction to this 1952 case, that I include further below. This 1952 anecdote also gives me pause (without my further comment) to ponder where Supreme Court justices (and potential justices) fall now in 2018 as to the notion that a Supreme Court justice lays aside private views in discharging his or her judicial function.

The issue in this 1952 Supreme Court case dealt with some Washington DC public transportation passengers who asserted their constitutional rights were violated by having to listen to streetcar, bus, and railway piped-in music, announcements and advertisements. This content consisted generally of 90% music, 5% announcements, and 5% commercial advertising. The Supreme Court did not side with these constitutional objections.

And, Justice Frankfurter had such a strong reaction (and opposition) to this forced audio content, that he recused himself from the case with the following comment (which is in the published Supreme Court opinion) [I added the underlining below]:

Justice Frankfurter:

The judicial process demands that a judge move within the framework of relevant legal rules and the covenanted modes of thought for ascertaining them. He must think dispassionately and submerge private feeling on every aspect of a case. There is a good deal of shallow talk that the judicial robe does not change the man within it. It does. The fact is that, on the whole, judges do lay aside private views in discharging their judicial functions. This is achieved through training, professional habits, self-discipline and that fortunate alchemy by which men are loyal to the obligation with which they are entrusted. But it is also true that reason cannot control the subconscious influence of feelings of which it is unaware. When there is ground for believing that such unconscious feelings may operate in the ultimate judgment, or may not unfairly lead others to believe they are operating, judges recuse themselves. They do not sit in judgment. They do this for a variety of reasons. The guiding consideration is that the administration of justice should reasonably appear to be disinterested, as well as be so in fact.

 

This case for me presents such a situation. My feelings are so strongly engaged as a victim of the practice in controversy that I had better not participate in judicial judgment upon it. I am explicit as to the reason for my nonparticipation in this case because I have for some time been of the view that it is desirable to state why one takes himself out of a case.

 

Asset Protection Trust Planning for Divorce (a Nevada Win)

Here is a link to my recent publication in Steve Leimberg’s Asset Protection Planning Email Newsletter – Archive Message #358 (dated February 15, 2018), titled “Augmenting the 2017 Nevada Trust Win in Klabacka“.   Klabacka is the name of a 2017 Nevada Supreme Court opinion. You are welcome to pass along a digital or hard copy of my Leimberg piece to any other readers.

I suggest in this piece the possible  use of a prenuptial (or in some cases postnuptial) agreement in conjunction with self-settled asset protection trusts, as a way to protect each spouse’s respective property in the event of divorce.

But, because from time to time I also assist divorce lawyers with attacking and finding  chinks in the defensive armor of a divorcing spouse’s trust, this Klabacka piece also provides a backdrop highlighting the importance in any protective trust planning situation of crossing each “t” and dotting each “i”.  The devil in the details most often is the tipping-point difference in whether defensive trust planning succeeds, or fails.

As I state in this Klabacka piece, some lawyers — with too much overconfidence — cut corners in their trust planning process, especially failing to give sufficient attention to long-arm jurisdiction exposure when (and if) the trust becomes the target of litigious attack.

 

 

Divorce: Attacking a Spouse’s Unilateral Trust

One spouse creates a trust during marriage. A divorce later arises. Can the trust be excluded for alimony and equitable division purposes? Here is my recent newsletter centering on a recent June 2017 Gibson Georgia Supreme Court opinion that addresses a spouse’s $3.2 million funding of two trusts without the other spouse’s knowledge.  My newsletter was published yesterday by Leimberg Information Services. You may reprint and distribute my newsletter to other readers. Click here for this newsletter.  Also, click here for more information about Leimberg Information Services.

Winner of the 2016 Heckerling Institute on Estate Planning Tax Court Opinion Writing Contest

 

This blog post is about my recent winning entry in the 2016 Heckerling Institute on Estate Planning Tax Court Opinion writing contest. This is a contest Richard Covey (who is with the New York law firm Carter, Ledyard & Milburn, LLP and a founding member of Heckerling) presented to the Heckerling participants.

This contest centered on an extremely interesting, and now in my evolving view, broadly relevant, estate tax planning question dealing with the QTIP marital deduction.

More particularly, this QTIP question is good food for thought for a broad number of married couples, especially whose net worth hovers around the combined (current) $10.9 million federal exemption value.   For this blog post I am not making a recommendation one way or the other about whether clients apply this QTIP planning.

I include the following two links for readers who wish to delve further into this QTIP question and my hypothetical Tax Court Opinion in response to the contest.

The first link is yesterday’s newsletter in the Leimberg Information Services newsletter service. Click here for a link to the newsletter.

Click this second link here for my contest Tax Court opinion.

You are welcome, and I have no objection, to anyone forwarding or printing this blog post and these two links for other readers.  Also email me if you have any thoughts or comments that further shed light on this QTIP question.  Here also is the link to the Leimberg Information Services website.

 

 

 

 

 

Deja Vu. The 1974 NIXON Subpoena.

Regardless of one’s choice in this 2016 presidential election, last night’s debate took me back to my days at Emory Law School in Atlanta.  In my first-year constitutional law course. The U.S. Supreme Court opinion in United States v. Nixon, 418 U.S. 683 (1974).

I include some more details at the end of this post about this Nixon case.  But, essentially it dealt with President Richard Nixon’s objection to complying with a subpoena for his release of information during the Watergate investigation.

This case made a lasting impression on me in that first-year law school class.  I have thought about it many times over the years in response to U.S. and world news, particularly involving political conflict.  I thought about it again last night.

The key point that struck me many years ago is the question our constitutional law professor raised.

That is, “What would have happened to the balance of our three-branch democratic government if President Nixon had disregarded the federal District Court order that he turn over the information subject to the subpoena?”

Keep in mind the subpoena had been served on Nixon by his own executive branch. The U.S. District Court is the judicial branch.

We will never know this answer.  To the tremendous (constitutional) benefit of our country, Nixon chose to comply with the federal court order and turn over the subpoenaed information.

Here is some more background information about this Nixon case. In short, in 1974 federal special prosecutor Leon Jaworski obtained a subpoena from the Justice Department ordering President Richard Nixon to turn over certain tapes related to the Watergate investigation.  Nixon was still in office at this time. Nixon objected and asked the U.S. District Court in D.C. to quash the subpoena.

As an interesting aside, the news media at that time reported that President Nixon’s attorney, in arguing to the District Court against against the subpoena, stated:

“The President wants me to argue that he is as powerful a monarch as Louis XIV, only four years at a time, and is not subject to the processes of any court in the land except the court of impeachment.”  

[excerpt from Trachtman, Michael G. (2007). The Supremes’ Greatest Hits: The 34 Supreme Court Cases That Most Directly Affect Your Life. Sterling. p. 131. ISBN 978-1-4027-4107-4.]

 

 

Borderline Incapacity; A Family’s Greatest Estate Planning Threat

Ponder, for a moment, who is the winner in this kind of litigation?

A family not willing to plan for incapacity may later find itself hemorrhaging from substantial legal fees and litigation costs.  I see nasty disputes arise when a family member becomes incapacitated, often the problem is Dad in his second marriage. I also remain steadfast with my belief that incapacity, especially borderline incapacity, is the greatest threat we all face in the context of our estate planning.

Here also is a difficult question. That is, who do we trust and who will we designate as the person or persons who will step into our shoes for overseeing our affairs and property if we become incapacitated?

These names (your agents under a power of attorney, trustees, executor) must be trustworthy, self-starters, financially well-versed, and non-procrastinators. Using your own family members is fine. But, you still need to consider these characteristics.

Here are some additional key comments:

  • The term “conservator” typically refers to an entity or individual appointed by a court to manage and oversee an incapacitated person’s property. By contrast, a “guardian” is an individual appointed by the court to oversee an incapacitated person’s emotional and physical well-being, care, education, health, and welfare.
  • But, the goal is to have documents in place now (often revocable living trusts) for the management and oversight of your property to stave off getting a court involved in the event of your incapacity.
  • This means you must now have sufficient written documents as part of your estate planning that help defend against a court stepping-in and mandating a conservatorship or guardianship on your behalf.
  • The lawyer assisting you with this defensive planning must know the relevant procedural, evidentiary, declaratory judgment, and other important court / litigation rules so as best to block a court from becoming the arbiter in determining your incapacity.
  • Absent this planning, a Georgia court (my law office is in Atlanta) overseeing the fray as to a person’s possible incapacity is required to conduct a court proceeding (e.g., a trial) to determine whether incapacity exists. The litmus test is whether the person lacks sufficient capacity to make or communicate significant responsible decisions about the management of his or her property.
  • And, here is the kicker. If the court concludes there is incapacity, the court is not bound to name a family member as the conservator or guardian of the incapacitated person. Instead, the court has the power to name any conservator or guardian the court concludes is in the best interest of the incapacitated person. This might end up being the local county administrator or some other entity or person completely outside the family circle.
  • As to a court’s power to choose, click here merely as an example of a Georgia case where the son, whose mother was found to be incapacitated by the court, lost in his effort to be named by the court as his mother’s conservator. This case is In re Hodgman, 269 Ga. App. 34, 602 S.E.2d 925 (2004). The local county administrator was appointed by the court as the conservator. The son unsuccessfully argued that his having already been named as agent by his mother in her financial power of attorney and in her health care directive supported a conclusion that the court was bound to name the son as the conservator.

I have no personal knowledge of the following Georgia case that I include here as an example of what you hope to avoid. Click here. This case is In re Copelan, 250 Ga. App. 856, 553 S.E.2d 278 (2001), and illustrates what appears to have been a very expensive, time-consuming, painful ordeal for the family and for the mother who ultimately prevailed against her children seeking to have her deemed incapacitated.  Note there was a jury trial at the superior court level that the mother lost; she then successfully obtained a reversal of the jury verdict on appeal.  My guess is the angst and litigation expenses for these family members were substantial.

Finally, the court in this Copelan opinion pointed out that one of the sons had left a voice-mail message with another sibling threatening their mother with “embarrassment” in the community and referring to a lawyer who was ” ‘chomping at the bit’ to take the case.”