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| Umm, a different kind of vested. |
By Andrew Delaney
You might notice this case is over a year old. It happens we have a backlog. We can always use more writers. If you’re interested in joining our merry band, email me. A sense of humor and a basic grasp of the English language are the only requirements.
This case is about the effect a third party changing trust beneficiaries around can have on a property division in a divorce. The parties were married for about 30 years. The primary marital asset was the home. There was a vested inheritance of about $4K on wife’s side and wife owed $16K on a student loan for the parties’ son. All that is background.
Husband’s parents established a revocable trust about twenty years back (we like to round the numbers ‘round here). Parents put their real estate in the trust, named themselves as trustees and made husband the sole beneficiary. Husband would become successor trustee upon parents’ incapacity. Upon both parents’ death, the trust would become irrevocable and be distributed to the beneficiary. There was also a $38K CD in the trust that the parties used to secure a $38K loan for themselves.
Husband’s dad moved in in 2011 after husband’s mom died. The parties split in 2014 and husband filed for divorce. Dad got moved to a nursing home.
There was a January 2015 status conference where the parties discussed the significance of this case and the Legislature’s amendment of the property settlement statute in response. Here’s the 10-second version if you don’t want to parse through it yourself. In 2011, SCOV held that inheritances are pretty danged close to a sure thing and can be considered in the trial court’s property distribution. The Legislature then amended the property settlement to say that inheritances don’t get factored in unless they’re vested.
So, in February 2015, husband’s dad—with an attorney’s help—amended the trust and made the parties’ adult son the sole beneficiary.
Wife served subpoenas for production of medical records and testimony on husband’s dad. Husband moved to quash, and then a lawyer stepped in for dad and also moved to quash the subpoenas. The trial court took some testimony and granted the motions to quash.
The medical-records subpoena was quashed on the doctor-patient privilege. The testimony subpoena was quashed based on the amended property-settlement statute, which provides that a third party isn’t required to provide documentation or testimony about revocable estate planning instruments. The trial court rejected wife’s argument that husband’s dad lacked testamentary capacity and that made the trust pretty much irrevocable.
The trial court closed the evidence in March of 2016 and husband’s dad died the next month. Wife moved to reopen the evidence. She argued the “death meant that husband had acquired a significant amount of assets from the trust.” The trial court granted the motion and held a hearing. The parties mostly argued about the CD and son’s student loan (in wife’s name). Wife argued that the trust assets should be included in the marital estate because the parties’ son was a beneficiary in name only and that husband had equitable ownership of the trust’s assets.
In the final order, the family court considered the factors and found the parties on roughly equal footing. The court did note that husband is ten years older and so has fewer income-earning years left.
The court didn’t find that the parties’ son was a nominee beneficiary—a beneficiary in name only—for the trust. There wasn’t any evidence of an agreement between husband and son, The trial court didn’t directly address the equitable-ownership argument.
And though the court didn’t treat the trust assets as part of the marital estate, it did look at how he was benefitting from the trust. For example, husband lived rent-free in his parents’ house. Wife also spent significant time during the marriage caring for husband’s family members. So, the court ordered that wife got exclusive possession of the house for the next nine years, but the house would be sold if either she or the husband moved out for fourteen months. Both parties were held responsible for the CD-secured loan. But if husband paid off the loan within the following year, then wife’s right to stay in the marital home would terminate, they’d sell the house and split the equity. Yeah, I know. Seems a bit complicated to me too.
Wife appeals.
First off, she argues that the trial court screwed up when it granted the motions to quash her subpoenas “because this evidence would have showed that father lacked the testamentary capacity to amend his trust.” Next, she makes a two-pronged argument for why the trust assets were part of the marital estate. Husband had full control over the trust assets before and after the beneficiary change and treated the property as if it were his own. Then there’s the son-as-nominee argument—that husband’s dad named the parties’ son as the beneficiary only to shield the assets from wife.
SCOV is cool with the trial court granting the motions to quash. It reasons that even if the family court was the place to make lack-of-testamentary-capacity arguments, the statute bars such testimony. SCOV begins by noting that lack-of-testamentary-capacity claims as to trusts are within the probate division’s exclusive jurisdiction over matters involving the administration of trusts. So, really, this whole tussle shouldn’t even be happening in the family division, where son isn’t a party to the proceeding.
And even if the family division has jurisdiction to determine husband’s dad’s testamentary capacity, the statute bars wife's subpoena for husband’s dad’s testimony. SCOV reasons that the statute exempts third parties from subpoenas unless a party’s interest in an instrument is vested. So wife can’t compel testimony from husband’s dad to prove he’s incapacitated and that therefore the interest is vested. It’s too circular.
Here, on the face of the trust, husband’s interest had not vested before the subpoena. The trust could be amended until both grantors died, and husband’s dad was still alive. SCOV reasons that because husband’s interest was not vested—and in fact he had no post-amendment interest in the trust assets—the statute’s plain language prohibits husband’s dad’s compelled testimony.
SCOV also reasons that the family court was fine excluding the trust assets from the marital estate. SCOV rejects all the arguments that wife makes.
SCOV begins with the something’s-rotten-in-Denmark argument. SCOV reasons that revocable trusts—by their very nature—may be freely modified or revoked. And this trust “explicitly provided that the grantors could revoke, alter, or amend the trust at any time.” Since husband’s dad could do whatever he wanted with the trust assets during his lifetime, there was nothing hinky about husband’s dad’s changing the beneficiary of the trust.
SCOV also rejects wife’s son-is-just-a-nominee-beneficiary argument. There’s no law or facts that support the idea that this is just a hide-the-assets-from-the-wife-while-the-son-holds-the-assets-for-dad situation. Husband didn’t own the assets when they were transferred to son. It’d be a different story if husband took the marital home and put it in son’s name, but that’s not what happened. Because husband’s interests in the trust assets were always subject to his parents’ whims, he never owned the assets and they never became marital property.
SCOV notes that wife’s arguments are mostly about the “suspiciousness” of the transfer and not supported by citations to the record. There’s no evidence that son agreed to hold the assets for husband’s benefit. So, that’s the end of that. There’s a little swipe about lack of transcripts (only select transcripts were ordered). Make sure to order all the relevant transcripts, kids.
On the “equitable ownership” argument, SCOV just kind of throws up its collective hands and says, “We’re not even sure what the heck you’re talking about!” SCOV isn’t sure if wife is asking it to craft an equitable remedy based on husband’s alleged unjust enrichment by use of the trust’s assets, but if that is, in fact, the idea, SCOV isn’t going to do that.
There’s also a pierce-the-trust-veil-like-it’s-a-corporate-veil pitch. SCOV goes with the old, not-raised-below-not-getting-into-it response. And even if it were to entertain the idea, it’s not sure how that little legal marriage would work. “That’s apples and oranges,” says SCOV (Delaney’s Paraphrasing™). There’s no indication of fraud or improper behavior here.
The trial court properly excluded the trust’s assets and it also considered husband’s lifestyle and benefits from the trust in making its final order. That was the right way to deal with the facts wife uses in support of her arguments in this case. So, according to SCOV, the trial court did the right thing here.
There’s a lot to learn here about managing assets in a divorce. Though “all property owned by either or both of the parties, however and whenever acquired” goes into the pot, it doesn’t include stuff that someone else can theoretically take away. Now, would it be different if the beneficiary never changed (and assuming dad didn’t die a month after the final order)? I guess we’ll find out next time this issue comes up. Trust me.
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