Marriages may be made in heaven but, in the courts of the state of New York, marriages are treated as economic partnerships. There are three economic aspects to this partnership: equitable distribution, maintenance and child support. Trust law and matrimonial law intersect on all three.

Nature of Interests in Trust

As a general rule, separate property (property earned before marriage or bequeathed or given to only one party to a marriage) if kept separate and not comingled, remains non-marital property and is not subject to equitable distribution upon divorce. However, absent a valid premarital agreement, the same may not be the case for increases in value of such property, especially if increases may be attributable to the efforts of one or both parties during the marriage. This is also true for properties held in trust.

However, even if an interest in a trust is maintained separately, the non-beneficiary spouse may still have some recourse. If consistent trust distributions to the beneficiary spouse were used to support the marital lifestyle, even if such distributions are discretionary, they can be deemed a source of income to the beneficiary spouse and considered by the court when determining maintenance payments. Conversely, if a spouse seeks maintenance but is the beneficiary of a trust, income from that source may be a consideration in determining maintenance.

With child support, the technicalities of trust law are second to statutory guidelines for child support based on specified percentages of income. Courts can deviate from the guidelines to provide for funds “sufficient to meet the needs of a child commensurate with the lifestyle the child would have enjoyed had the marriage remained intact.” Allison B. v. Edward A., (Sup. Ct. New York County). Decided March 9, 2017. If a parent is the beneficiary of a trust and there is a pattern of distributions used to support the pre-divorce family, such income stream may well be on the table in determining child support.

Where Issues Arise

In a typical matrimonial case, each party is required to disclose assets and income. This information is used to negotiate and, if negotiations fail, then for the court to decide on property settlement, maintenance and child support, the three money issues critical in virtually every matrimonial dispute.

The settlor of a self-settled trust, or the beneficiary of a non-self-settled trust, may choose not to list the trust on their disclosure statement, taking the position that the trust assets are not theirs or may list the trust assets with a disclaimer of any right of ownership or to the income. The non-monied spouse, who knows or suspects the existence of a trust, may object to the non-disclosure on the basis that (a) the trust was funded with marital assets in which they have an interest and/or (b) trust funds were used to support a lifestyle which should be continued for the non-monied spouse and children and, therefore, must be considered in determining maintenance and child support.

Matrimonial courts have broad discretionary power to attribute income or assets to a party based on inter alia, a pattern of distributions from parents or trusts, even if such distributions are discretionary and there is no legal obligation to continue them.

In some cases, a non-monied spouse may hold a judgment and be entitled to payments for distribution of marital assets, maintenance or child support, but the monied spouse claims they cannot access trust funds due to the discretionary nature of the trust. In addition, they may assert that the trustee is not subject to the authority of the court which issued the order.

In other cases, the order may not be enforceable in the country in which the trust was formed, for lack of personal or subject matter jurisdiction or because the trustee was not—indeed, could not have been—a party to the matrimonial case giving rise to the judgment. Sometimes, the specific terms of the trust, explicitly provided for in the law of the trust situs, forbids the trustee from acting “under duress.”

A careful matrimonial practitioner must deal with trusts in which children or grandchildren may have an interest, fixed or discretionary. For example, parents or grandparents might have created a trust in which their issue are beneficiaries. Conversely, a careful trust draftsman should be aware of the marriage and divorce possibilities of beneficiaries. Important considerations are:

• The spouse who is a descendent/beneficiary may have rights to principal, income or both, whether or not discretionary, which should be considered in determining any property settlement, maintenance and child support.
• If the divorcing couple have children, the children may well be beneficiaries of the trust, notwithstanding the divorce of their parents. If the non-beneficiary spouse is the guardian or custodian of the children, they may want periodic information on the trust’s assets and income so that they can monitor and protect the children’s interest.

Premarital Agreements

Premarital agreements (pre-nups) are generally enforced if they are not unreasonable when made and not unconscionable when enforced. One essential condition to the validity of any pre-nup is full disclosure of assets and inclusion of trusts should be carefully considered from several perspectives.

For the beneficiary of a trust, especially if the interest in the trust is fixed and vested or reasonably anticipated to become vested, failure to disclose the interest could later be deemed to be a material omission from their schedule of assets and the omission could invalidate the pre-nup. Conversely, listing the interest may be viewed as acknowledgement that the interest is an asset and/or a (potential) source of income for the prospective spouse as could any vested interest in the principal.

Even if the beneficiary’s interest in a trust is vested and the terms of the trust provide for fixed, periodic distributions, there may be a provision where a beneficiary can be removed from the trust. Therefore, any disclosure of any interest in a trust in a pre-nup must be carefully worded.

For the non-beneficiary, getting the beneficiary’s interest in a trust listed in their pre-nup could be quite potent in any divorce negotiation, or litigation regarding the assets and/or income of the beneficiary spouse. On the other hand, accepting the omission of an interest in a trust which is known to the non-beneficiary spouse could be construed as acknowledgement that it is not a joint asset.

Who Decides?

Trusts in a matrimonial dispute are further complicated by an anomaly, in states like New York where trust disputes are usually determined in surrogate’s courts with jurisdiction over estates, trusts and guardianships. Divorces are handled by courts of general jurisdiction, Supreme Courts, where in certain counties matrimonial cases are referred to judges in a special part which deals only with divorces and related matters such as custody and child support. Support cases may also be heard in separate Family Courts. Judges other than surrogates may have a limited familiarity with trust laws, while surrogates may be unfamiliar with matrimonial law.

Governing Law

A basic consideration in seeking to enforce a judgment against assets when the trust is in another jurisdiction is the question of what law should apply to the enforcement: the law of the jurisdiction of the trust or the law of the jurisdiction of the judgment. The issue is not whether the judgment is valid per se; but whether and how it can be enforced against assets owned by a trust in which the judgment debtor is a beneficiary, but not owner.

Judges deciding whether and how to enforce a decision they made affecting a trust formed in another jurisdiction will generally look carefully at the trust document, analyze it in light of their views of both the law and reality, and then test it against the law and public policy of their own jurisdiction without any specific or explicit conflict of laws or comity analysis.

Even if a judge is reluctant to issue orders which directly affect a trust, particularly one outside the court’s jurisdiction, the judge is not without recourse. If there are other assets or sources of income which are within the jurisdiction of the matrimonial court, the judge could decide to divide the assets which are within the jurisdiction of the matrimonial court in a way which reflects the assets in trust.

U.S. courts are increasingly willing to look beyond the text of the trust document to see whether the beneficiary has practical control over the trust assets. Cases on this issue tend to be fact-specific and rely on an analysis of whether, in fact, the settlor/creditor practically divested themselves of effective control, or whether such authority and control was retained, thereby violating the very essence of a trust separation of legal and beneficial interests.

Conclusion

When dealing with a pre-nup or a divorce in which a trust may be a factor, it is essential to get both matrimonial and trust advice.

David I. Faust is a partner at Gallet Dreyer & Berkey.