This Insights was contributed by Richard Pasquantonio, CPA/CFF, CFE, CDFA (N.C. License Number 33577), an associate at Adam Shay CPA, PLLC.
Since the dawn of civilization, men and women have fallen in love, married and raised children. And if they were either lucky or disciplined, they built some wealth. Enter the dawn of a new era. As exemplified by the Pritchett-Dunphy-Tucker clan on the Emmy-award winning ABC series Modern Family, the family dynamic has evolved, and with it the need for more sophisticated tax and estate planning.
If you have not watched the show, Jay Pritchett is the patriarch of the family, a business man, and married to his much younger, much more attractive second wife, Gloria. There are probably at least two trusts and a prenuptial agreement baked into that cake. Jay has two adult children (Pritchett Trust #1) named Claire and Mitchell from his first wife and an infant son with his current wife (Pritchett Trust #2). Claire is married to real estate agent Phil Dunphy and is an executive at her father's closet empire. The Dunphys have three children, and I would guess at least one trust (Dunphy Trust).
The trust saga continues. Mitchell is an attorney and married to stay-at-home dad, Cameron Tucker. The Tuckers are a same-sex couple (Tucker Trust #1) and have an adopted daughter, Lily, who was born in Vietnam (Tucker Trust #2).
This little dive into pop culture is meant to illustrate the complexity that may arise as the family dynamic shifts, and to alert divorcees and their professionals of possible property that may be considered for equitable distribution. Over the last 75 years, people are getting married more often and in many cases raising more than one family. Same-sex marriage is now the law of the land since the Supreme Court heard Obergefell v. Hodges and made its ruling in June of this year. In many ways through society’s progression, trusts have served as a stopgap to some uncertainty in how existing laws and testamentary procedures may impact the exchange of assets upon death.
Trusts have been around for a long time and have many legitimate and beneficial uses. You can pass wealth more efficiently and privately to your heirs, reduce estate taxes for married couples, and provide some assurance that your assets are distributed to your heirs as you have planned, to name a few. However, I would like to focus on the use of trusts in the marital context and how trusts can be used and abused in protecting assets from creditors, including divorcing spouses. Before we dive into the issue a little deeper, now seems like the appropriate time to highlight that I am not an attorney, I am a forensic accountant. If these issues are relevant to you, please seek legal advice.
Some Trust Basics
Every trust must have at a settlor, a trustee and a beneficiary. The settlor gives up ownership of property and "settles" property into a trust for the benefit of a beneficiary. The trustee has a fiduciary duty to manage that property for the benefit of a beneficiary. The beneficiary is the person who is entitled to the benefit of the trust arrangement. There may be other parties to a trust, but these three are a must.
In the Marital Context
I recently exhibited at the 2015 N.C. BAR Family Law Intensive in Raleigh and listened to Stephen Brown, David Holm, and John Hutson explain in their presentation, “Trust Issues and Marital Property,” that:
“… marital rights raise complex questions in trust and estate planning. These questions may arise unintentionally as when a spouse desires to transfer assets to a company, trust or family member for the purpose of reducing his or her wealth transfer tax exposure. In other cases, a spouse may intentionally transfer assets in an effort to reduce or eliminate his or her spouse’s interest in those assets. The timing, purpose and methods of transfer as well as the assets used to accomplish the transfer are crucial in evaluating the rights of the non-transferring spouse.” (Emphasis applied)
In a nutshell, the facts are critical in a court’s determination of the legitimacy of asset transfers pursuant to a divorce. As a forensic accountant, facts are always critical.
Forensic Accountants Can Help
Everyone knows someone who is going through a divorce. It's a difficult time. As I have pointed out, the family dynamic is more complicated than ever before, and as a result trust assets can be overlooked or transferred intentionally to prevent having to share assets with an estranged spouse. In the latter circumstance, there are a couple of questions that arise in analyzing a non-transferring spouse's rights to those assets that a forensic accountant can assist in answering:
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