Intersection of Family Law and Trusts and Estates

“Intersection of Family Law and Trusts and Estates,” that is the subject of today’s ACTEC Trust and Estate talk.

Transcript/Show Notes

This is ACTEC Fellow Margaret Van Houten of West Des Moines, Iowa. Today, we will be discussing family law in more detail, specifically consideration of the conflict of interest, joint estate planning, and documenting aspects of trust and estate planning that could be an issue in the dissolution of a marriage.

American Academy of Matrimonial Lawyers Fellow, Anita Ventrelli, from Chicago joins us as a guest discuss this topic in more detail share her thoughts with estate professionals. Welcome, Anita.

Anita Ventrelli: Thank you so much, Margaret. Happy to be here. Happy to be sharing with this group. Family law attorneys do a tremendous amount of work estate and trust counsel when we work on matters that involve complex financial situations, premarital agreements, postnuptial agreements, marital settlement agreements, and it always helps, I think, for one discipline to have the thoughts that go through the heads of the folks in the other discipline in order to be most effective.

Preventing Conflicts of Interest During a Divorce

The first tip I want to give you of the three I’m going to cover today is about making sure that you do what’s necessary to prevent conflicts of interest from creating issues with any estate plan that you do. In many states, the ethical rules on conflicts of interest prohibit an attorney from representing entering into a joint representation. If they can reasonably foresee that the two individuals involved could become adverse to one another.

It doesn’t go without saying in this context that two people who are married could face a divorce. So when you’re going to represent a married couple in engaging in joint estate planning, you must get conflict of interest waivers that mirror the rules of the rules of the jurisdiction where you’re doing the estate plan. That means making sure that if this is a concurrent representation, meaning you’re representing both at the same time, that you make sure they sign whatever acknowledgments conform to the rules in your state about doing that. You should also consider when engaging in that kind of joint representation, taking certain pieces of the representation and recommending and writing that the two individuals seek separate counsel. What do I mean by that? Well, if a married couple are engaging in a joint estate plan and the estate plan could remove property from a court’s jurisdiction, and the key example, keying off of Illinois law, which is where I practice, would be if property goes into an irrevocable trust. We typically, when we are characterizing property for divorce purposes, we have the marital estate: one spouse is a non-marital estate, and the other spouse is a non-marital estate. As soon as property goes into the ownership of an irrevocable trust it passes out of all of those estates that the court can control.

So, you’re going to be using irrevocable trust as part of the estate plan, making sure that both spouses get advised independently of the effect that will have on their marital estate. For example, if there’s a vacation home and the vacation home is going into the irrevocable trust, then the divorce court can’t award that vacation home to one spouse or the other. It’s not a surprise that many divorce lawyers get ahold of people and when they go through the tracing of how things are titled and the effects of the estate plan, that people learn things they didn’t know before. They learn that they can’t get their vacation home. Sometimes they learn can’t even receive their primary residence. It’s a question of good estate planning sometimes being like a harmful drug interaction with what goes on in divorces. So, making sure that you have a family law attorney look at the estate plan, talk to the individual and say, “Do you understand this estate plan means this property won’t be available to you in a divorce? Do you understand that these streams of income might not be available for your support in a divorce?” That’s key and making sure that that lawyer that consults with them gives them a written opinion and that you get a copy of that written opinion for your file, will make it so that you can say you got them the right advice to make a good and informed decision about entering into the estate plan. You can create the greatest estate plan in the world and it can save people a fortune in taxes, but if it means that when they get divorced there’s no money for them to receive – they’re not going to be terribly happy with you. So that’s my pitch on conflicts of interest.

Consequences in Divorce

Next up is a tip on consequences in divorce. When you’re going to be making transfers while a couple is married, regardless of the purpose, they may have companies, and you may create an estate plan that puts corporate interests into a holding company. You may create an estate plan that puts a corporate interest into a trust. You may put a property into a trust.

In some states, Illinois being one, there are several principles. We have presumptions as well. One presumption we have is that when a husband makes a gift to a wife, or a wife makes a gift to a husband, a spouse makes a gift to a spouse– it is presumed to be a gift. Any transfer, a gift. There’s also a presumption that when a parent makes a transfer to a child, there is a gift.

Why does this matter you might say? Well it matters because when we’re categorizing property states that work off of the Uniform Marriage and Dissolution of Marriage Act work with principles that everything acquired during the marriage is marital property with certain exceptions. One exception is an exception for property that an individual receives by gift. Another exception is property that an individual receives by inheritance. A third is property that an individual by virtue of a valid and enforceable agreement under a section of the statute that allows the creation of non-marital property.

Also, in many statutes- Illinois being one- is if you make a transfer of property, if a spouse makes a transfer of property for purposes of fulfilling an estate plan, it will not be deemed a gift. It will not create non-marital property. It might remove property from the estate into an irrevocable trust, but if a husband gives a wife or a wife gives a husband or spouse gives a spouse property to hold, it won’t render that property the spouse’s non-marital property. So, from the estate and trust lawyers’ perspective, if the only reason the people are making transfers that might be denominated as gifts in the estate and trust world is in furtherance of an estate plan, you should document that. You should have that acknowledged by both spouses because then, if there’s a divorce, they can walk that in and say fulfilled the estate planning exception, so none of these transfers are deemed to be gifts creating a non-marital property. So that’s a documenting thing.

Awareness of the Correct Terminology

The third thing I like see when estate planners do work is acknowledgments and making sure that when they write things — or when we write things for that matter as family law counsel — that if we’re writing an agreement where trust and estates are in play, that we get your language right. And then if you’re writing something in your world and you’re going to mention the element of divorce, that you have the right terminology.

One of the concepts that’s a big deal for me is making sure that if someone’s going to abrogate a statute, I’ll use the simplest example. Most statutes have provisions that say that spousal support will terminate on death of the recipient, remarriage of the recipient, or the recipient cohabiting with another individual on a resident continuing conjugal basis. As soon as your agreement, no matter what the agreement is, states its own definition, you are abrogating the statute.

What does this mean? Well, it means that if the statute changes later. You’ve locked these folks into something that isn’t the same as the statute. So, having a conversation about what your statute does now, what abrogating it can mean, and having the client make a studied decision about whether they want to abrogate the statute will always serve you well. You’ll get people calling you up saying, “The law just changed. There’s a lower standard for cohabitation.” Well, if you made your agreement read that the only terminating event for spousal support was remarriage and death, then you’re out of luck because you’ve abrogated that statute. So, when lawyers, especially divorce lawyers you something and they say, “Well, this comes straight from our statute,” you should ask them questions like, “Do we have to restate the statute in the agreement? What is the effect of stating this version of the statute in the agreement?” Some people want to be locked into a today version of the statute. Others don’t need to or shouldn’t want to.

Those are my three tips for estate and trust counsel working with family law attorneys. I will say that estate and trust counsel are some of my most cherished contacts, and I love the synergy of working within our disciplines when we have an agreement to do. And I often work with trust in the state’s counsel when the divorce comes across the radar, because making sure that you get the inputs from all of the disciplines is very meaningful in creating the best possible product for our clients.

Margaret Van Houten: Thank you, Anita, for that very interesting presentation.

Additional Resources:

• Caution for Divorcing Spouses Who Are Trust Beneficiaries (Oct 2024)
• How to Protect Inherited Assets from a Beneficiary’s Creditors in the Event of a Divorce (Jan 2021)
• Marriage, Divorce and Asset Protection (Jul 2019)

 

A Video Resource for Your Clients:

• Divorce and Estate Planning

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