A spouse’s interest in an irrevocable trust, normally established by the spouse’s parent or other relative, is not subject to equitable distribution in a divorce. But what about an irrevocable trust established by one of the spouses? A new Florida case holds that an irrevocable trust, established by one spouse for the benefit of the other spouse, is not subject to equitable distribution in a divorce.
In Nelson v. Nelson, (2nd DCA 2016), the husband established an irrevocable trust in favor of the wife and her children. The husband and wife transferred their California home to the trust. The parties then divorced in Florida.
Under the laws of many states, including Florida, the marital property is divided under the concept of “equitable distribution.” Florida Statute Section 61.075. The starting point is an equal division of the marital assets, although the court is not required to divide the assets equally. The court is also not required to split the marital assets equally in a pro rata fashion. Instead, the court may allocate different assets to the spouses, and may order a monetary payment by one spouse to the other to effectuate a fair division of the assets. The trial court considered the home in the trust to be subject to equitable distribution, and ordered the home sold and the proceeds divided between the spouses.
The husband relied on the Florida Trust Code, Section 736.04113, which permits a court to modify the terms of an irrevocable trust on the application of a trustee of the trust or a beneficiary of the trust.
The Former Husband argues that he, as the settlor of the Trust, presented unrebutted testimony that the Trust was created as an estate planning mechanism intended to protect the California home from claims made by his heirs in the event he were to predecease the Former Wife during the marriage. He asserts that the purpose of the establishment of the Trust is no longer necessary now that the parties have divorced and contends that section 736.04113 authorized the trial court to modify the Trust and thus reach the assets of the Trust for the purpose of equitable distribution.
Because neither the trustee of the trust nor any beneficiary of the trust petitioned for such modification, the appellate court held that the statute did not apply. Moreover, because the trust was not made a party to the proceedings, the court could not order equitable distribution of the assets of the trust.
At bottom, the trial court here impermissibly adjudicated the property rights of a nonparty to this dissolution proceeding—the Trust. See Juliano, 991 So. 2d at 396 (explaining that, as a general matter, “a trial court cannot, in a dissolution proceeding, ‘adjudicate property rights of a non-party’ ” (quoting Barabas v. Barabas, 923 So. 2d 588, 590 (Fla. 5th DCA 2006))); see also Minsky v. Minsky, 779 So. 2d 375, 377 (Fla. 2d DCA 2000). Indeed, this court has disavowed the equitable distribution of assets held by nonparty corporations, limited liability companies, and partnerships. See Ehman v. Ehman, 156 So. 3d 7, 8 (Fla. 2d DCA 2014) (limited liability company); Mathes v. Mathes, 91 So. 3d 207, 208 (Fla. 2d DCA 2012) (corporation); Lassett v. Lassett, 768 So. 2d 472, 474 (Fla. 2d DCA 2000) (partnership).
I’m not sure the court fully reached the right conclusion. Clearly, the court was without the power to do anything to the trust under the Florida Trust Code and also because the trust was not a party to the proceedings. But could the court have considered the home marital, and considered the home in adjusting the other marital assets under equitable distribution, which the court did have jurisdiction over? The court did, properly, explain the difference between marital and nonmarital assets in equitable distribution.
The legislature has set forth a statutory scheme to guide the trial court’s equitable distribution of assets upon dissolution of a marriage. See § 61.075, Fla. Stat. (2015). Under Florida’s equitable distribution statute, marital assets include “[a]ssets acquired . . . during the marriage, individually by either spouse or jointly by them.” § 61.075(6)(a)(1)(a). Nonmarital assets include “[a]ssets acquired . . . by either party prior to the marriage, and assets acquired . . . in exchange for such assets . . . .” § 61.075(6)(b)(1). The statute also creates a rebuttable presumption that assets acquired by either spouse during the marriage are presumed to be marital assets: “All assets acquired . . . by either spouse subsequent to the date of the marriage and not specifically established as nonmarital assets . . . are presumed to be marital. The parties transferred the California home to the Trust seven months after the Former Husband initially funded the Trust with $10 cash. – 4 – assets . . . . Such presumption is overcome by a showing that the assets . . . are nonmarital assets . . . .” § 61.075(8).
But the court failed to consider whether the the home could be an asset subject to equitable distribution, to be used in considering how to divide the other assets of the parties. I think that was the real question for the court to consider.
This case is also a good lesson in the unintended consequences of estate planning and asset protection strategies that rely on inter vivos transactions. There may have been a failure here to consider the consequences of the transaction in case of divorce.