Protecting wealth in a divorce proceeding

Business Litigation attorney Warren NJJoseph A. Lambariello, Esq./LL.M drafted a discretionary support trust for asset protection and estate tax reduction for Wendy Tannen’s parents. Wendy’s parents were Joe’s estate planning clients. They transferred $1 million to the trust to utilize their lifetime gift exemption that was available at the time. The parents and Wendy were co-trustees. She did not have the right, as the lifetime beneficiary, to compel payments of income or principal from the trust. Her parents, as the independent co-trustees, had the discretion to pay her income or principal for her maintenance, education, support and health (“MESH” standard), after taking into consideration other assets that are available to her at the time. The trust paid for a multitude of things during Wendy’s 18 year marriage – including the nanny, real estate taxes, and an addition to her marital home. When the divorce happened, Wendy’s estranged husband requested the court to impute income upon her when calculating his alimony obligation because she is a proverbial “trust fund baby.” The New Jersey Appellate Division found the trust is impenetrable and cannot be forced to make income payments to Wendy that would decrease her husband’s alimony obligation. The court concluded Wendy does not have a present ownership interest because her parents can refuse her request for payment from the trust at any time. See Tannen v. Tannen, 416 N.J. Super. 248, 3 A.3d 1229 (N.J. Super., 2010). The New Jersey Supreme Court affirmed the Appellate Division without a written opinion.

According to Mr. Lambariello:

“We take our client’s desires for asset protection very seriously. We structure trusts to provide protection for beneficiaries who may encounter life circumstances that would expose a gift or inheritance to risk by third party invaders that could have otherwise been avoided, especially in a divorce context. We take steps to fix trusts that do not comply with the specific discretionary support provisions the court upheld. We so very often see trusts drafted by others that are defective and will not accomplish the client’s intent of keeping their assets preserved for their beneficiaries, removing the possibility of loss to their beneficiaries’ creditors, predators, in-laws and those who may become “out-laws,” as we saw in Tannen v. Tannen.

When a client comes to Lambariello & Pilato, LLC with a defective trust, it may be possible to correct it by establishing a new trust and doing a trustee-to-trustee transfer if the terms of the new trust substantially conform to the terms of the old trust. The biggest mistake we see in trust instruments purported to be asset protection vehicles is a provision setting forth that assets are “not subject to the beneficiaries’ creditors or judgments,” but within the same trust, another provision sets forth that the beneficiary has the right to request or demand payments from the trust. That is an avoidable error, and can be presumed by any attorney with complex trust knowledge that the drafter confused an “irrevocable” trust for asset protection with a “revocable” trust for asset management, which are two entirely different purposes. Too often, software packages utilized to construct planning documents like wills and trusts simply compute data and are not proof-read, or if they are, may not be understood by the drafter.  We pride ourselves in taking the time to understand clearly the client’s goals, and we engage in a holistic thought process to achieve their goals while complying with tax regulations and statutory requirements when we draft our documents.

Click here to read the New Jersey Appellate Division’s published opinion.

Click here to read the New Jersey Supreme Court decision affirming the Appellate Division.