In 2017, I wrote an article about the treatment of trust interest in a marital proceeding. It started with the following: “Your divorce client advises you that her parents, who are well off, have likely provided for her in their trusts and she is concerned that her husband may share in her potential inheritance. What do you advise her?” A recent New Hampshire Supreme Court Case furthers this analysis.
New Hampshire courts use a two-step analysis in making an award of property in a divorce. The Trial Court first determines as a matter of law whether the property to be divided is marital property. Second, the Court determines what division of that property would be equitable. The New Hampshire Supreme Court, in the case of In re Chamberlin and Chamberlin, 155 N.H. 13, 16 (2007), held with regard to an interest in a third party trust that the court must (1) determine whether the trust interest is marital property under New Hampshire law, and, if so, (2) in its discretion, apply the various factors of RSA 458:16-a, II, in making an equitable distribution of the marital property between the spouses.
The New Hampshire Supreme Court, in the case of In re Goodlander, 161 N.H. 490 (2011) held that the interest of a beneficiary in a discretionary trust is a mere expectancy and pursuant to RSA 564-B:8-814(b) is not to be considered marital property. The statute specifically provides: “[I]f a distribution to or for the benefit of a beneficiary is subject to the exercise of the trustee’s discretion, . . . then the beneficiary’s interest is neither a property interest nor an enforceable right, but a mere expectancy.” The analysis does not change whether or not there is a discernible standard for the trustee to use in making distributions. If the beneficiary possesses the right to compel distributions, the trust interest will likely be deemed marital property.
A recent New Hampshire Supreme Court Opinion was published this past July, Matter of Bournival, No. 2019-0537, 2021 WL 3013456, at *3 (N.H. July 16, 2021). This case is a matter of first impression regarding the relationship between a beneficiary and a trustee when determining whether a party’s interest in a trust is part of the marital estate.
On July 16, 2021, the New Hampshire Supreme Court found that a Husband’s interests in both of his trusts constitute marital property even though the “trusts may be potentially independent of [Husband] ‘on paper,’ in practice, he has so much control over the trusts that they do not appear to be fully independent ‘discretionary’ trusts.” Matter of Bournival, No. 2019-0537, 2021 WL 3013456, at *3 (N.H. July 16, 2021).
In the Matter of Bournival, the husband has interests in two discretionary trusts. The trust was created at the direction of husband’s parents and funded by his parents. Id. at 1. Husband argued “his interests were too remote and speculative to be included in the marital estate because the discretion afforded the trustees insulates him from having access to trust assets.” Wife countered “the discretion afforded the trustees is illusory because the accountant (the primary trustee) lacks the neutral independence that the law requires, and the other trustee, Husband’s uncle, has had no involvement in the management of the trusts or their assets.” Id.
The Court found the Husband was not independent of the trusts for a number of reasons:
Requirements of the trusts were not being followed;
- There were no annual accountings;
- One of the two trustees did not play any role in administering the trust, which made the accountant the effective sole trustee;
- Trustee acted on behalf of the husband (beneficiary); and
- The husband was managing the assets of the trust.
Id. at 1-3. The Court cited several examples of how the accountant, trustee, acted on behalf of husband, rather than independently, including:
- the accountant’s refusal to provide an accounting to Husband’s estranged adult child, despite the child’s entitlement to one;
- the accountant’s decision to invest all of the trust funds with Husband’s investment firm;
- discussions between the accountant and Husband about sharing clients;
- discussions between the accountant and Husband about distributions;
- the fact that Husband is the broker of all portfolio amounts of the trusts;
- Husband’s active role in the investment of trustfunds;
- Husband’s admission on cross-examination that the accountant does not know how any of the trustfunds are invested; and
- the inference from Husband’s testimony and the accountant’’ deposition testimony that the accountant encouraged and facilitated Husband’s early tax filing in 2017 to claim a $20,000 overpayment that the parties had made jointly before Wife could claim it.
Id. at 3. The Court further held Husband “probably has been significantly involved in the investment of trust funds and [has] provide[d] [the accountant] with input on related trust decisions” and “the accountant ‘lacked the neutral independence, required of a trustee, to whose discretion [Husband] pointed as preventing [Husband’s] access to trust assets as a matter of right.’” Id. “[The lower court] [h]aving found that the trusts are for Husband’s benefit, the class of beneficiaries of the trusts is limited to Husband and his children, the accountant trustee lacks independence, and Husband exerts control over the trust assets and has a power of appointment over any assets of the GST that are not exhausted during his lifetime, the court determined that Husband’s interests in both trusts constitute marital property.” Id.
This case has broad implications. Estate planners and divorce practitioners should take note of this case.