Trusts & Estates

NH Supreme Court Protects Child's Trust from Divorcing Spouse

March 2011

By Jan P. Myskowski*

One of the most common questions clients pose to me is how to protect a child’s inheritance from the child’s spouse. A common answer is to suggest that the client impose a trust on the child’s inheritance. However, a common caveat in recent years has been that we do not yet know what effect the Uniform Trust Code will have on the interpretation of such trusts in the context of a divorce proceeding. The New Hampshire Supreme Court recently answered many of those lingering questions.

On February 25, 2011, the Supreme Court issued its decision in a case known as In the Matter of Theodore J. Goodlander and Elizabeth M. Tamposi (which I will refer to as “Goodlander and Tamposi”). (Official citation pending.) The litigation surrounding the estate of Samuel Tamposi, Sr. has garnered a great deal of media attention. Goodlander and Tamposi is an offshoot of that estate litigation, and focuses specifically on the extent to which a trust that Samuel established for his daughter Elizabeth would be insulated from the claims of Elizabeth’s husband Theodore in the context of his suit for divorce against Elizabeth.

Specifically, Theodore asserted three distinct claims against the trust established for Elizabeth’s benefit:

• That the assets of the trust should be considered assets of the marriage subject to division upon divorce;
• That the assets of the trust should be taken into account when dividing the parties’ non-trust assets upon divorce; and
• That Theodore should be able to compel the trustees of the trust to pay directly to Theodore the alimony that Elizabeth had been ordered to pay to Theodore.

In what is likely to be one of the most important trusts and estates cases of the year, the Supreme Court sided squarely with Elizabeth on the first two issues, and remanded the case for further proceedings on the last issue.

Theodore’s three claims can be broken down into two categories. The first two claims fall under one question: whether a beneficiary’s interest in a trust is a property interest subject to division upon divorce. The last claim relates to the question of the extent to which a beneficiary’s creditors can reach the beneficiary’s interest in a trust. The New Hampshire Uniform Trust Code (UTC) speaks to both of these questions, and in Goodlander and Tamposi the Supreme Court gave us considerable guidance on how the UTC should be interpreted.

Property Interests

The trust for Elizabeth’s benefit had several key features that supported favorable rulings (from Elizabeth’s perspective) on Theodore’s first two claims. Distributions to Elizabeth were entirely discretionary (there were no fixed or mandated payments), and the discretion whether to make any particular distributions and the timing and amounts thereof lay entirely with the Trustee. Based on these features, the Court was willing to conclude that Elizabeth’s interest was a “mere expectancy” as that term is defined by UTC section 8-814(b). As a mere expectancy, Elizabeth’s interest in the trust was not a property right subject to division upon divorce. In addition, the Court concluded that because Elizabeth could not count on any particular distributions in the future, the trial court had properly excluded Elizabeth’s interest in the trust from consideration when deciding how much of the couple’s non-trust assets to award to Theodore.

In addition to these features, the Court also seemed persuaded by the fact that neither Elizabeth nor anyone subordinate to Elizabeth could serve as a trustee (the trust appears to have used the Internal Revenue Code’s definition of “disinterested” trustee). Finally, the court also focused on the fact that the trustee, in deciding whether to make distributions to Elizabeth, would owe some fiduciary duty to the other beneficiaries of the trust.

In Goodlander and Tamposi, Elizabeth’s descendants were also eligible to receive distributions during Elizabeth’s lifetime, meaning the Trustee had concurrent duties to consider the needs of Elizabeth and her descendants, but the analysis would likely have been the same even if Elizabeth’s descendants were only remainder beneficiaries (i.e., slated to received distributions only after Elizabeth’s death). Although the analysis under UTC section 8-814(b) does not require that the trustee be disinterested, in light of Goodlander and Tamposi, when protection of a child’s inheritance from the risks of divorce is an express objective of the grantor, the use of a disinterested trustee appears to be advisable. Making the child’s descendants concurrent beneficiaries would also cause a trust to more squarely fall within the holding of Goodlander and Tamposi, but, such a feature is also not required by UTC section 8-814(b), and because a trustee owes fiduciary duties to both concurrent and remainder beneficiaries, such a feature does not seem to be a necessary prerequisite to the conclusion that a child’s interest is a mere expectancy not subject to division upon divorce.

Creditor Protection

In general, a trust that contains a spendthrift clause will be protected from the claims of the beneficiary’s creditors by virtue of section 5-502 of the UTC. However, there are a number of important exceptions, most notably in the context of this article those under UTC section 5-503(b)(1) and (2), which allow enforcement of child support orders, and to a limited extent, alimony orders, against a spouse’s interest in a trust. Child support was not an issue with respect to Theodore’s claims against Elizabeth’s trust in Goodlander and Tamposi, but Theodore did succeed in securing an alimony order. Under UTC section 5-503(b)(2), alimony orders are enforceable against the obligor spouse’s interest in a trust only to the extent that the order for alimony specifies the “amount attributable to the most basic food, shelter and medical needs of the spouse or former spouse…” In other words, alimony orders that are designed to sustain a spouse in his or her customary standard of living may not be enforceable against a trust to the extent that standard of living exceeds the spouse’s most basic needs. Although Theodore succeeded in securing an alimony order, the Supreme Court remanded to the trial court the issue of the extent to which the alimony order related to his most basic needs so that the trial court could determine the extent to which the alimony order could be enforced against the trustees of Elizabeth’s trust.

All told, Goodlander and Tamposi provides important clarification of the extent to which the parents may protect a child’s inheritance from the claims of the child’s spouse. Through careful drafting and coordination with the New Hampshire Uniform Trust Code, the extent of that protection appears to be substantial.

*Jan P. Myskowski is admitted in New Hampshire and Massachusetts.

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