“It has been my experience that few (if any) parents want assets they leave in trust for the benefit of children to negatively impact what their children will receive in the event of divorce. Because we live in what is generally considered a mobile society, where beneficiaries might move to different states that consider invasion of separate or even what constitutes marital property differently, a review of language that might be used in estate planning documents, as well as the use of marital property agreements can be important to furthering a grantor’s intent.”

Sandy Glazier provides members with commentary on Levitan v. Rosen, a decision that reminds advisors why marital property agreements and drafting intent provisions in trusts remain important considerations.

Sandra D. Glazier, Esq., is an equity shareholder at Lipson Neilson, P.C., in its Bloomfield Hills, MI office. She was also the 2019 recipient of Bloomberg Tax’s Estates, Gifts and Trusts Tax Contributor of the Year Award and Trusts & Estates Magazines Authors Thought Leadership Award and has been awarded an AEP designation by the National Association of Estate Planners and Councils. Sandra concentrates her practice in the areas of estate planning and administration, probate litigation and family law.

Here is her commentary:

EXECUTIVE SUMMARY:

Levitan v. Rosen is instructive in that it reminds advisors why marital property agreements and drafting intent provisions in trusts remain important considerations.

FACTS:

Amy Levitan’s father died in 2007. As part of his estate plan, Amy’s father created a revocable trust governed by Florida law. That trust became irrevocable upon his death. Three separate shares were created under that trust, one of which was primarily for Amy’s benefit during her lifetime, with a residuary interest provided for her children who survived her. The trust also provided Amy with the right to annually withdraw the greater of 5% or $5,000 of her trust share’s value, and a limited power of appointment to and among her father’s issue.

Amy and an independent individual acted as co-trustees of Amy’s trust share. The independent trustee had the power to make wholly discretionary distributions to Amy. These distributions were not subject to, or limited by, an ascertainable standard (which are typically distributions for a beneficiary’s health, education, maintenance or maintenance). Other than the 5-5 power, Amy had no right to compel the trustee to make any distributions to her and all distributions from the trust were subject to a spendthrift provision under Florida law based upon the terms of the trust.

The type of trust and provisions described above are not dissimilar from those many parents include as part of an estate plan created with the intent and desire of protecting children and assets that a parent chooses to leave for the benefit of a child from the claims of creditors (including a spouse in the event of divorce).

In 2013, Amy initiated divorce proceedings between herself and her husband, Daniel Rosen. At the time of commencement, the parties had been married for 16 years. For most of their marriage, Daniel had worked full-time while Amy stayed home and raised their five children. At the time of their divorce, Daniel was earning in excess of $191,000 per year, while Amy (who had re-entered the work force) was earning approximately $69,000. The parties appear to have accumulated modest assets during their marriage. Daniel had a 401(k) worth approximately $128,000, and the parties had some personal property and “modest” bank accounts. Amy’s share of her father’s trust was worth over $1.67 million by the time their divorce proceeded to trial in 2016.

The trial court held that the value of the 5-5 power represented a marital asset (under Massachusetts law) and was, therefore, subject to division. On appeal the entire value of Amy’s interest in the trust was determined to be a marital asset (under Massachusetts law) subject to division, however,

an interest in the trust could not be distributed to Daniel as a result of the spendthrift provisions of the trust, leaving the court to equitably divide the “marital” estate through the use of other assets.

In Michigan, the trust would have been considered separate property, and would generally only have been considered subject to division if there were insufficient assets to provide for Daniel’s support and any children entrusted to his care, or if he had contributed to the acquisition or maintenance of that interest. In some jurisdictions, because of the discretionary nature of distributions to Amy, her interest in the trust (other than perhaps her 5-5 power of invasion) might have been considered a mere expectancy and not subject to division. However, under Massachusetts’ law Amy’s interest was determined to be subject to division, albeit only distributable to Amy because of the spendthrift provisions contained in the trust and provided under Florida law which governed the terms of the trust.

COMMENT:

It has been my experience that few (if any) parents want assets they leave in trust for the benefit of children to negatively impact what their children will receive in the event of divorce. Because we live in what is generally considered a mobile society, where beneficiaries might move to different states that consider invasion of separate or even what constitutes marital property differently, a review of language that might be used in estate planning documents, as well as the use of marital property agreements, can be important to furthering a grantor’s intent.

Based upon a review of the appellate court’s decision in Levitan v. Rosen,ⁱ it appears that a different result might have occurred had the trust not indicated that the “’primary intent’ of the trust [was] to provide for the wife rather than for subsequent generations”. The specific language of the trust indicated that “[it is the primary intent of this [trust]…that the [wife] shall be primarily provided for” and “the Trustee shall have no liability in favoring [the wife] over, or to the complete exclusion of, the remaindermen of this share”.

Many articles have touted the potential benefits of “intent” provisions because they provide guidance to the trustees (in terms of investment policies and distribution decisions) as well as assist in reducing or eliminating claims between beneficiaries. Levitan v. Rosen illustrates how despite the benefits provided to trustees, and in clarifying the rights of

beneficiaries, care in crafting intent provisions remains important. The court of appeals appears to indicate that had the discretionary trust been a pot trust or not been primarily established for Amy’s benefit during her lifetime, the discretionary powers might not have resulted in the trust being considered a marital asset subject to division in the parties’ Massachusetts divorce proceedings.

For those who administer “pot trusts”, they are aware that balancing the needs and claims of multiple beneficiaries can be challenging and carries other risks and the potential for differing claims of entitlement as between the beneficiaries. It is unclear if a statement of intent that indicated something along the following lines would have resulted in a different outcome:

Grantor intends that the trust established for my daughter, Amy, be distributed for her benefit in the exercise of the independent trustee’s sole discretion, as he deems appropriate. It is my intention that by providing a potential benefit to my daughter it is also my intent that it not lessen in any way the obligation that her spouse would otherwise have to her support her or provide for the support of any children they may have. It is also my intent that by providing this benefit to my daughter it not result in the reduction of any amounts she would otherwise be entitled to in the event of divorce and not be considered as asset in the division of their marital estate. This trust is intended to provide for my daughter, and upon her death, her issue, subject to the spendthrift provisions of this trust and the 5-5 power and limited power of appointment otherwise provided in this trust for her benefit. While it is Grantor’s desire to provide for his daughter and future generations, preference in making distributions shall be given to Amy’s needs during her lifetime over the potential needs of future generations, even if doing so might negatively impact the value of the trust estate ultimately available for distribution to such future generations.

While such language might have been helpful, the better course would be, whenever possible, to have a marital agreement that clearly indicates the parties’ intention to eliminate inherited and gifted assets from consideration in the division of their marital estate. When crafting such terms, it is also important to also consider the potential implications that a beneficiary’s rights might have with regard to spousal support. This might be possible by defining what will (and won’t) be considered income and assets available