The seminal case
on the subject of trust property’s treatment in divorce in New York is
Riechers v. Riechers, 178 Misc 2d 170 (Sup. Ct. Westchester Co. 1998),
affd. as modified 267 AD2d 445, 446 (2d Dept. 1999), lv. denied 95 NY2d
757 (2000). Two years prior to the Riechers’ divorce action, the husband
had set up both a Colorado limited partnership and a Cook Islands
trust. He transferred substantial marital assets into the partnership
and then funded the trust with the assets of the partnership. He was a
physician, and insisted that his intention was to avoid malpractice
liability. The husband, his wife and their children were the named
beneficiaries of the trust. However, the wife was not named personally,
but was identified only as “Spouse of the Settlor,” so that, upon entry
of a judgment of divorce, she would no longer be the “spouse” and would
lose her rights as a trust beneficiary.
At trial in the divorce matter, the husband won two important battles concerning the ownership of the trust, but lost the war. The trial court ruled in favor of the husband by holding that it did not have jurisdiction over the corpus of the offshore trust. It also ruled that the wife had failed to meet her burden of proving the trusts had been created as part of a scheme to secrete or dissipate marital assets in contemplation of divorce. Accordingly, the trust was irrevocable.
However, these were hollow victories for the husband, since the court ruled that the trust assets were part of the marital estate and were subject to inclusion in the calculation of the total marital assets. The court determined the value of the assets and then ordered the husband to use his other domestic assets to pay to the wife her 50% share of the offshore trust assets. On appeal, the Second Department held that the trial court had not abused its authority when it determined that assets used to create an offshore trust in the Cook Islands 2 years before the commencement of the divorce action were subject to equitable distribution.
In Surasi v. Surasi, 2001 WL 1607927, 2001 Slip Op. 40408(U) (Sup. Ct. Richmond Co. 2001), the husband’s New Jersey attorney had created a family trust into which the husband placed all of his assets, including the marital residence, another house and a commercial office unit. The trust agreement named the parties’ children as the beneficiaries of the trust. The trial court found that the trust was “a revocable trust which was created in an effort to defeat the plaintiff’s rights regarding arrears and equitable distribution.” The court further ruled that the trust was “a sham and a fraud upon this court created expressly with the intent to deny the plaintiff’s claims to said marital property and to thwart the jurisdiction of this court to make a distributive award.” Accordingly, the court concluded that the trust must either be set aside or that specified trust property must be transferred directly to the wife.
In Alvares-Correa v. Correa, 285 A.D.2d 123, 726 N.Y.S.2d 668 (2d Dept. 2001), the court held that, while there should be no equitable distribution of property pursuant to the terms of a prenuptial agreement, the husband should be considered as controlling or having available to himself the income from offshore trusts established by his grandmother for his benefit, so that this income should be taken into account in determining spousal support and child support. The evidence “clearly showed” that the husband and his brothers had control and management of the trusts, that the husband effectively oversaw the trust funds, and that the trust documents showed that he had complete and unfettered access to the funds. The court ruled that “[t]he trial court properly rejected defendant’s contention that he has no control of, or access to, those offshore trusts. Defendant’s property interest in such trust property was not evaluated for purposes of equitable distribution (see Riechers v. Riechers, 267 AD2d 445, lv denied 95 NY2d 757) but to determine whether he would be able to afford maintenance and child support. The trial court found that defendant had not met his burden of demonstrating that extensive trust assets were not available to him.”
Most recently, in Villi v. O’Caining-Villi, 10 Misc.3d 1060(A) (N.Y. Sup. 12/16/2005), the husband had transferred the matrimonial residence into a family partnership. He and his wife each held a 49.5% partnership share and his sons held the remaining 1%. Subsequently, the partnership transferred the house into a New York trust for the benefit of the family. Neither husband nor wife was a beneficiary but they each had the right to lifetime use and enjoyment. The wife asked the court to include the house as a marital asset, citing Riechers.
The court ruled that the house was not part of the marital property, primarily because the parties had retained no control over it and had given all decision-making power to the trustees. It determined that the transfer of the home to the trust “is akin to the making of a gift of the home to defendant’s son, subject only to the condition that both parties may continue to reside in the home during their respective lifetimes.” Consequently, stated the opinion, “this court holds that its value may not be distributed in this matrimonial action, if it was validly transferred to the Villi Family Trust.”
The wife also claimed that the trust was revocable, relying on Surasi in which a transfer to a trust had been deemed a sham. However, since there was no evidence that the transfer to the trust was designed to benefit one spouse over the other, Surasi was inapplicable and the trust was not revocable. Nonetheless, on the particular facts of the case, there was an issue as to the validity of the transfer of the house to the trust and, for this reason, the court denied summary judgment to the husband.
ENGLISH CASES
Practitioners who advise clients with international business or personal interests should also be aware of a major shift in the English cases toward allowing the invasion of trust assets. The stage was set in a case called Minwalla, but it is the Charman case that has the English divorce bar buzzing.
English courts, on dividing assets on divorce, regard a settlement, including an offshore one, as either: 1) A pre- or post-nuptial settlement. A pre-nuptial settlement is one made by a party to a future marriage in anticipation of it, while a post-marriage settlement is one made by one of the parties to the marriage or settled on them by a third party; or 2) As a “financial resource.” Even though the settlement is not pre- or post-nuptial, it is a financial resource if there is a reasonable likelihood that a party to the marriage will benefit from it. This could include a reasonable expectation of benefiting under a discretionary settlement.
Where the settlement is pre or post-nuptial, an English court may claim the power to vary it directly — for example to allocate lump sums out of it to the spouses. If it is a “resource,” but not a pre- or post-nuptial settlement, an order can be made against one of the spouses, although the trustee itself will not be subject to any direct order of the court. However, the court will “[o]ffer judicious encouragement to third parties to provide the maintaining spouse with the means to comply with the court’s view of the justice of the case.” Thomas v. Thomas, [1995] 2 FLR 668. Thus the pressure on an onshore spouse/beneficiary could persuade the offshore trustee to supply him with trust assets so as to be able to comply with any order made against him to give assets to his former spouse.
In Minwalla v. Minwalla, [2004] EWHC 2823, the court expressed great skepticism as to a husband’s motive for creating certain offshore trusts. The husband, during the marriage, had set up a Jersey trust to hold shares in an offshore company and various properties. The court found, on the evidence, that the husband had never had any intention of respecting the formalities of the trust and corporate structure. His purpose had been to set up a screen to shield his resources. He was therefore held to be the sole and true owner of the trust, which was therefore to be included as a marital asset.
‘SQUEEZING THE CHARMAN’
In the very recent case of Charman v. Charman, [2005] EWCA Civ 1606 — which the London newspapers referred to as involving “the insurance multi-millionaire John Charman, one of the richest men in the City” — the English Court of Appeal directed that evidence could be procured overseas concerning an offshore trust that had been created during the marriage from the husband’s insurance business. There was a £67 million difference between the husband’s statement of assets and the wife’s. The discrepancy represented the assets of the trust, which, the wife claimed, would be made available to the husband if he so requested and should therefore be included as part of the ancillary relief claim.
The court adopted a broad interpretation of the nature of the “resources” that a divorce court must take into account in determining the financial aspects of a divorce. In other cases the courts had held that the test was whether or not the spouse had “real or effective control” over the trust. However, the Charman court held that that test was too restrictive, since trustees may have the control but may allow the settler or other beneficiaries to have access to the income or capital of the trust. Accordingly, Lord Justice Wilson stated that the test should be whether it is likely that a party has access to trust assets. Since Mr. Charman refused to concede that he had any such access, it was most appropriate for the wife to have discovery on this issue.
At trial in the divorce matter, the husband won two important battles concerning the ownership of the trust, but lost the war. The trial court ruled in favor of the husband by holding that it did not have jurisdiction over the corpus of the offshore trust. It also ruled that the wife had failed to meet her burden of proving the trusts had been created as part of a scheme to secrete or dissipate marital assets in contemplation of divorce. Accordingly, the trust was irrevocable.
However, these were hollow victories for the husband, since the court ruled that the trust assets were part of the marital estate and were subject to inclusion in the calculation of the total marital assets. The court determined the value of the assets and then ordered the husband to use his other domestic assets to pay to the wife her 50% share of the offshore trust assets. On appeal, the Second Department held that the trial court had not abused its authority when it determined that assets used to create an offshore trust in the Cook Islands 2 years before the commencement of the divorce action were subject to equitable distribution.
In Surasi v. Surasi, 2001 WL 1607927, 2001 Slip Op. 40408(U) (Sup. Ct. Richmond Co. 2001), the husband’s New Jersey attorney had created a family trust into which the husband placed all of his assets, including the marital residence, another house and a commercial office unit. The trust agreement named the parties’ children as the beneficiaries of the trust. The trial court found that the trust was “a revocable trust which was created in an effort to defeat the plaintiff’s rights regarding arrears and equitable distribution.” The court further ruled that the trust was “a sham and a fraud upon this court created expressly with the intent to deny the plaintiff’s claims to said marital property and to thwart the jurisdiction of this court to make a distributive award.” Accordingly, the court concluded that the trust must either be set aside or that specified trust property must be transferred directly to the wife.
In Alvares-Correa v. Correa, 285 A.D.2d 123, 726 N.Y.S.2d 668 (2d Dept. 2001), the court held that, while there should be no equitable distribution of property pursuant to the terms of a prenuptial agreement, the husband should be considered as controlling or having available to himself the income from offshore trusts established by his grandmother for his benefit, so that this income should be taken into account in determining spousal support and child support. The evidence “clearly showed” that the husband and his brothers had control and management of the trusts, that the husband effectively oversaw the trust funds, and that the trust documents showed that he had complete and unfettered access to the funds. The court ruled that “[t]he trial court properly rejected defendant’s contention that he has no control of, or access to, those offshore trusts. Defendant’s property interest in such trust property was not evaluated for purposes of equitable distribution (see Riechers v. Riechers, 267 AD2d 445, lv denied 95 NY2d 757) but to determine whether he would be able to afford maintenance and child support. The trial court found that defendant had not met his burden of demonstrating that extensive trust assets were not available to him.”
Most recently, in Villi v. O’Caining-Villi, 10 Misc.3d 1060(A) (N.Y. Sup. 12/16/2005), the husband had transferred the matrimonial residence into a family partnership. He and his wife each held a 49.5% partnership share and his sons held the remaining 1%. Subsequently, the partnership transferred the house into a New York trust for the benefit of the family. Neither husband nor wife was a beneficiary but they each had the right to lifetime use and enjoyment. The wife asked the court to include the house as a marital asset, citing Riechers.
The court ruled that the house was not part of the marital property, primarily because the parties had retained no control over it and had given all decision-making power to the trustees. It determined that the transfer of the home to the trust “is akin to the making of a gift of the home to defendant’s son, subject only to the condition that both parties may continue to reside in the home during their respective lifetimes.” Consequently, stated the opinion, “this court holds that its value may not be distributed in this matrimonial action, if it was validly transferred to the Villi Family Trust.”
The wife also claimed that the trust was revocable, relying on Surasi in which a transfer to a trust had been deemed a sham. However, since there was no evidence that the transfer to the trust was designed to benefit one spouse over the other, Surasi was inapplicable and the trust was not revocable. Nonetheless, on the particular facts of the case, there was an issue as to the validity of the transfer of the house to the trust and, for this reason, the court denied summary judgment to the husband.
ENGLISH CASES
Practitioners who advise clients with international business or personal interests should also be aware of a major shift in the English cases toward allowing the invasion of trust assets. The stage was set in a case called Minwalla, but it is the Charman case that has the English divorce bar buzzing.
English courts, on dividing assets on divorce, regard a settlement, including an offshore one, as either: 1) A pre- or post-nuptial settlement. A pre-nuptial settlement is one made by a party to a future marriage in anticipation of it, while a post-marriage settlement is one made by one of the parties to the marriage or settled on them by a third party; or 2) As a “financial resource.” Even though the settlement is not pre- or post-nuptial, it is a financial resource if there is a reasonable likelihood that a party to the marriage will benefit from it. This could include a reasonable expectation of benefiting under a discretionary settlement.
Where the settlement is pre or post-nuptial, an English court may claim the power to vary it directly — for example to allocate lump sums out of it to the spouses. If it is a “resource,” but not a pre- or post-nuptial settlement, an order can be made against one of the spouses, although the trustee itself will not be subject to any direct order of the court. However, the court will “[o]ffer judicious encouragement to third parties to provide the maintaining spouse with the means to comply with the court’s view of the justice of the case.” Thomas v. Thomas, [1995] 2 FLR 668. Thus the pressure on an onshore spouse/beneficiary could persuade the offshore trustee to supply him with trust assets so as to be able to comply with any order made against him to give assets to his former spouse.
In Minwalla v. Minwalla, [2004] EWHC 2823, the court expressed great skepticism as to a husband’s motive for creating certain offshore trusts. The husband, during the marriage, had set up a Jersey trust to hold shares in an offshore company and various properties. The court found, on the evidence, that the husband had never had any intention of respecting the formalities of the trust and corporate structure. His purpose had been to set up a screen to shield his resources. He was therefore held to be the sole and true owner of the trust, which was therefore to be included as a marital asset.
‘SQUEEZING THE CHARMAN’
In the very recent case of Charman v. Charman, [2005] EWCA Civ 1606 — which the London newspapers referred to as involving “the insurance multi-millionaire John Charman, one of the richest men in the City” — the English Court of Appeal directed that evidence could be procured overseas concerning an offshore trust that had been created during the marriage from the husband’s insurance business. There was a £67 million difference between the husband’s statement of assets and the wife’s. The discrepancy represented the assets of the trust, which, the wife claimed, would be made available to the husband if he so requested and should therefore be included as part of the ancillary relief claim.
The court adopted a broad interpretation of the nature of the “resources” that a divorce court must take into account in determining the financial aspects of a divorce. In other cases the courts had held that the test was whether or not the spouse had “real or effective control” over the trust. However, the Charman court held that that test was too restrictive, since trustees may have the control but may allow the settler or other beneficiaries to have access to the income or capital of the trust. Accordingly, Lord Justice Wilson stated that the test should be whether it is likely that a party has access to trust assets. Since Mr. Charman refused to concede that he had any such access, it was most appropriate for the wife to have discovery on this issue.