Trusteeship can bring with it some serious personal financial risk for the trustee who is divorcing
The subject of this posting is the trustee who is neither the trust’s settlor nor one of its beneficiaries. The trustee also possesses no non-fiduciary powers of appointment, such as a right of revocation. The trustee and his/her spouse are divorcing.
It is settled law that physically the trust property is outside the marital estate and must remain so. Were the court to include it physically in the marital estate, the parties to the divorce action would merely hold the title jointly as co-trustees for the benefit of the trust’s beneficiaries with a fiduciary duty to keep the trust property physically segregated from the rest of the marital estate. Were the court, an instrumentality of the state, to attempt to force an actual physical commingling of the trust property with the other assets of the marital estate we would have a taking and re-allocation of the equitable property rights of the trust’s beneficiaries in violation of the 5th and 14th amendments to the U.S. Constitution. The beneficiaries themselves should have nothing to fear, at least as a matter of black-letter law and equity, from the trustee’s personal marital problems. See generally §8.3.1 of Loring and Rounds: A Trustee’s Handbook in this regard, which section is reproduced in its entirety in the appendix below. The Handbook is available for purchase at https://law-store.wolterskluwer.com/s/product/loring-rounds-a-trustees-handbook-2022e-misb/01t4R00000OVWE4QAP.
While the beneficiaries may have nothing to fear, the trustee who has failed to maintain careful records of the trust’s administration, as well as a strict segregation of personal and fiduciary assets, risks having the divorce court, whether out of pique or ignorance, deem the title-holding trustee to possess the trust property not in trust but outright, though only for purposes of computing the value of the marital estate. The court then notionally assigns the value of the entrusted property to the trustee’s side of the equitable-division ledger and orders that whatever the trustee personally owns that is not nailed down be transferred physically over to the soon-to-be-ex-spouse. As the equitable property rights of the trust’s beneficiaries remain unaffected by the notional assignment, they have no say in the matter.
See Original Article Here: https://www.jdsupra.com/legalnews/absent-a-history-of-meticulous-fiduciary-35067/
Such deeming on the part of the judiciary can have devastating and life-changing consequences, financial and otherwise, for the trustee personally, particularly when the value of the trust corpus is substantial. The trustee is deemed to own property that in equity belongs entirely to others, namely the trust’s beneficiaries.