Divisibility of Irrevocable Trust by Court Order in Divorce Proceedings

Author: LegalEase Solutions 

Short Summary

Little to no support was found with respect to a court splitting the suits (assets) of an irrevocable trust through a court order in a divorce proceeding. There is support however for finding spouses or beneficiaries as “creditors” of such a trust and/or reaching the trust assets for alimony support purposes. Pursuant to applicable case law, the extent of the reach depends on various factors including whether the trust is revocable or irrevocable.

Research Findings

In divorce proceedings, the court shall determine what constitutes marital property and what constitutes separate property. In either case, upon making such a determination, the court shall divide the marital and separate property equitably between the spouses, in accordance with this section. For purposes of this section, the court has jurisdiction over all property, excluding the social security benefits of a spouse other than as set forth in division (F)(9) of this section, in which one or both spouses have an interest. Ohio Rev. Code Ann. § 3105.171(B) (West). The express language of this act is clear and gives the court authority over any spouse’s property with very few exceptions. The question that arises with irrevocable trusts is that the property has changed ownership from either/both spouse to another entity permanently for all effective purposes. Generally, if the debtor retained no right or interest in and to the property, he would cease to be the owner for purposes of the federal revenue acts. Helvering v. Fuller, 310 U.S. 69, 74, 60 S. Ct. 784, 787, 84 L. Ed. 1082 (1940). However, for purposes other than those of the federal income tax, local law determines the status of the parties and their property after a decree dissolving the marriage. Helvering v. Fuller, 310 U.S. 69, 60 S. Ct. 784, 84 L. Ed. 1082 (1940).

It has been provided that the property of a revocable trust is subject to claims of the settlor’s creditors, during the lifetime of the settlor, whether or not the terms of a trust contain a spendthrift provision. Sowers v. Luginbill, 2008-Ohio-1486, 175 Ohio App. 3d 745, 755-56, 889 N.E.2d 172, 179 (2008).  With respect to an irrevocable trust, in the same context, a creditor or assignee of the settlor may reach the maximum amount that can be distributed to or for the settlor’s benefit. Id. This provides creditor protection when the settlor creates an irrevocable trust when the settlor retains an interest in the trust property. Id.  It is evident that the legislature sought to provide comprehensive creditor protection by providing protection for creditors in either circumstance. Id.

Ohio R.C. 5805.06(A)(2)’s Official Comment provides that subsection (a)(2) follows traditional doctrine in providing that a settlor who is also a beneficiary may not use the trust as a shield against the settlor’s creditors. Sowers v. Luginbill, 2008-Ohio-1486, 175 Ohio App. 3d 745, 756-57, 889 N.E.2d 172, 180 (2008).   The drafters of the Uniform Trust Code concluded that traditional doctrine reflects sound policy and therefore, the drafters rejected the approach taken in States like Alaska and Delaware, both of which allow a settlor to retain a beneficial interest immune from creditor claims. See Henry J. Lischer, Jr., Domestic Asset Protection Trusts: Pallbearers to Liability, 35 Real Prop. Prob. Tr. J. 479 (2000); John E. Sullivan, III, Gutting the Rule Against Self–Settled Trusts: How the Delaware Trust Law Competes with Offshore Trusts, 23 Del. J. Corp. L. 423 (1998).

Under the Code, whether the trust contains a spendthrift provision or not, a creditor of the settlor may reach the maximum amount that the trustee could have paid to the settlor-beneficiary. If the trustee has discretion to distribute the entire income and principal to the settlor, the effect of this subsection is to place the settlor’s creditors in the same position as if the trust had not been created. Sowers v. Luginbill, 2008-Ohio-1486, 175 Ohio App. 3d 745, 756-57, 889 N.E.2d 172, 180 (2008).

The courts of Ohio have always derived the power to award ‘alimony’ from the statutory law. The current provisions of R.C. 3105.18 set forth an 11-factor guide for determining, first, ‘whether alimony is necessary,’ and, secondarily, ‘the nature, amount, and manner of’ payments of the sum allowed as ‘alimony’. Many of those factors have little relevance to a possible need for sustenance, e.g. the duration of the marriage, the standard of living of the parties established during the marriage, the property brought to the marriage by either party, the contribution of a spouse as homemaker, and the relative situation of the parties. On the other hand, those factors are quite pertinent to considerations of the distributions of marital assets and liabilities–the property settlement.  Zarlengo v. Zarlengo, CA 4629, 1977 WL 200993 (Ohio Ct. App. Dec. 20, 1977).

A wife separated from her husband is in the position of a creditor and may set aside a voluntary conveyance by him without consideration. The applicable rule is stated in 21 Ohio Jurisprudence, 376, Section 50.  It states that the property of the husband is subject to the support of his wife, except where the rights of bona fide creditors intervene, and she cannot be lawfully deprived of this interest in his property. To this extent, she is his creditor. She is just as much a creditor before a judgment for alimony is entered, and entitled to the benefit of his property for her support, as she is afterwards, when she is entitled to subject his property to the payment of alimony.’ Block v. Block, 165 Ohio St. 365, 377, 135 N.E.2d 857, 865 (1956).

However, Ohio Courts have declined to adopt a position that in all cases in which a wife has separated from her husband she automatically attains the status of a creditor. Dumas v. Estate of Dumas, 1994-Ohio-312, 68 Ohio St. 3d 405, 410, 627 N.E.2d 978, 982 (1994).

In O’Connor v. O’Connor, 3 O.O.2d 186, 141 N.E.2d 691, 696 (Ohio Com. Pl. 1957), it was held that the wife and children ‘are not ‘creditors’ of the beneficiary and the liability of the beneficiary to support them is not a debt.  The court observed that there is no difficulty in their enforcing their claims for support against the trust estate if the settlor did not show an intention to exclude them.’ Scott, Sec. 157, 1, pp. 1109-1110. In this respect they stand in the beneficiary’s shoes and his rights are their rights. This is obtained by virtue of the nature of the duty to support and the legal and social consequences of failure to support; and it inheres in the majority rule allowing invasion by dependents despite attempted restraints. Id. at 696.

The Ohio Courts’ position on the issue of duty to support and invasion of the property by dependents is not clear. In 40 O.Jur. at page 513 it is stated that it seems to be quite uniformly held that the interest of the cestui que trust in both spendthrift trusts and trusts for support can be reached by the wife and dependent children of the beneficiary. It has been held that a wife or dependent children can even compel the trustee in a discretionary trust to pay a part of the income to them.’ This was written in 1935, and the text is supported by no Ohio citations. In opposition to this view stands the Common Pleas Court of Franklin County in McWilliams v. McWilliams, 140 N.E.2d 80, 83. O’Connor v. O’Connor, 3 O.O.2d 186, 141 N.E.2d 691, 696 (Ohio Com. Pl. 1957).

Where spendthrift trusts are allowed many courts have held that in certain circumstances the wife or children of the beneficiary may reach the interest of the beneficiary in spite of the restraint contained in the terms of the trust. In Ohio, two Common Pleas Courts reached different conclusions. See; McWilliams v. McWilliams, 140 N.E.2d 80; O’Connor v. O’Connor, 141 N.E.2d 691.  There are several states in which statutes provide for recovery from a trust where the claim is for alimony or support, and there is respectable authority outside of Ohio supporting the views of both the McWilliams and the O’Connor cases. This court is of the opinion that the matter is one of public policy which ought to be and should be decided by the legislature. Payer v. Orgill, 191 N.E.2d 373, 376 (Ohio Com. Pl. 1963).

In Payer v. Orgill, 191 N.E.2d 373 (Ohio Com. Pl. 1963), a former wife, who secured judgment for alimony and support, and wife’s mother, who secured judgment for supplying necessaries to her daughter, could reach the interest of former husband-beneficiary in a spendthrift trust to extent of specified income limitation, notwithstanding fact that trust contained restraint on alienation and provided that income interest of beneficiary was exempt from claims of his creditors.  The Payer Court held that it is of the opinion that trusts are a creature of equity and it is difficult to take a too rigid position either way. Equity should not feed the husband and starve the wife no more than should equity feed the wife and starve the husband.  Generally, the Courts have allowed the interest of a beneficiary in a spendthrift or other support trust to be subjected to claims for support and maintenance of a wife and children. 54 American Jurisprudence, Sec. 176, page 140, Restatement of the Law of Trusts 2nd, Sec. 157; Scott on Trusts (1st ed.), page 790; Scott on Trusts (2nd ed.), page 1110.  The Court upon analysis of the principles set forth by the learned Judge Alexander, Court of Common Pleas, Lucas County in his Opinion in the O’Connor v. O’Connor, 141 N.E.2d 691, adopted Judge Alexander’s Opinion as a direct precedent in support of its holding in this case.

The court reasoned that “the strong public policy demands the protection of children and families. It must be obvious that in any clash between a policy protecting children and families and one favoring property or any other interest, the former must prevail.  And the logic is as cogent, the policy as compelling, whether applied to an ordinary spendthrift trust, a support trust, a discretionary trust, or any other kind of trust.  To deny dependents the right to invade and to adopt a rule that would remit them to their right to reach funds only after they are paid to the beneficiary would serve no useful purpose.  The majority rule as quoted from the Restatement of Trusts applies here and the husband’s interest may and should be subjected to the claims of his divorcing wife and their two children for alimony and child-support; that these claims should constitute a lien upon the trust.” O’Connor v. O’Connor, 3 O.O.2d 186, 141 N.E.2d 691, 698-99 (Ohio Com. Pl. 1957).