It wasn’t too long ago that during office hours I received a telephone call from a distant cousin. His father had died and left him a considerable sum of money. Normally I expect these calls to entail my giving free legal advice to a family member. I had heard family rumors that this cousin’s marriage wasn’t on the strongest foundation. Whispers of a possible divorce circulated. Since I am not a divorce attorney, I wondered what the reason for the call could be.

As it turns out, no sooner than cousin “Bob” receive his inheritance than his wife filed for divorce, seeking a hefty lump sum alimony payment based on equitable distribution. While inheritance is usually not considered a marital asset, many state laws allow judges some freedom to divide the marital estate “equitably” – in other words what the judge deems “fair” based upon the relative net worth and income of the parties.

“Is this something I can fight?” Bob asked.

Generally speaking, it’s probably too late for that in Bob’s case. Ideally, Bob’s father should have left Bob his inheritance in trust as opposed to leaving Bob his inheritance as an outright distribution. A recent New Jersey appellate court ruling upheld this type of an arrangement for a Florida decedent who left her child an inheritance in trust. The New Jersey court said that her son’s wife had no right to alimony, child support or equitable distribution of the inheritance because it was left in a discretionary trust for the son’s benefit for the rest of his life.

Pearl Lerman, a Florida resident, died in 2004. She left approximately $500,000 in trust for her son, David. The trustees included a Florida resident and a New York resident. They had absolute discretion to distribute income and principal to David, or they could accumulate income inside of the trust. Upon David’s death, the trust provides that his children receive the balance that would remain at that time.

David and Adrianne were divorced in New Jersey. In 1996, Adrianne obtained a judgment against David for $298,900 for alimony, child support and equitable distribution. By November, 2007 with interest the judgment had ballooned to over $650,000.

In October 2007, David was arrested in California for failure to pay child support, was extradited to New Jersey and put in jail. Shortly thereafter Adrienne obtained a writ of execution to levy the trust (the monies were then held at a bank in New Jersey) – and the trial court held that David would not be released from jail unless the trustees turned over the account to Adrienne.

In response to Adrienne’s petitions, the trustees claimed in various courts that by distributing the funds in satisfaction of the New Jersey levies would not have been in the best interests of the beneficiary, David. One of the arguments that Adrienne’s attorneys presented that by not making the distribution, David remained in jail; therefore the trustees were not acting in his interest.

Yet the trustees had discretion under the terms of the trust. David never demanded that the trustees make a distribution for his child support. The trustees weren’t required to make distribution to him under the terms of the trust nor under Florida law which governed the trust.

The New Jersey appellate court eventually agreed, saying that a discretionary, spendthrift trust is valid under Florida law. Therefore, the creditor (in this case Adrienne) can only garnish disbursements from the trust. Where the trustee elects not to make those disbursements, the court ruled that it cannot order them.

Here it is important to note that Pearl knew of David’s predicament when she restated her trust in 2002, long after Adrienne obtained a judgment against David. She planned in the best way possible to protect David’s inheritance by naming an independent trustee and making the trust entirely discretionary.

The fact pattern of this case coupled with the rulings tells us that one can protect a child’s inheritance, presumably even in very difficult looking circumstances. You may disagree whether public policy of satisfying child support obligations should trump the legal language of a trust document. Yet for parents who are concerned about protecting their child’s inheritance from a variety of this and other potential issues, this case gives us an important benchmark.

Imagine a parent who wants to leave their medical doctor daughter an inheritance. The parent worries that if her physician daughter were ever liable under a malpractice case, the daughter might lose everything that she ever owned along with any inheritance she might receive.

A parent could therefore use the concepts we learn here in this case to protect what they leave their children and grandchildren.

©2009 Craig R. Hersch