Effect of Estate Planning Trust on Division of Property in Divorce Proceedings, Post-judgment Interest, Case Digest, Ensor v. Ensor, Ky Court of Appeals

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Larry James Ensor v. Deborah Lynn Ensor, 2010-CA-001660-MR, 2010-CA-001699-MR and 2010-CA-002048-MR

Published: Affirming in part, Reversing in part, and Remanding

County: Oldham

 FACTS:

Husband and Wife were married on June 14, 1980. Husband’s family owned an automotive parts remanufacturing business, which was very successful for many years. When business declined, Husband and his two brothers invested money from the family business into several real estate holdings, which produced significant rental income. Husband and the brothers, in an effort to minimize tax liabilities, utilized the assistance of attorneys and accountants and created a Grantor Retained Annuity Trust (GRAT). A GRAT, according to the Court of Appeals, is an estate planning tool wherein assets are transferred to a trust and ultimately to other beneficiaries so as to avoid estate taxes upon a donor’s death. Husband and his brothers also created a partnership, with all of the brothers and their wives executing general warranty deeds for all of the partnership’s property, which transferred any dower interest the wives had, or might have had, in the properties. Husband created his irrevocable GRAT and transferred his limited partnership interest while retaining a small general partnership interest. Husband received from the GRAT quarterly payments of $72,295 for nine years. The funds were used for the couple’s personal and joint expenditures. Husband’s children were beneficiaries of the GRAT as well, and received their portions of the GRAT; a gift tax return was filed with the IRS. Wife also retained an interest in the GRAT when the annuity payments terminated. Although divorce was not contemplated in the GRAT instrument, Wife would retain an interest in the GRAT if Husband died, until her death or remarriage.This arrangement avoided up to one million dollars in tax liability.

 Husband and Wife initiated divorce proceedings in 2004. A limited divorce decree was entered in January 2005, which reserved rulings on the division of marital assets. Wife argued that she did not fully understand the extent of the assets transferred to the GRAT and would have never agreed to release her share of assets valued at millions of dollars. Wife sought her interest in the property of the GRAT.

 The court held a five day trial of the property division in April and May of 2006. After additional filings and extensive motion practice followed, the court requested calculations consistent with its draft opinion of the issues. The court issued its opinion May 28, 2008, finding that the GRAT was valid and legally created and that Wife was entitled to a one-half interest in her marital portion of the GRAT. The court held additional hearings on the value of the GRAT property. On February 18, 2010, the court entered findings of fact and conclusions of law on the value of the GRAT and ordered Wife’s was entitled to a payment of $1,769,718.00, which was later reduced by the court to $1,410,106.00 plus post-judgment interest calculated at five percent. Husband appealed, alleging multiple errors; Wife filed a cross-appeal and a direct appeal on the issue of post-judgment interest. ANALYSIS:

 The Court of Appeals found that Wife was not defrauded when the GRAT and partnership interests were created. Husband did not defraud Wife into signing any documents or coerce her to release her interest in property, and the trust instrument did not contemplate divorce. Wife also failed to join the GRAT and its trustees, beneficiaries, or contingent beneficiaries, all of whom would have been necessary parties in an action seeking to avoid the trust.

 The Court further found that the funding of the irrevocable trust removed the transferred property from the marital estate. KRS 403.190(1) and other relevant case law define whether an asset is marital or non-marital for purposes of division.  The court must determine whether the asset is marital or non-marital, assign each party his or her non-marital property, assign each party’s interest in property with both marital and non-marital components based on the evidence and equitably divide all marital property. The formation of the GRAT in this case was for a valid estate planning purpose and is nearly identical to the estate planning scheme in Gripshover v. Gripshover, 246 S.W.3d 460 (Ky. 2008). Wife received an adequate benefit from the GRAT income because she and Husband enjoyed the quarterly annuity payments over the years, which exceeded $2,600,000. It was proper that the trial court accepted Wife’s expert in the accounting of the disbursements.

Because the GRAT was improperly included in the marital estate, the Court remanded for further determination concerning the proper valuation of the marital estate and division thereof without reference to the GRAT.  Because property division and equalization payments would be different without inclusion of the GRAT, the issue of maintenance was also remanded, but the Court of Appeals made no finding of whether a maintenance award would be appropriate in this case.

 Husband also argued that $60,000 was erroneously assigned to him in the valuation of marital assets because he used those funds for a marital purpose. Trial courts are given wide discretion in this area, and the court did not find Husband’s testimony that the funds were used for a marital purpose credible. The trial court found that those funds had been used for attorney’s fees, non-marital debts and other personal expenditures, which was not clear error.

 Wife challenged an award to Husband of accounts receivable for loans made during the marriage. Since Wife was awarded one-half of the accrued interest payable to Husband on a particular loan, any further award to Wife would result in a double recovery. Therefore, the court did not err in preventing a second division of this asset. 

 Wife also appealed the trial court’s decision to award her an unfinished vacation home in Gulf Shores, Alabama, valued at $2,050,000, and making Wife responsible for all taxes, claims and costs associated with the property. Wife insisted on retaining the home against the advice of trial counsel and the court. Wife argued that Husband should be responsible for his portion of the taxes and other costs associated with the property before he conveyed the property to her in 2010. The trial court allocated unpaid construction costs, insurance premiums and other costs to each spouse at the time of the divorce decree. Since the other costs were incurred after the divorce decree was entered and was incurred solely for Wife’s benefit, the debts were non-marital, and Wife is responsible for all of the costs associated with the property after that date.

 On the issue of post-judgment interest, the Court of Appeals upheld the trial court’s order award of five percent post-judgment interest.  The trial court concluded that five percent was the rate of return on investments during the litigation and imposing a higher rate would be inequitable. The Court of Appeals agreed, stating that the post-judgment interest rate is mandatory only to money awards containing deferred payments for portions allocated to the non-paying spouse. In this case the trial court weighed the equities, including that Wife’s award was to be paid in a lump sum and Husband was given a relatively short amount of time to make full payment.

Affirmed in part, reversed in part and remanded.

Digested by: McKenzie Cantrell, Attorney, of counsel, Diana L. Skaggs + Associates

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