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

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