MGD’s Jennifer Belmont Jennings recently co-authored an article with Paul Hood on the intersection of estate planning and divorce.

Republished courtesy of Leimberg Information Services, Inc. Issue 3303 | 06-08-26

“In a case of first impression in the state of New York, the Supreme Court of New York ruled that irrevocable trusts not even owned by either spouse can be considered marital property for equitable distribution when a spouse-grantor, in this case, the ex-husband, retains both direct and indirect control and causes and directs the assets of those trusts for family maintenance expenses, including for the spouses while married and the ex-husband post-separation. The landmark decision awarded the wife 50% of the estimated $181 million marital estate.”

Jennifer Belmont Jennings and Paul Hood provide members with important and timely commentary on C.S. v R.H., 2025 NY Slip Op 51426(U). Members who wish to learn more about this topic should consider registering for their upcoming LISI webinar titled “Representing Both Spouses in Estate and Business Planning: Divorce Happens!.” Click this link to learn more or to register: Jennifer/Paul

Jennifer Belmont Jennings is a Trusts and Estates Attorney and Member at MGD Law, LLC in St. Louis, MO. Her practice includes estate and wealth planning for individuals and families looking to build and protect their legacies. In addition to her legal experience, Jennifer spent nearly 10 years in financial services where she obtained the CFP® certification and worked with high net-worth individuals and families developing and implementing financial plans that complemented their estate planning and tax objectives. Jennifer co-authored the book, “Women in Law: Discovering the True Meaning of Success,” has had several media appearances discussing estate planning and finances on KMOV News 4, KSDK News 5, and various podcasts, and has been quoted in US News and Money, USA Today, ThinkAdvisor, AARP’s Senior Planet, and Town & Style Magazine. She has spoken at the Beverly Hills Bar Association, The US Center for Women and Law at the University of Texas, The Military Spouse JD Network, Ms. JD, and Washington University School of Law. Jennifer received her J.D., M.A., and B.A. from Washington University in St. Louis, and completed the General Course Program at The London School of Economics and Political Science (LSE).

A native of Louisiana (and a double LSU Tiger), Paul Hood obtained his undergraduate and law degrees from Louisiana State University and an LL.M. in taxation from Georgetown University Law Center before settling down to practice tax and estate planning law in the New Orleans area. Paul has taught at the University of New Orleans, Northeastern University, The University of Toledo College of Law and Ohio Northern University Pettit College of Law. Paul has authored or co-authored nine books, including his most recent book, Yours, Mine & Ours: Estate Planning for People in Blended or Stepfamilies and hundreds of professional articles on estate and tax planning and business valuation. Paul’s website is www.paulhoodservices.com and his e-mail address is paul@paulhoodservices.com

Here is their commentary:

EXECUTIVE SUMMARY:

In a case of first impression in the state of New York, the Supreme Court of New York ruled that irrevocable trusts not even owned by either spouse can be considered marital property for equitable distribution when a spouse-grantor, in this case, the ex-husband, retains both direct and indirect control and causes and directs the assets of those trusts for family maintenance expenses, including for the spouses while married and the ex-husband post-separation. The landmark decision awarded the wife 50% of the estimated $181 million marital estate.

In her inaugural LISI newsletter, Jennifer Belmont Jennings, joined by long-time LISI teammate Paul Hood,  provides members with the sad facts and commentary on a recent decision by the Supreme Court of New York (New York State’s trial court-despite the name-New York courts of appeals are named the Appellate Division of the Supreme Court, and New York’s highest court is named the Court of Appeals) in C.S. v R.H., 2025 NY Slip Op 51426(U), a sad but instructive tale that highlights the risks involved when a married couple engages in significant inter vivos irrevocable estate planning with “marital assets” (a very important term in New York) in a way that gave one of the spouses de facto control and ability, either directly or indirectly, to reduce or eliminate the rights and/or powers of the other spouse, when ostensibly represented by the same lawyer. The primary issue in this case was whether the value of those assets should be included when calculating the marital property division, but the specific facts of the case also give rise to estate tax considerations as well as a lawyer’s ethical duties when representing both spouses jointly when complex planning is involved and most of the communications are with only one spouse.

FACTS:

Throughout their marriage, Husband and Wife, whose names were redacted in the opinion for privacy purposes, amassed significant wealth. In a tale as old as time, Husband was the driver of the financial decisions and transferred close to $100 million to various trusts and entities for the benefit of their children and their future descendants.

While the testimony adduced at trial was that Husband did discuss these estate planning strategies with Wife, and Wife concurred, the educational sessions were hardly formal (mentioning something on a “ski lift, at dinner, or not at all”), and Wife was often presented the documents at the time of signing as opposed to having any real opportunity to review and comprehend what she was doing.

No fewer than six times in her 29-page opinion, Judge Kathleen Waterman-Marshall noted something to the effect of “she never had her own legal counsel to advise and guide her on the impact of these Changes,” often being presented with the documents for the first time, each time, in the office of a lawyer that Wife assumed was representing her interests too as her lawyer. Judge Waterman-Marshall also stated several times that Wife did not know the details of any of the financial assets and transactions, real property purchases, or tax matters  Wife stated that she “trusted her husband and his assurances that the Trusts were meant to protect their vast marital assets while permitting them to enjoy their use and benefit, that he would manage the assets, and that she had a ‘role’ in the Trusts.”

While Wife was not the Grantor of the Trusts, and neither Husband nor Wife were beneficiaries of either trust, they did each use their lifetime applicable exclusion amounts by making gifts to the Trusts. Wife was initially appointed to roles such as Trustee and Managing Director, but Husband retained the exclusive power to remove and replace the Trustee and Managing Director at any time and for any reason.

Notably, while Husband and Wife were not beneficiaries of the Trusts, the Court drew attention to the fact that Husband and Wife benefited immensely from the Trusts, mentioning the “legion of proof” that the Trusts funded the family expenses and lifestyle. In addition to funding their lavish lifestyle, they enjoyed living in the various residences for either no rent or significantly below market value rent. For all intents and purposes, Husband and Wife lived as though they were beneficiaries of the Trusts.

After the marriage crumbled, and a few years after the Wife filed for divorce, Husband exercised his powers to effectively remove Wife from all involvement. He removed Wife as Trustee and replaced her with a close friend, who according to the court, was essentially a “straw man used to do his bidding.” Husband also removed Wife as Managing Director of the LLCs.

There are other important facts in the case that the Court characterized as bad faith actions by the Husband, including:

·      Involving lease renewals that did not include the Wife, leading to her eviction from her home.

·      An unauthorized decanting where the Husband consented on behalf of his minor children to give him more power than he had previously, while also removing the right of his daughters to receive the assets when they turned 30.

·      Additional bad faith conduct mentioned by the Court, which in conjunction with the conduct already referenced, ultimately led the Court to decide that they could consider the value of the Trusts in the marital property division even if it could not direct the distribution of the Trust assets. The Court ordered Husband to pay Wife an amount of the non-trust assets that would effectively equal half of the value of both the non-trust and Trust assets.

Court’s Analysis:The Court was compelled to consider the value of the marital assets that had been transferred to the Trusts because (1) the majority of the parties assets [were] contained in the Trusts, they used those assets to fund and support their lifestyle, and Wife reasonably expected to enjoy the use and benefit of the Trust assets in the future; and (2) Husband never relinquished control over the Trust assets.”

The Court first acknowledged that families transfer marital assets into trusts for legitimate estate tax planning purposes as well as to protect those assets for future generations. Historically, when marital assets were placed into irrevocable trusts for legitimate planning purposes, New York courts (and other state courts) have not divided those assets when the parties were well-informed as to the terms or had relinquished control over the assets and were not serving as trustees.

However, assets in “sham” trusts, and the assets transferred to trusts in fraud of marital rights have not been afforded such protection and could be subject to actual division.

While there may be circumstances that exist preventing the court from distributing the Trust assets, the Court cited cases where value of those trust assets counted as marital property when determining the distributive award.

The Court’s summarized the emerging principles of the cases that supported inclusion of the Trust assets in the total value of marital property subject to division by stating:

(1) marital property is sacrosanct, regardless of its form, title, or how maintained and the court will protect the parties’ respective equitable interests therein; and (2) in furtherance of its mandate, the court must consider the parties’ conduct vis-à-vis marital property held in trusts in determining whether it should be included in the marital estate.

COMMENT:

Comprehensive and successful estate and tax planning for a married couple relies on a factor that is too often undervalued; the presumption that the marriage will not end unless it’s “until death do [they] part,” and that evidence and findings from the dissolution proceeding may have unintended estate tax ramifications.

The findings in this case highlight the risk that marital assets transferred to an irrevocable trust may be considered when awarding marital property to spouses during a divorce. The conduct of the parties carried more weight than the fact that neither party had a legally enforceable beneficial interest in the trusts.

Those findings are not only important when considering equitable division of marital assets, but also from an estate and gift tax perspective. As noted by the Court, the primary purpose of these Trusts was to protect the family’s wealth, but protecting wealth and minimizing taxes requires some tradeoffs, among which include giving up dominion and control of those assets to a level that passes muster with the IRS and Tax Courts. In this case, the actions that led the Court to conclude that the Trust assets should be considered when awarding marital property are also the same actions that could lead to estate inclusion under IRC Sec. 2036.

When the Personal Representative of the Estates of Husband and Wife file their Estate Tax Returns, their divorce case will likely be marked “Exhibit A” when the IRS argues for estate inclusion under IRC Sec. 2036.

Treas. Reg. Sec. 25.2511-2(b) specifically provides that a gift is complete “when the donor has so parted with dominion and control as to leave in him no power to change its disposition, whether for his own benefit or for the benefit of another.” While the Court in this case was not making a finding regarding a completed gift for tax purposes, the facts suggest that Husband did not part with dominion and control, and both Husband and Wife clearly retained a beneficial interest in the assets even if not a legally enforceable beneficial interest.

Numerous cases support IRC Sec. 2036 estate inclusion when the facts demonstrated an implicitly retained interest in property. The rationale in the Estate of Strangi v. Commissioner comes to mind with the Court noting that the “crucial characteristic is that virtually nothing beyond formal title changed in decedent’s relationship to his assets.” Strangialso referenced using entity funds for personal expenses, and the failure to pay rent for a period of time, noting that a “residential lessor dealing at arm’s length would hardly be content merely to accrue a rental obligation for eventual payment more than 2 years later.” Strangi v. Comm’r, 417 F.3d 468. Likewise, in Guynn v. United States, the Court also found an implied possession and enjoyment, resulting in 2036 estate inclusion, when Guynn “retained all the attributes of ownership except bare legal title.” Guynn v. United States 437 F.2d 1148 (4th Cir. 1971).

In addition to the legal ramifications of this case, there are some important practical practice takeaways.

When representing both spouses, it’s vital to ensure that both spouses understand the significant implications of transferring marital assets to irrevocable trusts and entities, and to know when it is appropriate to recommend that each have separate legal counsel. While it may not have been necessary to retain separate counsel in this case, both spouses should have been involved in the planning meetings with the attorney and received drafts in advance of signing. While the facts of this case do not indicate what the attorney did or did not communicate to the Husband during the formation of the trusts and various entities, the Court found Wife’s testimony of her lack of involvement and inclusion credible. Regardless of what transpired in this case, it’s clear that this Court and other courts place significant value on well-informed decision-making when it comes to transferring away your interest in marital property.

When designing complex estate and gift tax strategies, practitioners must also convey the rules and the risks of failing to follow those rules not only for potential dissolution purposes, but also for potential estate inclusion purposes. The facts of this case indicate that the legal documents do not list Husband and Wife as beneficiaries, yet the trusts continued to fund their lifestyles as if they were beneficiaries. As a general practice, making sure your clients know what money should or shouldn’t be used to fund their personal expenses, and documentation of those instructions is vital, especially if surviving family members are looking to find someone to make them whole after paying unanticipated estate tax.

We do know in this case that the attorney did advise Husband to “set the rent of trust property at the middle-to-high end of a fair market value assessment provided by a real estate professional,” which lends itself to the issue that while a practitioner can provide the best of instructions, the client may not be willing or capable of following those instructions. While the client has hired us to assist them, we are not short-order cooks. Care should be taken to ensure each engagement is a good fit and that at the time of the planning you have the appropriate level of confidence in your client’s capability and willingness to follow instructions.

Complex estate and tax planning is a minefield that can spill into more than one practice area, and minimizing the risks involved should be a vital component to every practice.

Another Cautionary Tale for Joint Representation as Marriage Shifting Sands Happen. It’s clear beyond cavil that this judge, who was candid in her evaluations of the credibility of the husband and the wife, credited the Husband’s estate planning counsel for his testimony in the case.

However, with that said, the opinion does not say with metaphysical certitude that the estate planning lawyer represented Husband and Wife, jointly or separately., However, the lawyer testified that he’d prepared wills, trusts, foundation documents, and entity governance documents during their marriage for both of them. Additionally, the judge noted six different times in her opinion that the Wife “never had her own legal counsel to advise and guide her on the impact of these Changes,” and was repeatedly asked to sign documents that she’d never seen.

It seems equally beyond doubt that many of the changes to documents and new documents that the Wife’s “lawyer” (before the Wife filed for divorce) drafted and/or revised clearly left the Wife exposed to the financial difficulty (abuse is a fair characterization) that she eventually encountered after she’d allowed her entire applicable exclusion amount to be used in gifts that the Husband probably made from his separate property (a death concept) but marital property as defined in the State of New York.

While it did not involve a divorce, there are similar lessons in Smaldino v. Comr., T.C. Memo. 2021-127 (November 10, 2021).

Mr. Smaldino had six children from a previous marriage. As is common practice, Mr. and Mrs. Smaldino’s estate plan contemplated complex family dynamics and was designed to avoid comingling.

Mr. Smaldino owned and operated numerous rental properties. He established an LLC, as well as a Dynasty Trust. Mr. Smaldino transferred entity interests in 10 different parcels of real estate into the LLC. Mr. Smaldino “purportedly” transferred about 41% of the LLC membership interests to his wife, who “purportedly” gifted those same interests to the Dynasty Trust the very next day.

While Mr. Smaldino did not report the gift to his wife on his federal gift tax return, as he was not required to, Mrs. Smaldino did report the transaction on her 2013 federal gift tax return using $5,249,118 of her $5,250,000 available exemption, which resulted in zero gift tax due. “In exchange for the use of Mrs. Smaldino’s available Federal estate and gift tax exemption…[Mr. Smaldino] amended the Smaldino Family Trust to provide [Mrs. Smaldino] additional moneys and properties.”

Notably, the family and their advisors skipped numerous key steps, including following the terms of the LLC’s Operating Agreement when substituting Members or assigning Membership Interests. Corporate documents were not updated to reflect this Assignment, nor was there any record of board approval, though the Operating Agreement was later amended to show the Dynasty Trust as holding a 49% ownership interest.

In a classic “substance over form” case, the Court found that Mr. Smaldino “never effectively transferred any membership interest in the LLC to Mrs. Smaldino and consequently that the Dynasty Trust received its entire 49% of the class B membership interests as a gift from [Mr. Smaldino].” Mrs. Smaldino essentially acted as a “straw party” in the transaction. “[A]s a practical matter there was never a time when Mrs. Smaldino would have been able to effectively exercise any ownership rights with respect to any LLC membership interests. Moreover, for the reasons previously discussed, we do not believe that petitioner ever intended for her to do so.” [Emphasis added]

Consequently, the Tax Court’s opinion effectively negated any taxable gift that came from Mrs. Smaldino. Does this mean she automatically had the amount of her used applicable exclusion amount restored? Probably not unless she had taken some independent steps such as filing a Protective Claim.

Additionally, did the same lawyer represent Mr. and Mrs. Smaldino jointly? It’s not entirely clear, but the facts of this case underscore the risk that estate planners take when they represent two spouses with different interests or where one spouse is more heavily involved with the mechanics of a transaction. Why? Because hindsight is always 20/20, and it would be easy and unfortunate for a court to have questioned the motives and actions of lawyers in either this C.S. v. RHorSmaldino.

We highly recommend consideration of the following protective steps when representing a married couple in any estate planning where there are related trusts or other entities:

·      The estate planner’s engagement letter for a joint representation of spouses where other trusts or entities are involved must be very carefully crafted to address the additional ethical considerations and complications that arise when the estate planning covers multiple trusts and/or entities.

·      Before any such documents are executed (or, better yet, before sending out drafts), “stress-test” the scheme from the standpoint of who has control and what checks-and-balances on power and authority between the spouses-does one spouse have the unilateral authority to remove or eliminate the other spouse? If so, under what circumstances? Clearly, in the instant case, Husband had retained-as the lawyer had drafted-full unfettered ability to remove Wife under any circumstances. In our opinion, to protect the estate planner, the couple should be told of this imbalance on discovery. The problem is that not only can lay unsophisticated or inexperienced clients get bamboozled by the official sounding of a trust or entity governance position without considering who could remove them and under what circumstances, estate planners can neglect to consider these issues, which could very easily be spun to make an estate planner look really badly.

·      Always build in checks-and-balances on power and authority, particularly with respect to spouses that the estate planner represents jointly, which could be triggered on any action by either spouse to dissolve or terminate the marriage. The problem is that any advantage of one spouse over the other may not be exploited to the other spouse’s detriment while relations are copacetic at home almost assuredly will be either threatened or used (like Husband did in this case) when the bloom has fallen off of the flower of marital bliss. Unfortunately, as we said earlier: “Comprehensive and successful estate and tax planning for a married couple relies on a factor that is too often undervalued; the presumption that the marriage will not end unless it’s “until death do [they] part.”

·      It’s an undeniable fact of life that estate planners who work with couples jointly might not always communicate simultaneously with both spouses every time, particularly where there are other trusts and entities in which either or both spouses are involved-in fact, the estate planner may well be communicating with a representative or subordinate of only one spouse. Where decisions concerning potential changes (including by way of exercise under a buy-sell agreement, trust instrument or other estate planning document), we strongly recommend communication of said changes and how they could impact the balance of power in writing to both spouses.

·      Where documents are required to be signed or executed, always send in draft to both spouses with enough advance notice for meaningful review. In this case, the uncontroverted testimony was that Wife was presented numerous documents for her signature under pressure that she hadn’t seen in advance. That fact alone clearly troubled this female judge and could have been spun against the lawyer very easily.

·      In our fast-paced world of instant and constant communication, it’s easy to miss the potential implications on one change, which can and sometimes provide counterintuitive and unexpected results. This is why all potential changes need to be worked through the entire system, which often includes multiple trusts as well as entities on both the profit and non-profit side, to make sure that the gears mesh.

·      Be nice, stay humble and respectful, and let’s be careful out there!!!

CITES:

 C.S. v R.H., 87 Misc. 3d 1201(A) (2025); 239 N.Y.S.3d 917, 2025 N.Y. Slip Op. 51426(U); Smaldino v. Comr., T.C. Memo. 2021-127.

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This material is for informational purposes only and is not legal advice. Receipt and use of this information, by itself, does not create an attorney client relationship.  You should consult with your attorney, tax professional, and financial advisor when creating and implementing your estate plan. The choice of a lawyer is an important decision and should not be based solely on advertisements.