3 CREATIVE WAYS FAMILY LAW ATTORNEYS CAN USE TRUSTS

By: Phillip B. Rarick, Miami Trust Attorney, and Maria C. Gonzalez, B.C.C., Family Law Attorney

The following note is a brief review of three popular trusts that can help ensure compliance with future financial obligations set forth in a Pre-Nuptial Agreement or Marital Settlement Agreement.

Hypothetical #1. Husband and Wife plan to marry and are expecting their first child in 7 months. Husband has a net worth of $10 million; Wife $200,000. In addition to all support needs for their child, Wife wants assurance that she will have an independent source of funds during the marriage, and sufficient funds if the marriage is dissolved to maintain the same quality of lifestyle she enjoyed during the marriage. Husband wants assurance that funds set aside for Wife are not used for a lavish lifestyle during the marriage; if Wife dies such funds would continue to be wisely managed for their children.

Solution: Irrevocable Spousal Lifetime Access Trust. The Pre-Nup requires establishment of an irrevocable Trust with a third party as Trustee for the sole benefit of Wife for her lifetime. In addition to any child support obligations, Husband will commit to fund $1 million into an Irrevocable Spousal Lifetime Access Trust. The Pre-Nup requires the Husband to fund the Trust with $1 million cash and the Trustee is required to purchase a $5 million term life insurance policy with the Trust as the beneficiary. The “Triggering Event” is defined as the annulment, dissolution of marriage, divorce proceeding or similar proceeding between the Husband and Wife. Wife has liberal rights to all income produced by the Trust; therefore prior to the Triggering Event, the Trustee can distribute such amounts of income as the Wife requests for her health, education, maintenance, support, and reasonable comfort. After the Triggering Event, the Wife can direct the Trust to distribute all income and principal as she wishes provided sufficient funds remain to fund the Life Policy. Note: This type of Trust has excellent asset protection features for the funds in the Trust.

Hypothetical #2: Both Husband and Wife want to ensure that their children will receive not just a high-quality private education through high school, but also have no excuse not to secure a quality post-high school degree, including a graduate degree.

Solution: Children’s Educational Trust. The parties commit to paying $100 per child per month into an Irrevocable Children’s Educational Trust. The Trustee is required to invest the funds in the Florida Prepaid College Fund, Florida 529 Savings Plan, or similar 529 plan. Individuals can contribute as much as $90,000 to a 529 plan in 2024 if they treat the contribution as spread over a 5-year period. Such plans grow tax free and avoid the high tax rate of Trusts. These plans provide excellent income tax reduction planning plus help ensure a high quality education for the children.

Hypothetical #3: One or both parties is not a good money manager which has led to financial stress that is a primary cause for the couple’s divorce. Both agree for the need to purchase or continue payment offer existing life insurance policies upon death of the spouse who has been the main provider.

Solution: Children’s Safe Harbor Trust. The MSA provides for the establishment of an irrevocable Trust to own the policies and pay the premiums. See post Children’s Safe Harbor Trust. The parties agree to yearly funding to the Trust to cover the premium payments. The sole beneficiary of the Trusts are the children; distribution standards are health, education, support, and best interests of the child at the sole discretion of the Trustee. Note: The trustee’s discretion is absolute to protect the children from creditor claims or claims of their spouses if they marry.

Notice: This article is intended for informational purposes only. It is important you consult with an experienced Miami Trust attorney. For more information contact attorney Phil Rarick at  (305) 709-2858 or by email prarick@raricklaw.com.

More Resources:

• Practical Tips for Administration of a Florida Trust
• Florida Trustee Checklist

Irrevocable minors trusts should always be an important tool in the Family Law Attorneys bag of tools because a well designed trust can address multiple issues that cannot be fully resolved through a Marital Settlement Agreement. It may be a good idea to brainstorm possible trust solutions with an experienced estate planning attorney at the commencement of the case. Here are three examples:

Problem #1: Wife, Husband (or both) are Poor Money Managers. Example: Husband and wife have minor children, ages 8 and 10. Wife is big shopper and bad money manager. Your client is the Husband. He is concerned that if child support payments go directly to wife she will use some of the funds to buy expensive clothing and keep up her lavish life style – to the detriment of the children. Both parents agree that they want to ensure that the children go to a private high school and a prestigious college or university after high school.

Solution: Safe Harbor Educational Trust For Minor Children. A Safe Harbor Trust with prepared by a Miami Trust attorney with the following purposes: (1) Ensure that all support funds go the children, and (2) the children secure a first rate high school and university education. These goals are achieved by having the funds under the management of a third party trustee – who can be an attorney, CPA, trust company, or other trusted person. The trustee can be directed, pursuant to the Settlement Agreement, to purchase a 529 plan or Florida Prepaid College Plan for the children’s educational needs and the balance of the funds would be set aside to meet the Husband’s support obligations and the private high school. Of course, the Trust can incorporate many other unique requirements of the Settlement Agreement. Each quarter the Trustee provides an informal accounting of Trust payments so both parents are kept fully informed of all trust expenses, income, and distributions. Read More: Children’s Safe Harbor Trust.

Problem #2: Love Child But No Marriage. In this situation Mark Anthony (not the actor) has a two year old daughter from a prior relationship. The child’s mother is harassing Mark, demanding child support of over $1 million by posting pictures and demands on Facebook and Instagram. Mark is willing to make the payment, but wants to end all further communications with the mother.

Solution: As required by the Support Agreement, Mark establishes an Irrevocable Minor’s Trust with the purpose of providing for the daughter’s support needs until she is 25 or secures a degree from a fully accredited college or university, whichever occurs first. Mark funds the Trust with a onetime payment of $1 million. Thereafter, it is the Trustee’s obligation to ensure that the funds are conservatively invested and used for the health, education, and support of the minor daughter, and special activities, such as summer camp and tennis lessons. The Trustee provides an informal accounting to both the mother and Mark every 90 days.

#3: Protecting Homestead Contributed by Grandmother. Jose and Emily Perez live in a house owned by Jose’s elderly mother. They have twin daughters, age 7. Jose’s mother wants to devise the house to the twins upon her death. She wants Emily to continue to live in the house with her and the girls after the divorce as long as she does not remarry, but upon grandmother’s death, she wants the house or the sale proceeds available for the twins living needs or education until they are at least 25.

Solution: Irrevocable Homestead Trust For Minor Children. Grandmother deeds the homestead to an irrevocable Trust but retains a beneficial interest for life so Grandmother can still claim the three big benefits of homestead: (1) protection against creditors; (2) $50,000 property tax credit; (3) 3% Save Our Homes cap. Of course, grandmother must continue to occupy the house. Upon grandmother’s death, the trust can continue to qualify for homestead, upon application by the Trustee, provided one of the beneficiaries continues to reside at the home. If sold, the proceeds are distributed to the Trust accounts under the fiduciary management of the Trustee, and used for the education or other needs of the children.

Take-Away Points

1. Irrevocable Minor’s Trusts are often good “insurance policies” in a Marital Settlement Agreement to ensure marital funds go the children and are not misused by a free-spending spouse or young adult who is not a good money manager – such as the young teenage boy turning 18 who would prefer to buy the yellow Mustang rather than go to college.
2. These are just a few examples of how Irrevocable Marital trusts can be used in Marital Settlement Agreements. If is often a good idea to brainstorm with an experienced Miami Trust attorney about ways a trust may be used to protect marital funds.

Most divorce judgments call for one of the parties to obtain a life insurance policy for securing the payment of child support, alimony or some other financial obligation. Let’s assume the obligation is solely child support: a potential mistake is failure to secure payment of the policy premiums by use of an irrevocable Children’s Safe Harbor Trust structured as a spendthrift trust.

For securing the payment of child support, the settlement agreement should have specific language that may read as follows:

Larry shall establish an Irrevocable Children’s Safe Harbor Trust (“Trust”) to secure the payment of his child support and other financial obligations set forth herein. Within 10 days of execution of this Agreement, Larry shall transfer sufficient funds to the trustee of the Trust to purchase a term life insurance policy with a face value of $750,000 for a term of 10 years. The Trust shall be the owner and sole beneficiary of the insurance policy. The initial trustee of the Trust shall be [CPA, attorney, or independent third party]. The sole beneficiaries of the Trust shall be the children named herein. Said Trust shall be structured to (a) provide for the education, health, maintenance, support, and best interests of the children; (b) to protect the proceeds from creditor claims of Larry, the wife, or the children; and (c) comply with all of Larry’s financial obligations to the children as set forth in this Agreement. [Said Trust is attached hereto and fully incorporated herein.]

The Safe Harbor Children’s Trust could help insure that the policy does not lapse if Larry does not have sufficient funds to purchase the policy outright, but rather needs to pay on a monthly schedule. If a premium payment schedule is needed, it would be wise to have Larry prepay at least 3 months of premium in advance to the Trustee. The trustee would be required to notify the wife if funds for payment of the premium fall below a required minimum balance.

Such monies would be held by the Trustee to ver non-payment and give the wife time to compel the Husband to make payments. An alternative would be to purchase a life policy with the premiums guaranteed.

Note: Larry would want the trust structured to maximize his annual gift tax exclusion of $18000 per beneficiary in 2024. This is accomplished in the trust terms by use of what is known as “Crummey Powers”. Using such powers and assuming Larry has three children, he could annually transfer tax free $42,000 and not be required to file a Form 709 gift tax return.

How We Can Help

The primary focus of Rarick Trusts & Wills Law is trusts of all kinds and estate tax planning. As Miami trust attorneys, we have many years of experience in working with family law attorneys. We are available to consult with you and welcome any questions or comments. For more information, contact Phil Rarick at (305) 709-2858 or info@raricklaw.com. Special Note

The information on this blog is of a general nature and is not intended to answer any individual’s legal questions. Do not rely on information presented herein to address your individual legal concerns. If you have a legal question about your individual facts and circumstances, you should consult an experienced Miami trust attorney. Your receipt of information from this website or blog does not create an attorney-client relationship and the legal privileges inherent therein.