Revocable Trust as Post-Nup?

Can a revocable trust created by one spouse after marriage constitute an enforceable postnuptial agreement for divorce purposes? This question arose in a recent case decided by the Tennessee Court of Appeals. The facts are as follows:

Husband and Wife were married in 2006. It was a second marriage for both parties.

In 2009, Husband established a revocable trust, naming himself as trustee and Wife as successor trustee. The revocable trust named Husband as current beneficiary and Wife and children as remainder beneficiaries of anything left in the trust at Husband’s death. Husband also executed a will that directed his probate assets to the revocable trust at death.

Husband funded the revocable trust with at least four properties: (1) a lakehouse that he had acquired prior to marriage; (2) a 50-acre lot in White County; (3) a separate 5-acre lot, also in White County; and piece of property that he and Wife apparently acquired together after the revocable trust was established. In order to facilitate the transfer of the properties into the revocable trust, Wife signed deeds that, purportedly unbeknownst to her, conveyed all marital interest she had in the properties to Husband as trustee. In addition, the decision suggests Wife signed the revocable trust as well, presumably in her capacity as successor trustee.

In 2012, the parties filed for divorce. Husband argued that the assets in the revocable trust should be treated as his separate property, rather than marital property. He premised his argument on the notion that the revocable trust and accompanying deeds formed a valid postnuptial agreement. The trial court disagreed, finding that the parties lacked the mutual assent necessary to support a contract. As a result, the trial court ordered that the assets be divested from the revocable trust and re-vested in the names of the parties as they existed prior to the creation of the trust.

Notably, the Court of Appeals did not reject outright the idea that a revocable trust could serve as a postnuptial agreement. However, the Court made clear that

In order for an enforceable written postnuptial agreement to exist in the current case, Husband and Wife must have had a meeting of the minds regarding creation of the Trust as a postnuptial agreement.

The Court then went on to note the following facts:

  • The revocable trust made no mention of a postnuptial agreement;
  • The revocable trust contained no provisions addressing divorce or separation, as would commonly be expected in a postnuptial agreement; and
  • Husband had unfettered access to the assets of the revocable trust and thus could deplete the trust before Wife ever received any benefits.

Moreover, the Appellate Court cited facts in the record indicating that Husband and Wife each had a different understanding as to the purpose of the revocable trust. While Husband claimed that the revocable trust was intended as a postnuptial agreement, Wife apparently understood it to be a vehicle for protecting Husband’s assets from potential lawsuits from third parties [a dubious proposition for numerous reasons, including the reason discussed here]. Accordingly, the Court found that there was no meeting of the minds and affirmed the decision of the trial court.

This case underscores that in a blended family or second marriage situation, it is not enough just to have a prenuptial agreement or postnuptial agreement. The agreement must be enforceable. A  prenuptial agreement or postnuptial agreement can fail for many reasons, including lack of mutual assent, failure of one party to fully disclose assets, lack of independent counsel, and coercion. Good advice is key.

Notwithstanding the result in this case, with proper planning certain trusts can be used to supplement (or, if necessary, replace) a prenuptial or postnuptial agreement. For example, a Tennessee Investment Services Trust (TIST) established before marriage can be used in conjunction with a prenuptial agreement to protect separate property in the event the prenuptial agreement is later set aside by the court. Furthermore, community property trusts may contain terms that specify how trust assets should be distributed in the event of divorce, thereby functioning as a postnuptial agreement. 

Source: Ogle v. Duff, No. E2016-01295-COA-R3-CV (Tenn. Ct. App. 2017)

Posted by Joel D. Roettger, JD, LLM, EPLS

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