Trusts and Equitable Division

By Kevin J. Rubin

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Estate planning and trusts serve many purposes, including the transfer of wealth to future generations. However, when assets are transferred into trusts for nefarious purposes to deprive a spouse of his or her rights to equitable division or alimony claims, then the aggrieved spouse has recourse under Georgia law. Specifically, the case of Gibson v. Gibson, 301 Ga. 622 (2017), provides guidance to family law practitioners who are presented with those scenarios in divorce cases.

In Gibson, the husband created two irrevocable trusts and funded the trusts with assets titled in his individual name to protect his family from potential liability associated with his oxygen business, which was a significant contingent liability for his family, as well as to provide for his special needs daughter. The husband was the grantor of both trusts, but was not (and could never be) a beneficiary or a trustee of the two trusts. Between 2010 and 2013, the husband attempted to place approximately $3.2 million worth of assets, including bank and brokerage accounts, life insurance policies and an ownership interest in a business interest into the two irrevocable trusts. The wife joined the trustees of the trusts to the divorce case and asserted fraudulent conveyance claims against the husband and the trustees in an effort to claw back the trust assets into the marital estate for purposes of equitable division. After a lengthy bench trial, the trial court involuntarily dismissed the wife’s fraudulent conveyance claims, finding that the husband did not fraudulently transfer the assets to the trusts and that the transfers were proper under Georgia law.

On appeal, the Supreme Court of Georgia held that property in trusts like those in Gibson “are exempt from equitable division absent a finding of fraud.” The Court affirmed the dismissal of the wife’s fraudulent transfer claims because the trial court’s finding that the husband’s transfers of assets into the trusts were not fraudulent was supported by record evidence. However, the Court agreed with the wife that the husband’s transfers of the assets in the two brokerage accounts to the trusts were ineffective under O.C.G.A. § 53-12-25(a) because the accounts erroneously listed the husband as trustee. The Court remanded the case to include the assets in the two brokerage accounts in the equitable distribution of marital assets.

There are several key takeaways from the Supreme Court of Georgia decision. First, Gibson confirms that the concept of whether an asset is marital property, separate property, or third-party property does not apply until a divorce action has been filed. In reaching its conclusion, the Gibson Court reaffirmed its holding in Armour v. Holcombe, 288 Ga. 50, 52 (2010), that if one spouse transfers assets that he or she owns to a third party before any divorce action has been filed, the transfer will be upheld unless it is a fraudulent or voidable transfer. The Court reiterated the law that transfers to a trust are transfers to a third party.

There is an exception under O.C.G.A. § 53-12-80(f) and Speed v. Speed, 263 Ga. 166 (1993), where the transferring spouse is also a beneficiary of the trust. In that situation, a spendthrift provision will not be valid and property in a trust that is attributable to a beneficiary’s contribution is subject to a spouse’s claims for alimony and equitable distribution of property. However, because the husband in Gibson was neither a beneficiary nor trustee of the trusts, the corpus of the trusts was third-party property not subject to the wife’s claim for distribution, unless a fraudulent transfer had been present.

Second, in determining that dismissal of the wife’s fraudulent transfer claim was supported by evidence in the record, the Gibson opinion clarified the case law surrounding the confidential relationship of marriage. The Court held that there is generally a confidential relationship between spouses, and that this finding does not depend on the particular circumstances of each marriage. While the trial court erred in relying on the evidence of the parties’ financial situation to find that no confidential relationship existed, the Court held that the proper result was reached. The Court distinguished its prior decisions, finding that a spouse has a duty of candor when seeking agreement on a matter related to termination of the marriage, and a duty to disclose a sexually transmitted disease, from what it has never held—“that a person must gain the consent of or even inform his or her spouse before undertaking every financial transaction, whether a moderate lunch bill, a generous holiday gift to a friend, or a $50 charitable contribution.” The Court noted that the size and circumstances of the financial transactions at issue could give rise to some suggestion of fraud, but it did not set any particular threshold. Because spouses generally have a confidential relationship with each other, Gibson suggests that certain transfers may be carefully scrutinized by a court; however, the Court did not go so far as to say that every transfer must be disclosed to a spouse. While the failure to disclose a $50 transaction is not evidence of fraud, it is unclear what amount would suggest fraud. Since spouses are in a confidential relationship, if there was a finding of fraud, then the four-year statute of limitations related to fraudulent or voidable transfers under the UFTA/ UVTA would be tolled and a spouse could claw back additional transfers during a marriage.

Third, the Gibson Court concluded that a person’s spouse is a creditor or potential creditor under Georgia’s fraudulent or voidable transfer laws (i.e., O.C.G.A. § 18- 2-70, et seq.).¹ However, the existence of actual intent to defraud remains a question of fact, even in the context of a spousal relationship. The Court affirmed the trial court’s conclusion that there was no actual intent to defraud, because it properly applied the “badges of fraud” listed in O.C.G.A. § 18-2-74(b), and its factual findings were supported by evidence.

Finally, with respect to two brokerage accounts that were not titled in the name of the legal trustees, the Gibson Court concluded that those transfers to the trusts were incomplete under O.C.G.A. § 53-12-25(a). Because O.C.G.A. § 53-12-25(a) provided that “transfer of property to a trust shall require a transfer of legal title to the trustee,” and the brokerage accounts were not titled in the name of the trustee, the brokerage accounts were not trust property. In this respect, Gibson stands for the proposition that the titling of assets is important, and strict compliance with O.C.G.A. § 53-12-25 is critical to effectively transfer assets to a trust. However, effective July 1, 2018, O.C.G.A. 53-12-25(a) was revised and broadened to not limit a transfer solely to the legal trustee, but to acknowledge valid transfers where the trust is named as a grantee on the title of the property. Even with this expanded criterion for property transferred to trusts, the family law practitioner should still engage in a deeper analysis of the issues surrounding the criteria for inter vivos gifts, such as whether the donor spouse relinquished dominion of the assets or the requirements under the trust instruments related to the trustee’s obligation to accept or refuse to accept property to the trust.

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Kevin Rubin is a partner at Marple Law Firm, LLC, and has practiced exclusively in the area of family law since graduating from Emory University Law School in 2008. Kevin can be reached at kevin@marplelawfirm.com or 404-795-5021.

Endnotes

1 Effective July 1, 2015, the Uniform Fraudulent Transfer Act (UFTA) became the Uniform Voidable Transactions Act (UVTA). Whether the UFTA or UVTA is applicable depends on which act was in effect at the time of the transfers. Interfinancial Midtown, Inc. v. Choate Constr. Co., 343 Ga. App. 793, 797 n.7 (2017)(citing Gibson, 301 Ga. at 628 (2)).