A funny thing happens on the road to marital bliss. I love you becomes “I love you, but. . . do you mind signing this. . . this protects both of us. . . my parents think it would be a good idea. . .,” etc.
For estate planning attorneys with a client who is single and contemplating marriage, one set of facts causes concern. Clients with religious leanings want to protect their valuable businesses and property interests but also be married in accordance with their particular religion. Entering into a prenuptial agreement may not be allowed as a precursor to marriage and could jeopardize the client’s ability to be married in the eyes of his religion. If the client is religious, is there another alternative to a prenuptial agreement that would suffice? Is this alternative available to the client in every state?
For estate planning attorneys and their married clients, a typical question at the beginning of the process is whether, upon the surviving spouse’s death, assets should remain in trust for the clients’ children or be distributed outright and free of trust. The estate planning attorney will often caution the client about leaving assets outright. The estate planning attorney’s chief concern is that assets left outright to child or grandchild beneficiaries become susceptible to creditors’ claims, including spousal creditors. Sometimes the conversation ends here: clients want their children’s inheritance to be left in trust—no further discussion. In other cases, clients circle back to their unmarried child or child with the weakest marriage. (“Her husband is lazy.” “All my son’s wife does is spend his money.”) The client wants the estate planning attorney to draft protective provisions for such child within the client’s revocable trusts. Some estate planning attorneys take the client’s cue and suggest provisions be placed in a trust to specify that trust distributions are made to a married child or grandchild only if he has entered into a prenuptial agreement (or, if the child or grandchild is already married at the time the estate planning document is signed, a postnuptial agreement). Such advice is well-intentioned and might work. But what if the client is religious? Might his religion prevent the use of a prenuptial agreement? If a prenuptial agreement arrangement cannot be made to protect the child or grandchild beneficiary’s interest, what is the client to do?
According to the Religious Landscape Study from the Pew Research Center in May 2015, in the United States, 76.5 percent of the population identifies with a religious affiliation, while only about 22.8 percent identifies itself as religiously unaffiliated; contrast that statistic with statistics posited in an article by Casey Leins in the U.S. News & World Report, in which it was noted that in the rest of the world the percentage of people who are religiously unaffiliated is expected to fall from 16 percent in 2015 to 13 percent in 2060. In other words, this issue will come up more often than estate planning attorneys might think it does. Additionally, clients, hearing about cases such as Berlinger v. Casselberry, 133 So. 3d 961 (Fla. 2d DCA 2013), Pfannenstiehl v. Pfannenstiehl, 475 Mass. 105 (Mass. 2016), and Klabacka v. Nelson, 394 P.3d 940 (Nev. 2017), from their friends and other advisors, want definitive answers on whether leaving assets in trust to beneficiaries are protected. With such unique answers comes unique planning opportunities. But, where religious affiliations intersect with premarital planning, additional creativity may be necessary.
One religion where religious affiliations intersect with premarital planning is Catholicism. Catholics have a specific set of laws that its priests must consult to determine whether a couple can be married in the church. Can a priest marry someone who has undertaken prenuptial planning? Are there certain estate planning techniques that, if initiated by a client, will prevent a client or a client’s descendants from being married in the Catholic Church?
Using Catholicism as an example (the author is Catholic), this article summarizes how religion may conflict with estate planning advice and how estate planning attorneys can undertake premarital planning without running afoul of religious law for the single client contemplating marriage or the client who is concerned about divorcing spousal creditors for his children or more remote descendants. Although this article uses Catholicism as an example, other religions may have similar laws that should be consulted before marriages for clients or their descendants with religious leanings. Additionally, although this article discusses clients with religious leanings, the use of the planning discussed in this article shouldn’t be limited to clients with religious leanings.
Catholicism and Marriage
Traditional estate planning advice is that clients who are about to enter into marriage should sign a prenuptial agreement. For clients with children or descendants, the chief concern of that client is that such proposed spouse of the child or descendent could become a creditor upon divorce. When marriage in compliance with a religion is contemplated, extra consideration is necessary to properly address the client’s concerns.
Catholics believe in Christ’s presence in the Catholic Church community through the sacraments. Marriage is a sacrament. If a client is Catholic, he will want to properly undertake the sacrament of marriage. And the client who is a parent will want his child to undertake the sacrament of marriage. This is marriage in the religious, as opposed to the purely legal, sense.
Canon Law is the code of ecclesiastical laws governing the Catholic Church. Several Canons are applicable to marriage, especially Canon 1102 Section 1, whereby a marriage subject to a condition about the future (i.e., signing a prenuptial agreement) cannot be contracted validly. In other words, although in the legal sense two people can be validly married by anyone holding a notary in some states, and a marriage is valid with or without a prenuptial agreement, to be valid in the Catholic Church, a marriage cannot be preceded by a contract such as a prenuptial agreement.
To even get to the point of marriage in the Catholic Church, most couples are required to go through marriage preparedness courses put on by their Catholic Church of preference before marriage. The preparedness courses are often run by the priest who will marry the couple. In the marriage preparedness process, couples are asked with frequency whether such marriage is subject to a condition about the future. If a couple indicates that a marriage is subject to a prenuptial agreement, a priest isn’t permitted to marry the couple. (There are exceptions, but such exceptions are outside of the scope of this article.) For example, when a client’s inheritance from a parent or grandparent is contingent upon the execution of a prenuptial agreement before marriage, the client’s marriage would be forbidden in the Catholic Church if the prenuptial agreement was entered into. The client is left choosing between marriage in the Catholic Church or inheritance.
Additionally, the author is aware of a situation in which clients’ intentions to marry subject to a prenuptial agreement were found out by the Catholic Church because the couple were public figures. In that situation, the Catholic Church declined to marry the couple. What can estate planning attorneys do? What types of prerequisites might other religions have?
The Client Is Single and Contemplating Marriage
Although there may be some exceptions, generally a client contemplating marriage isn’t going to want to transfer assets to another person, even for a short period of time, just to be married in the religious sense. For example, a transfer subject to an escrow arrangement isn’t going to sound enticing to a client. Similarly, a client isn’t going to want to enter into a transaction resembling a sale with a buyback provision. The business owner isn’t going to want to part with control of his asset for a short period of time. What if a regulatory issue took place or during the interim ownership period a tort or other claim occurred? For insurance purposes, transfers where the client parts with control or ownership, contemplating to resume ownership following the marriage, are problematic. What company would insure such business for even a short period of time? An additional concern would be what if the religion found out about any of the planning immediately following the marriage? Might steps be taken to void the marriage (in the religious sense), thereby causing embarrassment and shame to both families?
The author has determined that at least one estate planning technique is suitable for the single client contemplating marriage who would like to be married in compliance with a particular religion. The client could create a self-settled trust and would also be a beneficiary of the trust, remaining eligible to receive distributions of income or principal from the trust.
The Restatement (Second) of Trusts, Section 156(2), provides in relevant part, “[w]here a person creates for his own benefit a trust for support or a discretionary trust, his transferee or creditors can reach the maximum amount which the trustee under the terms of the trust could pay to him or apply for his benefit.” Restatement (Third) of Trusts, Section 58(2), provides, “[a] restraint on the voluntary and involuntary alienation of a beneficial interest retained by the settlor of a trust is invalid.” This black letter rule is commonly referred to as the “Self-Settled Trust Doctrine,” adopted from old English law. Although the Self-Settled Trust Doctrine is currently the majority rule in the United States, the present legislative trend is to reverse this rule.
Foreign countries have allowed self-settled trusts for years, including, for example, the Cook Islands International Trust Act (1984 as amended), the Nevis International Exempt Trust Ordinance (1994 as amended), Trusts (Jersey) Law (1984 as amended), and the two-statute format of the Bahamian Fraudulent Disposition Act (1991) and the Bahamian Trusts (Choice of Governing Law) Act (1989). According to John E. Sullivan III, in his article titled Gutting the Rule Against Self-Settled Trusts: How the New Delaware Trust Law Competes with Offshore Trusts, “[t]he American approach to self-settled trusts is prudish when compared to the approach of other common law jurisdictions. For example, England and those nations that follow its precedents, have long recognized common law trusts known as the ‘protective trust’ and the ‘discretionary trust.’” Over time, the stigma of self-settled trusts has lessened to the point where now many US states allow them.
In 1997, states began to allow self-settled trust legislation. Initially, Alaska enacted Alaska Stat. § 34.40.110: the first set of statutes whereby a person could establish a “self-settled” perpetual trust—because there is no rule against perpetuities that limits the term of the trust, it can conceivably continue forever—have the assets held in the trust protected from the claims of “unknown future creditors,” and still remain a discretionary beneficiary of the trust. This differed from most states’ laws, under which, if a person transferred assets to a trust for his own benefit, the transfer could be ignored by both present and future creditors. For example, under Fla. Stat. § 736.0505, Florida does not afford the same creditor protection to “self-settled” asset protection trusts (revocable and irrevocable trusts created by a settlor where the settlor retains a beneficial interest in the trust), as do states such as Alaska, Delaware, Nevada, and South Dakota. Currently as many as 17 states allow a person who settles a trust to remain as a “discretionary beneficiary.” The four US jurisdictions with a combination of protections for self-settled trusts and a limited or lengthy perpetuities period are Alaska, Delaware, Nevada, and South Dakota.
There are a few important steps that should be taken for a client considering transferring his primary assets to one or more self-settled trusts. For example, if the client has an important business asset that he wants placed outside of the reach of a future spousal creditor, he would want to separate such asset in trust from other, just-as-lucrative assets: the business should be separate from one or more lucrative investment accounts or rental properties. An umbrella structure, a trust owning multiple LLCs that in turn own single assets, could be appropriate under certain circumstances.
For federal gift tax purposes, the client would retain such dominion and control (within the meaning of Treasury Regulations § 25.2511-2) over the assets transferred to this trust as to render the gift incomplete (such as by retention of an inter vivos and a testamentary special power of appointment over the trust assets). The client has thus made a transfer while retaining control over the trust to avoid using up the client’s unified credit amount.
The client would appoint a qualifying trustee in the particular self-settled trust jurisdiction. This importantly strengthens the creditor protection purpose of the trust by allowing an independent fiduciary control over the assets.
The client would remain a discretionary beneficiary over the trust assets. This allows the client to still have access if money is needed from the trusts. If the trust is created to run the client’s business, any distributions or dividends would be caught by the trust and then could later be distributed to the client-beneficiary.
In order to continue running a business owned by the trust, the client would set up the business’s operating documents to remain as president or manager of the business. The client essentially remains the key person in his business. The difference is that instead of the client-owned business paying distributions to the client directly, the client’s business pays the trust, and the client can request a distribution from the trust.
On the protection from spousal creditor issue, the client would look to the statutory guidance in the trust creation state. For example, if the client chooses South Dakota in which to create her trust, the client would create and fund the trust before marriage. Following the marriage, the client would provide notice in compliance with S.D. Cod. L. § 55-16-15(3) that her spouse has a time period within which to object to transfers of property to the trust. If such notice is given, the time period within which the assets become susceptible to a fraudulent transfer claim of the spouse will be shortened. Using Catholicism as an example, this would be in compliance with Canon Law, as such notice provided by the client was not a contingency to marriage. In Nevada, such notice would not be required for the client to obtain protections from divorcing spouses; under Alaska Stat. § 34.40.110(l), the trust would not be protected if created during or less than 30 days prior to the marriage.
The Client Has Children or Other Descendants and Is Concerned with Divorcing Spouses
For clients who are married with religious leanings and redoing their estate planning documents, the focus should be on planning using a revocable trust that creates discretionary trusts or irrevocable discretionary trusts in jurisdictions that protect beneficiaries’ interests from alimony or support creditors, as opposed to forcing a beneficiary to sign a prenuptial, postnuptial, or any other pre- or post-marital agreement in order to receive a distribution.
Nationally known estate planning attorneys have suggested conditioning a beneficiary’s trust distributions to her execution of a prenuptial, postnuptial, or any other pre- or post-marital agreement in order to receive a distribution. Such execution may occur once, annually, or more frequently, depending on the terms of the trust instrument. The prenuptial, postnuptial, or any other pre- or post-marital agreement would provide at a minimum that the non-beneficiary spouse has no entitlement, right, or other interest in the beneficiary-child, grandchild, or more remote descendant’s trust interest or distribution. This conditioning serves to prevent a future argument by the then non-related divorcing spouse that he had any interest in the beneficiary-child, grandchild, or more remote descendant’s trust interest or distribution. The problem with such planning is that if the family members have religious leanings, such prenuptial, postnuptial, or any other pre- or post-marital agreement execution could prevent a marriage in compliance with religion.
What are the alternatives for the client with wealth who wants to benefit a child, grandchild, or more remote descendant who is either contemplating marriage or is already married? Basically, discretionary trusts are trusts created by the settlor where a trustee is given the authority to make distributions at such trustee’s discretion. The trusts contemplated in this section are third-party discretionary trusts whereby the client (parent or grandparent) creates a discretionary trust for the benefit of a beneficiary (child or grandchild) or a class of beneficiaries (children, grandchildren, or both). The settlor is not a beneficiary and, although she may be the trustee, it is recommended that, when creditor protection is a concern, a professional trustee be used (or at least somebody unrelated and not subordinate to any of the settlor or beneficiaries). The key point is that such trust be created in a jurisdiction (or later have the ability to be moved to a jurisdiction) that outlaws the beneficiary’s spouse or former spouse who has a judgment or court order against the beneficiary for support or maintenance from benefitting from such trust (or making a claim that such spouse has access to the funds or should have some sort of entitlement to the funds).
Because some states allow a beneficiary’s spouse or former spouse who has a judgment or court order against the beneficiary for support or maintenance to threaten the creditor protection aspects of a discretionary trust, when drafting trusts, estate planning attorneys should consider the combined use of fully discretionary trusts and clauses that enable a trustee to change the principal place of administration and governing law of such trusts, when drafting. A typical revocable trust will provide that, upon the surviving spouse’s death, assets are distributed to beneficiaries outright and free of trust or outright at a specific mandated age. The combined use of fully discretionary trusts (terminating only after exhaustion of the state governing law’s rule against perpetuities) and clauses that enable a trustee to change the principal place of administration and governing law of the trust provides the beneficiaries with more flexibility should the beneficiary have creditor concerns, including spousal creditors. The fully discretionary trust does not provide the beneficiary with an entitlement to any distributions; such distributions to a beneficiary are in the trustee’s sole and absolute discretion. In some states, this language is enough to keep trust assets out of the computation of the marital estate for purposes of divorce, and away from exception creditors in the context of alimony. In other states, such as Massachusetts (for purposes of calculating the marital estate) and Florida (for purposes of alimony creditors), this language isn’t enough, because the trust property may enter into the calculation when determining the beneficiary spouse’s ability to pay maintenance to his former spouse or become subject to an alimony spousal creditor’s continuing writ of garnishment. Clauses that enable a trustee to change the principal place of administration and governing law of such trust are important because, in the right situation, they may allow an independent trustee to move the trust to a more favorable jurisdiction (either domestic or foreign) that may not honor a state court’s continuing writ of garnishment.
For clients with religious leanings, estate planning attorneys must think outside the box. Depending on the rules of the particular religion, a single client that wants to be married within his religion should consider whether a self-settled trust is in compliance with the client’s religion, as opposed to using a prenuptial or postnuptial agreement. For clients with children or grandchildren, estate planning attorneys should consider whether the clients would prefer to create a foreign or domestic discretionary trust (or consider the use of a change of governing law and principal place of administration clause in the clients’ trusts) for the beneficiaries’ inheritances, as opposed to suggesting that the clients encourage the use of a prenuptial or postnuptial agreement for the beneficiaries.