Tannen Applies Only to Third-Party Trusts, Not Self-Settled Trusts
by Jeralyn L. Lawrence
In divorces involving alimony, N.J. Stat. Ann. § 2A:34-23(b) sets forth a non-exhaustive list of 13 factors that must be considered by a court in determining the duration and amount of alimony, if any, that one spouse must pay to the other after divorce. The 11th factor of this statute, “[t]he income available to either party through investment of any assets held by that party,” has become a subject of legal scholarship and debate since the Appellate Division rendered its opinion in Tannen v. Tannen, which was summarily affirmed by the Supreme Court of New Jersey in 2011.1
In Tannen, the husband and wife were married at the end of 1988. Shortly after they married, the couple moved into a large home that was purchased by the wife’s father and titled in the wife’s name. In 2000, the wife’s parents settled an irrevocable trust naming the wife as the sole beneficiary, with the wife’s parents as the co-trustees. At the time of trial, the corpus of the trust included shares of mutual funds and stock valued at $1,155,877, a commercial property from which the trust received rental income, and the large home in which the couple resided (which had been previously conveyed by the wife to the trust).2
The terms of the trust provided, in essence, that the trustees had the sole discretion to determine what portion, if any, of the net income and corpus of the trust would be distributed to the wife.3 In making such a determination, the trustees were obligated to determine what was in the beneficiary’s best interest after consideration of a number of factors relating to the beneficiary, not the beneficiary’s spouse, children, or any other third party.4 The terms of the trust also explicitly stated that the beneficiary had no right or authority to compel or influence any distribution from the trust without the written consent of the trustees.5
From the proceeds of this third-party trust, the couple paid the real estate taxes on their home and half of the cost of a housekeeper.6 The proceeds from the trust were also used to pay for improvements on the home, such as a two-story addition, new roof, new driveway, new kitchen, new deck, new floors, landscaping, and pool renovation.7
After nearly 18 years of marriage, the husband filed for divorce. As part of the divorce litigation, the wife argued that the income from the trust should not be considered by the court in calculating alimony because she had no discretion whatsoever in how or whether the proceeds from the trust were distributed. Because the trustees (her parents) could decide at some point in the future to cease distributing any proceeds from the trust to her, consideration of this income by the court in calculating alimony would be improper.8
The husband, on the other hand, argued that the trust proceeds should be considered by the court in calculating alimony. He noted that his wife, throughout the marriage, received disbursements from the trust that she ceased utilizing.9 Thus, the court should consider the proceeds of the trust and impute income to the wife as if she was utilizing them.10 The husband also argued that the wife had an obligation to use the proceeds of the trust toward maintaining her lifestyle after the divorce.11
After examining the terms of the trust, the Appellate Division agreed with the wife, and held that the proceeds from the third-party trust of which she had no control could not be considered as her income in calculating alimony, notwithstanding the responsibility of the trustees to distribute proceeds from the trust to the wife in accordance with the trust’s terms.12 The Appellate Division also recognized the broad discretion that trustees of discretionary trusts have, as well as the limited ability of beneficiaries of such trusts to compel an exercise of the trustee’s discretion.13 Thus, the beneficiary interest the wife held in the trust was neither an asset nor an income source for purposes of determining alimony.14
It is critical to note that Tannen involved a discretionary trust that was established by a third party for the benefit of one spouse. But, the principle elucidated in Tannen, specifically that the beneficiary interest of a discretionary third-party trust is not an asset for purposes of calculating alimony, would not apply to a trust that was established by one spouse for that spouse’s benefit.
N.J. Stat. Ann. § 3B:11-1 states the following:
The right of any creator of a trust to receive either the income or the principal of the trust or any part of either thereof, presently or in the future, shall be freely alienable and shall be subject to the claims of his creditors, notwithstanding any provision to the contrary in the terms of the trust.
The New Jersey Legislature enacted this statute to prevent individuals from shielding their assets from creditors by placing them in a protective, self-settled trust and preventing judgments against them from ever being satisfied. The text of this statute makes a trust created by an individual for that individual’s benefit fully accessible by law to the beneficiary, notwithstanding the terms of the trust, thus making the trust an asset a court can consider for purposes of imputing income to that individual and determining an appropriate level of alimony.
In a divorce involving a trust for the benefit of a spouse, one must first determine who settled the trust and the nature of the discretion afforded to the trustees to make distributions from it. If the trust is completely discretionary and was settled by a third party for the benefit of one spouse, Tannen indicates that such a trust cannot be considered an asset for purposes of imputing income and calculating alimony. If the trust is settled by one spouse for that spouse’s benefit regardless of the discretion granted to the trustees under the terms of the trust, then N.J. Stat. Ann. § 3B:11-1 indicates such a trust is an asset for purposes of imputing income and calculating alimony.
This is not the end of the alimony analysis in cases involving a discretionary third-party trust. The fourth factor of the alimony statute,15 which is the marital standard of living and the likelihood that each party can maintain a reasonably similar standard of living after the divorce, is the ‘touchstone’ of both an initial alimony determination as well as a decision on a motion to modify alimony after the divorce when either spouse alleges a change in circumstances.16 This is because the purpose of alimony is to enable the supporting spouse to meet the standard of living enjoyed while living with the supporting spouse during the marriage.17
The Appellate Division in Tannen reiterated those established principles, and it further stated that the source of the funds used to meet the marital standard of living is irrelevant to a court in ultimately calculating it.18 Thus, though a court cannot consider a discretionary trust settled by a third party as the beneficiary-spouse’s income in making an alimony determination, it must calculate the standard of living enjoyed by a couple during the marriage, even though the funds used to meet that lifestyle originated from such a trust. The first factor listed in the alimony statute19 is “[t]he actual need and ability of the parties to pay.” The Appellate Division in Tannen indicated that the historical record of payments made by a trust must be considered in determining the need of the beneficiary in making an alimony determination.20 Thus, even though the proceeds from a discretionary trust that was settled by a third party cannot be used to impute income to a beneficiary-spouse in calculating alimony, the historical record of disbursements from such a trust must be considered in determining the beneficiary-spouse’s needs.
In conclusion, a discretionary trust that was settled by a third party for the benefit of one spouse cannot be considered as the beneficiary-spouse’s asset for purposes of calculating alimony. But, a trust that was settled by one spouse for that spouse’s benefit must be considered as that spouse’s asset in making an alimony determination. Further, although a discretionary trust that was settled by a third party for the benefit of one spouse cannot be considered an asset for calculating alimony, the historical disbursements from the trust must be considered in determining that spouse’s need for alimony. Regardless of the nature of the trust in question, or who settled it, a finding regarding the standard of living enjoyed by the divorcing couple during the marriage must be made by a court in any alimony calculation, irrespective of the source of the funds used to meet the marital lifestyle.
Jeralyn L. Lawrence is a member of the law firm of Norris, McLaughlin & Marcus, P.A. The author would like to thank Rajeh A. Saadeh, an associate of the firm, for his assistance with this article.
Endnotes
1. Tannen v. Tannen, 416 N.J. Super. 248 (App. Div. 2010), aff’d 208 N.J. 209 (2011).
2. Tannen, 416 N.J. Super. at 256-57.
3. Id. at 256.
4. Ibid.
5. Ibid.
6. The house was free of mortgages.
7. Id. at 257.
8. Id. at 263.
9. Ibid.
10. Id. at 265.
11. Id. at 277.
12. Id. at 270-73.
13. Ibid.
14. Id. at 273.
15. N.J. Stat. Ann. § 2A:34-23(b)(4).
16. Crews v. Crews, 164 N.J. 11, 16 (2000).
17. Steneken v. Steneken, 183 N.J. 290, 299 (2005).
18. Tannen, 416 N.J. Super. at 275.
19. N.J. Stat. Ann. § 2A:34-23(b)(1).
20. Tannen, 416 N.J. Super. at 277.