Expected Inheritances: To divide, or not to divide – That is the question

Mary Zambreno Iowa Family Law Dickinson Law Des Moines, Iowa

Posted on 11/10/2016 at 12:00 AM by Mary Zambreno

The area of family law is largely a state-by-state practice – with individual states deciding what their own family law rules are going to be – although many of them agree with each other on most issues and all of them give full faith and credit to cases decided in other states. This blog keeps a somewhat close eye on the more prominent cases from other states in order to determine how Iowa compares and to what extent those cases may have an impact here.

A recent case from Massachusetts, Pfannenstiel v. Pfannenstiel, had the potential to impact not just divorcing parties in that state but also estate planning for everyone. The Pfannenstiels divorced in 2012. Prior to that, the husband had received $800,000 in distributions from an irrevocable spendthrift trust established by his father, all of which stopped once the divorce was initiated.  At the time of trial, the trust was valued at close to $25 million with 11 beneficiaries. The trial judge noted that the husband was entitled to one-eleventh of that, even though only the husband and his two siblings had ever received any distributions (the other 8 beneficiaries were grandchildren who were presumably benefitting from the distributions made to their parents). 

Section 34 of the state’s statute regarding property division in a divorce requires courts there to consider, among other factors, the opportunity of each for future acquisition of capital assets and income. As a result, the trial court awarded the wife 60% of the husband’s interest in the present value of that trust because the husband would have the opportunity to acquire future interests from this trust. This decision was affirmed on appeal.

However, the Supreme Judicial Court of Massachusetts recently reversed that decision stating that the husband’s interest in the trust was so speculative as to constitute nothing more than an expectancy. As a result, it was not divisible as part of the parties’ marital estate. The Supreme Judicial Court further stated that on remand, the lower court revisit issues like whether alimony to the wife would now be appropriate in light of the lower property award. 

Could the same thing that happened in the Pfannenstiel lower court happen in Iowa and if so, what repercussions would that have on advising our clients in the midst of a divorce or drafting estate plans?

Regarding expected inheritances, the current Iowa statute governing the division of property in a divorce, Section 598.21(5)(i), provides as follows:

The court shall divide all property, except inherited property or gifts received or expected by one party, equitably between the parties after considering all of the following:

(i) Other economic circumstances of each party, including pension benefits, vested or unvested. Future interests may be considered, but expectancies or interests arising from inherited or gifted property created under a will or other instrument under which the trustee, trustor, trust protector, or owner has the power to remove the party in question as a beneficiary, shall not be considered.

However, the statute did not always read as such.

In 2005, the case, In re Marriage of Rhinehart came before the Iowa Supreme Court. In Rhinehart, the Iowa Supreme Court noted that Iowa law requires marital property to be divided equitably and in this case, the trial court justified awarding the husband more marital property than wife because wife was “reasonably likely to receive substantial funds from her father’s trust [at] about the time she would retire from teaching.” The trust referenced here had a value in excess of $5 million and the wife had a future interest in one-ninth of that fund with the present value being $550,000.  The Court specifically also noted that although the wife’s father has the power to change the beneficiaries of the trust, there is no evidence indicating he is likely to do so. The Court stated that “it is permissible to consider [wife’s] future interest in this trust in determining an equitable division of the parties’ property” because 598.21(1)(i) “instructs the court to consider, among other factors, the ‘economic circumstances of each party, including pension benefits, vested or unvested, and future interests.’ {emphasis added.)” The Rhinehart Court stated that wife’s future need for the parties’ assets is considerably less than husband’s need and therefore, it is most equitable to award husband more in marital property because her retirement income “will be supplemented generously by her remainder interest in the family trust fund.”

It appears that what happened in Rhinehart above was akin to what happened in the Massachusetts Pfannenstiel case. The primary difference is that in Rhinehart, the Court justifiably considered the wife’s expected interests when awarding the husband a disproportionate share of the marital assets, reasoning that husband will have a greater need for that asset in the future whereas the wife will be able to tap into her family trust fund in her retirement. Notice here that the wife’s expected interest wasn’t awarded to the husband, only that the Court considered it and awarded the husband a larger share of the assets.  In Pfannenstiel, however, those expected interests were actually awarded to the wife.

Our legislature amended the statute later, in what appears to be a response to Rhinehart, to add the expected inheritances exception to the statute.

Prior to Rhinehart, the Iowa Court of Appeals in the case, In re Marriage of Wallace, had a similar opportunity to address this issue but with an entirely different outcome than in Rhinehart. In Wallace, the wife argued that the trial court erred by failing to consider the husband’s future inheritance from his mother to be an asset which should be considered when dividing the assets.  The Court declared that it did not have to decide this because the husband’s uncontradicted testimony is that he would receive no such inheritance from his mother because under a codicil to the will, his inheritance was to be given to charities that he designated.

To answer the question previously posed above, which is that could Pfannenstiel happen in Iowa? The answer to that is that it did, and the legislature closed that loophole with the expected inheritance exception.

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.

- Mary Zambreno

Categories: Family Law, Mary Zambreno

 

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