Estate plans collide with the Dissolution of Marriage Act

All in the Family

Dan Stefani

Dan Stefani is a principal at Katz & Stefani and primarily handles family law matters that require detailed analyses of complex transactions and business valulations. His work on behalf of mainly high net worth clients, as well as spouses of high net worth individuals, involves valuations of closely held corporations, partnerships and other entities, child custody and support issues as well as paternity and domestic violence.

October 2016

Several issues emerged in a recent 2nd District Appellate Court opinion, In re Marriage of Asta v. Pappas, 2016 IL App (2d) 150160.

In Asta, during the marriage, the wife acquired an interest in two companies, known as Olsun, founded in part by her father. She acquired Olsun more than nine years after her father died.

The wife argued she inherited the stock and therefore it was non-marital property. Her husband contended the stock was marital because his wife purchased it with the assistance of marital collateral and the parties’ personal guarantees in the settlement of the family dispute.

The trial court determined the stock was marital property because it was acquired during the marriage and the wife failed to meet her burden of proving that she obtained it by inheritance.

The Olsun stock was held in trust upon the wife’s father’s death, with her mother as trustee and beneficiary and with the wife and her two brothers as the other beneficiaries.

Primarily because of estate tax liabilities, the father’s probate estate remained open for more than nine years during the parties’ marriage. After those nine years, the wife and her two brothers filed a claim against their mother, the trustee, alleging that she mismanaged the trust and made excessive withdrawals for her own benefit. An additional lawsuit was filed by Olsun against the two brothers.

The three siblings and their mother then reached a comprehensive settlement agreement during the wife’s marriage in which, as a single transaction, the wife acquired 100 percent ownership in Olsun. The agreement specified it was a purchase by the wife.

The mother waived her interest as beneficiary of the trust in exchange for an annual payment. The two brothers received cash. The transaction was primarily funded by more than $3.6 million in cash and more than $2.25 million in loans procured by Olsun.

Security for the loans were Olsun’s assets, a $1 million life insurance policy on the wife’s life and three parcels of real estate personally owed — two of which were found in the divorce to be the wife’s non-marital property and one to be marital property.

In addition, both husband and wife signed personal guarantees. After the wife’s acquisition of Olsun, it was undisputed that Olsun provided 100 percent of the repayment of the loans. After almost four years, the loans were refinanced and the personal guarantees and security agreements involving husband and wife were canceled.

A few years later, the wife filed for divorce.

The appellate court analyzed four issues.

First, contrary to the trial court, the appellate court found the mother’s death was not a condition precedent because the wife could have received her share of the trust principal during her mother’s lifetime. Additionally, under the settlement agreement, the mother waived her interest in the trust and, therefore, the wife’s one-third remainder interest accelerated and became possessory.

Second, the appellate court found that the four beneficiaries of the trust decided to settle their myriad pending disputes and that the settlement was consistent with the wife’s father’s original estate plan. Specifically, the court said the wife simply received her share of the inheritance in a different form — namely, 100 percent ownership in the businesses rather than a cash distribution.

Third, the appellate court rejected the husband’s argument that the plain language of the settlement agreement described the transaction as a “purchase” by wife.

The last issue was whether the fact that the settlement transition was funded in part by loans guaranteed by the parties and secured with a small amount of marital property defeated wife’s non-marital claim.

The court pointed out that at the time of the trial, the new Illinois Marriage and Dissolution of Marriage Act, effective last January, was not in effect — even though it provides for a new category of non-marital property, “all property by a spouse by the sole use of non-marital property is collateral for a loan and is then used to acquire property during the marriage.”

The court concluded that the wife acquired her stock consistent with the distribution from a trust because the personal guarantees had no effect on the parties’ personal assets and the marital collateral had such little equity compared to the amount of the loan.