Thursday, December 27, 2012

In New Jersey, is trust income “income” for the purposes of support?

In New Jersey, the income that is received from a trust cannot be used to calculate alimony and child support payments.

In a 2011 case, Tannen v. Tannen, Wife’s parents set up an irrevocable trust with Wife as the sole beneficiary and Wife and Wife’s parents as co-trustees. The trust instrument did not require mandatory payments. Rather, the trustees had discretion. Thus, Wife, as only a co-trustee, could not demand funds from the trust as she chose. The assets of the trust included the mortgage-free home where Wife and Husband lived, commercial property and over $1 million in stocks and mutual funds. During the marriage, the trust also paid the annual real estate taxes on the marital home, paid the cost of private school for the children for two years, and generated $124,000.00 in income each year.

The trial court held that income from the trust should be treated as income to Wife for the purpose of determining how much alimony Husband would be required to pay to Wife. The trial court went so far as to order the trust to make monthly payments to Wife.

The appellate court disagreed with the trial court and reversed saying Wife’s interest in the trust was not an asset that she held. The appellate court decision turned on whether Wife could control the ability to “tap the income source,” which in this case, she could not. Therefore, the appellate court found that the trial court improperly imputed income to Wife from the trust when it determined the alimony and child support that Husband was required to pay.

The goal of an alimony award is to assist the supported spouse in maintaining a lifestyle that is reasonably similar to the one the supported spouse had during the marriage.

For the purposes of determining alimony and child support, the appellate court instructed the trial court to take into consideration past payments made by the trust when determining Wife’s actual needs. Failing to take these past payments made by the trust into account would be entirely unfair to Husband. The appellate court remanded this issue back to the trial court to determine the support Wife was entitled to from Husband, specifically noting that the trial court cannot ignore the benefits Wife receives from the trust that cover her actual needs.

The appellate court further found the trial court improperly determined the amount of child support Husband was required to pay. When determining child support, courts cannot overlook the provision of the guidelines which says the “fact that a family does not incur a specific expense in a consumption category is not a basis for a deviation from the Child Support Guidelines” (emphasis added). The trial court should not have deviated from the Guidelines simply because the mortgage and real estate taxes were paid by the trust, because Wife still incurred other “housing” category expenses. Thus, the appellate court remanded for reconsideration.

When assets are placed in a discretionary trust, under New Jersey law, the income generated will not be used in an alimony calculation. Even though the trust money was not available for the purpose of determining income, the courts will take into consideration how much that money has supported the spouse receiving it in the past. In short, when calculating support, the court will not adjust the trust beneficiary’s actual income to include the trust income. Instead, the court will subjectively consider how receiving the trust income affects the recipients’ life.

If you have questions concerning a trust account and how that would impact your divorce or support payments, you should contact an attorney.

Written by Allyson Lutley, law clerk at the Law Offices of Linda A. Kerns, LLC.  Edited by Linda A. Kerns, Esquire.

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