USA – MASSACHUSETTS Trends and Developments Contributed by: Patricia M. Annino, Rimon Law
has become increasingly aggressive in its audits both on the income tax and the estate tax front. The burden is on the taxpayer to prove the change in domicile. Trend: inclusion of gifted and inherited assets (including those in irrevocable trusts) in divorce proceedings Unlike most other states, gifted and inherited assets (including those held in irrevocable trusts) are custom - arily reviewed in Massachusetts divorce actions and may be considered when dividing the marital estate. This includes not only assets that are currently vested, but assets that a divorcing party may receive in the future. Massachusetts is not a community property state. In a divorce assets are divided “equitably” regardless of whose name is on the asset, meaning the division of assets may not necessarily be equal, but must be fair. MGL c 208 Section 34 sets forth the factors to con - sider when dividing assets in a divorce: length of mar - riage, conduct of the parties during marriage, age, health, station, occupation, amount and sources of income, vocational skills and employability, estate, liability and needs, opportunity for future acquisition of capital and income, and the amount and duration of alimony, if any is awarded. The court also has the discretion to consider each party’s contribution in the acquisition, preservation or appreciation in value of their respective estates and the contribution of each as a homemaker to the family unit. Over the past few years there has been a flurry of cases in the Massachusetts courts addressing the issue of whether assets held in an irrevocable trust established by a third party may be considered when dividing assets. Even if trust assets are not included in the Massachusetts divisible estate, the trust interests may be considered in a beneficiary’s divorce as an “opportunity to acquire future income and or assets” – a mandatory factor as noted above. In evaluating this issue, case law now mandates that the opportunity to acquire future income and or assets allows future inheritances to be formally discovered in the divorce. Following a landmark case, Vaughan v Vaughan , attorneys routinely ask the parents of
a child in a divorce to prepare what is known as a Vaughan Affidavit, providing information that includes their approximate total net worth (plus or minus USD500,000), a general description of their current estate plan and wills, and the date, if any, when the estate plan or wills were last amended. If a Vaughan Affidavit is not produced the attorney will customarily serve a deposition duces tecum requiring the parents to bring to a deposition all documents regarding their assets and estate plan. This is the law regardless of any right to privacy and even though the parent has and may change his/her estate planning in the future. In determining whether gifted or inherited assets are considered there is now a large body of case law addressing the factors to consider in determining if an asset is divisible in divorce. Central to the decision is whether the asset is a “fixed and enforceable” property right. In other words, is the interest vested (current and enforceable) or contingent and not yet vested (meaning it may be vested depending on a future event) or vested and not contingent but not yet possessory (meaning it is vested but not yet in possession, for example a remainder interest in real estate). Even if the interest is not “fixed and enforceable” the court can still consider a right to income interest for the purpose of calculating alimony and child support. When a divorcing party has received an inheritance, the court will typically review the value of the inherit - ance in relation to the entire marital estate, when the inheritance was received (and whether it has been “woven into the fabric of the marriage”), the charac - ter of the asset, whether the value of the asset has declined or depreciated during the course of the mar - riage and how the asset was used during the course of the marriage. In other words, each party’s role in man - aging the assets, and whether the assets in question were kept separate or commingled with the couple’s jointly owned assets. If the assets are held in a revocable trust established by a divorcing party, they are considered fully avail - able to the divorcing party and are treated as part of the divorce estate. If the trust is irrevocable, it must be determined if the divorcing party is the settlor and if so, then what rights
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