Divorcing Spouse Busts through Delaware Dynasty Trust to take $30 Million Mansion

Divorcing Spouse Busts through Delaware Dynasty Trust to take $30 Million Mansion

The estate planning community has been discussing the Daniel and Beth Kloiber divorce action for the past few years. This high profile divorce between Kentucky residents took center stage in 2014 when their Unpublished jurisdictional decision was released by the Court of Chancery of Delaware in the Matter of Daniel Kloiber Dynasty Trust u/a/d December 20, 2002, 2014 WL 3924309 (Del. Chan., Unpublished, August 6, 2014).

The biggest issue for the estate planning community was whether Beth’s Garretson v. Garretson argument noted in that opinion would allow her to bust through a Delaware Dynasty Trust to claim some of the assets via the divorce.

What was at stake?

The Kloiber Dynasty Trust was a Delaware health, education, maintenance and support trust (i.e., a Delaware support trust) for the benefit of Daniel and other beneficiaries.  Based on certain large sales of trust assets, there was roughly $310 million in the trust, plus or minus whatever was kept private.

First-Tier Trust Jurisdications

Delaware has long been considered one of the first-tier trust jurisdictions, along with Nevada, South Dakota and Alaska. But yet of these so-called first-tier trust jurisdictions, Delaware is the only one that has an unfavorable case on its books that says that a divorcing spouse of a beneficiary is not considered a creditor and therefore is not restricted by the trust’s spendthrift provision.

Delaware advisors have for years claimed that the Garretson case doesn’t stand for this proposition. There is no way to know how many under-the-radar divorce settlements have been made based on this Delaware case law, but Kloiber is the high profile divorce case that has had estate planners sitting on the edge of their chairs awaiting the result.

[Proposed] Order Severing Trust

A settlement has recently been reached by the parties. The terms of the settlement were sealed by the Delaware Court of Chancery. The [Proposed] Order refers to a Settlement Agreement entered into by Daniel and Beth in the divorce action which is “contingent upon the entry of an order in the Delaware Court of Chancery severing the Dynasty Trust to create a separate trust for the benefit of Beth to be funded with assets of the Dynasty Trust (the Severed Declaration of Trust);”.

Beth Severed Declaration of Trust gets the $30 Million Mansion

I can now report that Beth Kloiber’s Severed Declaration of Trust (i.e., the trust branched off from Daniel’s Delaware Dynasty Trust) has received a mansion at 1040 S. Ocean Blvd., Manalapan, Florida with a property tax value of $29,448,569.99 in the name of Whimsical Florida, LLC with Beth as manager and registered agent and with her Kentucky address.  Other assets that may have also passed to her trust via the divorce are private and haven’t been disclosed.

Does a Delaware Dynasty Trust still work?

Yes, but only if it’s a fully discretionary trust.  Do not ever draft a Delaware trust with health, education, maintenance and support distribution language since that is susceptible to the Garretson v. Garretson/Kloiber v. Kloiber problem given that a “support trust” must rely on a spendthrift provision to protect its assets and Delaware law doesn’t treat the divorcing spouse as a creditor.

You can avoid this problem altogether by using Nevada, South Dakota or Alaska law, each of which does not have statutory case law subjecting a support trust to divorcing spouses. But Delaware law works just fine if the scrivener drafts the trust as a discretionary trust.

Many thanks to:

Many thanks to Darrell Hofheinz, writer for the Palm Beach Daily News, who was the first to break the news about the transfer of the Kloiber property via his article at:  http://www.palmbeachdailynews.com/news/news/local/deed-unfinished-mansion-in-manalapan-changes-hands/ns72q/.  Darrell was very helpful to me in sharing information.

About the Author:

Steven J. Oshins, Esq., AEP (Distinguished) is an attorney at the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada, with clients throughout the United States. He is listed in The Best Lawyers in America®. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011 and was named one of the 24 Elite Estate Planning Attorneys in America by the Trust Advisor. He has authored many of the most valuable estate planning and asset protection laws that have been enacted in Nevada. He can be reached at 702-341-6000, ext. 2, at soshins@oshins.com or at his firm’s website, www.oshins.com.

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