The Superior Court issued a non precedential decision on September 21 grappling with a question that has lingered since Pennsylvania adopted equitable distribution forty years ago. What happens to transfers of marital assets effected without the knowledge or consent of the spouse? The timeline in Mohen v. Mohen tells a story.
1986 Parties marry
Three children born 1991, 1992, 1994
2011 Husband meets with trust attorney; establishes trusts for three kids. Wife not involved.
2012 August: Husband gives wife copy of his will naming her as primary beneficiary
October: Husband transfers significant portions of his businesses to trust for children
Wife discovers affair on part of husband
2013 December. Parties separate
2014 March. Wife discovers trust documents.
2015 March. Husband revises will to name girlfriend as beneficiary of his estate.
May. Husband files for divorce.
2018 January. Wife moves to set aside 2012 trust. Husband responds she assented to the
transfers although she never signed the gift tax return. Trust assets worth $9.3 million in
2019 Trial Court sets aside trust transfers as fraudulent conveyances and “void” but then treats transfers as pre-distribution to Husband.
2020 Trial Court issues final order related to $31M in assets of which $7M are business interests. Wife awarded 57% or $14M in kind + pay $9M in 60 days. Trust transfers treated as advance distributions to husband. Wife to receive 30% of business value payable in installments over 10 years.
The Mohen case, albeit non precedential, brings into focus every divorcing spouse’s
nightmare. Is an inter vivos gift made prior to separation and/or divorce proceedings valid to defeat the claims of the non-gifting spouse? Put another way, when does the status of marital property “attach”. The happy news in this case from wife’s perspective is that she does not need to sue her own kids to claw back assets that her husband started to gift two years before separation. The key section is 23 Pa.C.S. 3505. It provides that courts may void as “fraudulent” transactions disposing or encumbering marital property where the transaction is for “wholly inadequate consideration.”
Mr. Mohen asserted that Section 3505 is intended to cover transactions effected pendente lite (while the case is pending). What he did was make gifts intended to minimize federal estate tax exposure. On this subject, the Superior Court circles back to the trial court opinion noting that the estate plan was made without wife’s knowledge and that when she was provided with husband’s will, it came without disclosure of the gifts already made to the children. Needless to say, husband’s new relationship also weighed on the trial court’s approach. More on that later. It probably did not help husband to suggest that his wife of 27 years lacked the capacity to understand his estate plan. And as if these cases are not complicated enough, the adult children testified that “Mom knew” about the gifts. The Trial Court found she didn’t know, never agreed and that such gifting amounted to dissipation. So, credibility was given to wife’s testimony despite Husband’s contention that while giving away $3M to the kids in 2012, there was still $10M left in the marital pot for distribution in case things didn’t work out.
The case comes at a propitious time. In 1997 before Congress decided to meddle with the federal estate tax, the exempted amount was a paltry $600,000. By 2010, the exemption had grown to $5,000,000 despite hemorrhaging deficits to address the 2008 economic collapse. In 2017 Congress doubled down and exempted the first $11,180,000 and then continued to index the exemption to track inflation and then some. Thus, today it is $11,700,000.
If you hang around the water cooler with your estate planning colleagues these days there is lots of talk about Congress vastly reducing this exemption to harness the growing federal deficits or pay for infrastructure. So, people with potential taxable estates of $5,000,000 and up are looking to gift their inflated homes, stock and businesses to the next generation, now. And, if I already am not liking my spouse as much as in olden days, why not put the money in the hands of “our loving children” now rather than risk sharing half or more with that unworthy spouse if a divorce should serendipitously “happen.” Kill two birds with one gift. Greedy old Uncle Sam and greedy old spouse.
The Mohen case would seem to put the brakes on that kind of plan. If I am worth $30 mill and I clap $10 mill away for the kiddies, if my spouse pulls the trigger and files for divorce, there is risk that he/she might get $15-18 million. My crisis comes when the divorce is over and all I am left with is $3-5 million after the spouse gets her money and the kids finish writing the thank you notes for what was once my $10 million. So perhaps the prudent estate planner will caution the solo estate planning client that his or her spouse needs to not only be part of the estate plan but to consent to it. Mohen is non-precedential but it is now out there in the ether of appellate law and not many jurists are going to be sympathetic to folks like Mr. Mohen who decided to do estate planning alone.
Two parenthetical notes. The facts presented in the opinion do not portray husband in a favorable light. But one has to ask whether some of these facts are more prejudicial than probative. The obvious “bad acts” include conveying assets into trust without wife’s knowledge or consent and changing his will without notice. But if the issue is whether this was a fraudulent conveyance, did we need to know how husband changed his will or the details of his post separation behavior? The critical legal issue is whether married folk can gift marital property before a separation or divorce filing and whether the property so gifted “counts” in a later equitable distribution. Would it matter, if husband had given the assets to his children weeks before filing for divorce and entering the priesthood, naming the Church as his residual beneficiary in a revised will?
The second unanswered question. Suppose the unilateral gift gutted the estate? In this case, it was charged to Husband and there were other significant assets. Suppose there weren’t? Presumably, the donee children (or the trust) are made third parties to the divorce and risk a claw back under fraudulent conveyance law. This will make for some very unpleasant litigation.
Mohen v. Mohen, 835 EDA 2020 (September 21, 2021)