APPEAL AND CROSS-APPEAL FROM OLDHAM CIRCUIT COURT HONORABLE KAREN A. CONRAD, JUDGE ACTION NO. 04-CI-00515
The opinion of the court was delivered by: Nickell, Judge
RENDERED: APRIL 12, 2013; 10:00 A.M.
APPEAL FROM OLDHAM CIRCUIT COURT HONORABLE KAREN A. CONRAD, JUDGE ACTION NO. 04-CI-00515
AFFIRMING IN PART, REVERSING
BEFORE: MOORE, NICKELL AND THOMPSON, JUDGES.
These are combined appeals and a cross-appeal from a judgment of the Oldham Circuit Court concerning valuation and division of property, maintenance and the assessment of post-judgment interest from the dissolution of marriage of Larry James Ensor ("Larry") and Deborah Lynn Ensor ("Debbie"). Following a careful review of the detailed record, briefs and the law, we affirm in part, reverse in part, and remand for further proceedings.
Larry and Debbie were married on June 14, 1980. The marriage produced two sons who are now adults. Larry has a third adult son from a previous marriage. Larry worked in his family's automotive parts remanufacturing business, Hesco Parts Corp., LLC, which enjoyed great success for many years. When gross receipts from that business began to decline based on the loss of a major contract with Ford Motor Company, Larry and his two brothers, who also worked in the family business, began to diversify their investments. These investments included several real estate holdings which produced significant rental incomes.
In an effort to minimize tax consequences and to aid in the transfer of assets to their children, Larry and his brothers each undertook complex estate planning on the advice of family attorneys and accountants. One of the main vehicles suggested for accomplishing these tasks was the use of a Grantor Retained Annuity Trust ("GRAT"). Because the valuation and division of Larry's GRAT is at the center of the majority of the allegations of error in this appeal, an in-depth explanation regarding it is warranted. Although a somewhat complex concept to describe, in basic terms a GRAT is an estate planning tool wherein assets are transferred to a trust and ultimately to other beneficiaries so as to avoid estate taxes upon a donor's death. The use of GRATs for such a purpose is approved by the Internal Revenue Service.
To further effectuate their estate planning, Larry and his brothers formed a limited partnership known as LDF in December of 1997. On May 26, 1998, Larry and Debbie, along with Larry's brothers and their wives, executed four general warranty deeds conveying properties owned by FDL*fn1 collectively valued at $8,199,330.00 to LDF. Each of the wives executed the deeds for the specific purpose of transferring any dower interest they had, or might have had, in and to the subject properties. The transfer of these properties was intended to facilitate the establishment of the brothers' GRATs. Larry created his irrevocable GRAT on June 30, 1998, and transferred his 33.2222% limited partnership interest in LDF to the GRAT while retaining his .0011% general partnership interest. His brothers completed similar transactions.
In return for transferring his limited partnership interest to his GRAT, Larry was to receive quarterly payments of $72,295.00 for a period of nine years with the final payment to be received in April of 2007. The total value of these payments was $2,602,620.00 and the deposits were reported on Larry and Debbie's state and federal income tax returns. The funds were deposited into the parties' joint checking account controlled by Debbie and were used for her personal purposes and to pay their joint expenses. Pursuant to IRS guidelines and regulations, following the formation of-and the transfer of assets to-the GRAT, a gift tax return was prepared and executed showing a taxable gift to Larry's sons totaling $58,377.00, based on their status as beneficiaries of the trust portion of the GRAT. This amount was arrived at using appropriate calculations and guidance from IRS publications.
Following the final annuity payment in 2007, Larry's direct beneficial interest in the GRAT was to terminate, and the GRAT would pay sums to Debbie for her needs and also for the health, education, maintenance and support of Larry's three children. Debbie was entitled to appoint a "qualified" successor trustee of her choosing and could designate beneficiaries from any or all of Larry's descendants to receive the trust corpus at her death. In the event Debbie did not exercise her power of appointment, the GRAT would terminate at her death and be distributed in equal shares to Larry's three sons. Although divorce was not contemplated at the time the GRAT was created, under its explicit terms, Debbie's interest in the trust would terminate if she were to remarry following a divorce or Larry's death. If the GRAT ran its course as drafted, the net effect would be annuity payments to Larry and Debbie in excess of $2.5 million and the transfer of over $2 million in assets to Larry's children. The transfer of assets to the children in this manner had the added benefit of avoiding the nearly fifty percent estate tax which would be imposed if those assets remained in Larry's estate at his death and were then transferred to his children, a potential savings of over $1 million in taxes.
Unfortunate difficulties resulted in Larry and Debbie separating in November of 2003, and divorce proceedings being initiated in July 2004. A limited decree of dissolution was entered in January 2005 which reserved rulings on the division of marital assets. The parties stipulated to an "agreed valuation date" of December 31, 2004, for purposes of property division based on the complexity of their financial situation and the knowledge that many of their assets could fluctuate in value due to economic circumstances beyond the control of either of them. This was especially true of the real estate, business and investment holdings which comprised the bulk of the marital estate.
As the case developed over the course of the following three years,
Debbie claimed she did not fully understand the extent of the assets
transferred to the GRAT. She asserted she had been "kept in the dark"
regarding the parties' financial dealings, and Larry had told her only
that he was "going to put some money up for the boys." She indicated
she knew nothing about a trust and would certainly never have agreed
to release her share of an asset valued at nearly three million
dollars had she known that was the intent of the documents Larry
directed her to sign. In a motion to amend her pleadings-which was
Debbie alleged Larry had defrauded her into signing the deeds and
other documents surrounding the formation of the GRAT. She sought her
share of the "marital" interest in the corpus of the GRAT. By
agreement of the parties, Debbie was awarded fifty percent of the
remaining quarterly annuity payments due from the GRAT,*fn2
and these monies were considered an "advance" to be credited
against the ultimate property division.
The trial court held a trial on the contested issues over the course of five days in April and May of 2006. A protracted period of additional discovery and contentious motion practice followed. On September 25, 2007, the trial court circulated a "rough draft" of its opinion to the parties for their review and requested each to tender calculations from their respective CPA's regarding the proper equalization of the marital estate. The parties complied and the trial court considered these expert reports in preparing its final opinion.
Findings of fact, conclusions of law and judgment as to the division of property and maintenance were entered by the trial court on May 28, 2008. Therein, the trial court evaluated and divided much of the parties' marital estate.*fn3
It devoted nearly eleven of the thirty-two pages to an in-depth discussion of the GRAT, including a discussion of its formation and purpose before finding it was valid and legally created. The trial court ultimately found Debbie was entitled to an equalization payment for her one-half interest in the marital portion of the GRAT. Based on this finding, the trial court convened sessions on four additional days in December 2008 and March 2009 for the purpose of obtaining a proper value for the GRAT assets. Another extended period of discovery and motion practice ensued. Throughout the course of the litigation, the GRAT-a separate legal entity-was never made a party to the divorce action, nor were the trustee or any beneficiaries or contingent beneficiaries of the trust.*fn4
On February 18, 2010, the trial court entered its findings of fact, conclusions of law and judgment regarding the GRAT. It found the value of Debbie's share of the GRAT assets to be $1,392,108.00, plus an additional amount of $377,610.00 representing her portion of GRAT receivables in the form of outstanding loans and cash payments. Thus, in addition to the property and cash payments awarded to her by the order entered on May 28, 2008, the trial court ruled Debbie was entitled to a further equalization payment of $1,769,718.00. The judgment was designated as final and appealable, as was the May 2008 order. Each party moved to alter, amend or vacate both judgments.
Following additional motions and hearings, the trial court entered amended findings of fact, conclusions of law and judgment on August 11, 2010, addressing all contested matters regarding property division and maintenance.
Among numerous other amendments, the value of Debbie's share of the GRAT assets and receivables was reduced to $1,410,106.00, and the total equalization payment due from Larry to Debbie was reduced to $1,524,627.00.*fn5 This appeal and cross-appeal were timely taken from that order. Debbie has also appealed from the trial court's October 12, 2010, order granting her judgment interest at five percent on the cash equalization payment of $1,524,627.00 ordered to be paid to her in the August 11, 2010, judgment, rather than the twelve percent post-judgment interest she had requested. We have consolidated the three matters for the sake of judicial economy and will address all in this single opinion.
We begin with the appeal and cross-appeal emanating from the trial court's August 11, 2010, judgment. Larry raises ten allegations of error on direct appeal and Debbie raises seven additional allegations of error on cross-appeal. The majority of these claims are centered on the GRAT-including its valuation and division and the propriety of including it as part of the marital estate. Thus, our opinion will focus mainly upon the trial court's decisions regarding the GRAT, rather than upon the other, peripheral and comparatively minor areas of contention. We have, however, carefully ...