Can Wife Recover Misspent Trust Funds from Husband in Divorce?
A disabled woman has a court-established special needs trust primarily for medical expenses after serious injuries from an accident. During her marriage, the husband’s friend was a trustee of the trust for several years. During that time, the husband had the trustee write three checks in one year to the husband for a total of $300,000. The husband used the funds to purchase a house, remodel it and build an apartment over a new garage. The husband knew that the apartment violated zoning laws and ultimately the couple was cited and had to move, losing approximately $100,000 when the property was sold.
A decade later, a new trustee discovered the transactions that were unknown to the wife. Now the couple is getting divorced. Are the lost funds recoverable in the divorce proceeding?
You present a lot of issues here involving both trust and divorce law. Strictly speaking, this is a trust issue. The trustee may have violated the terms of the trust in a number of ways. First, he gave money to the husband to be put into a house that presumably was only half owned by the wife, the beneficiary of the trust. Second, the trustee appears not to have sufficiently investigated the use of the money.
The new trustee can seek recovery against both the husband and the former trustee. But it could be difficult to recover given that the trustee probably acted with the best of intentions, thinking that the renovations to the home were for the benefit of the wife as well as the husband.
Given that the divorce is in process, it might be easiest to make an adjustment in the division property in the divorce. The wife might argue that she should receive a greater share of the marital assets due both to the fact that funds from her trust went to the husband in violation of the terms of the trust and that the costs of violating the zoning laws should be assessed against the husband, since apparently he proceeded with full knowledge of the potential problem he was creating. Nevertheless, in order to gain leverage to make this happen, the wife may want to seek the cooperation of her new trustee to bring an action against the husband and former trustee on behalf of the trust.