By Ariel Sosna and Sarah Van Voorhis, Van Voorhis & Sosna
Bethenny Frankel (famous for starring in “Real Housewives of New York” and for her SkinnyGirl cocktail company) and Jason Hoppy had an explosive divorce. While the couple was only married for two years, their divorce took twice as long while they litigated child custody and finances. It turns out that Frankel’s estate planning attorney may have contributed to the drama.
Frankel bought a New York condo for $5 million from confirmed separate property funds (pursuant to her prenuptial agreement) during her marriage. Frankel claims that she put the house into a trust at Hoppy’s suggestion. The couple’s trust attorney drafted the paperwork. It was not until the couple was in the throes of divorce litigation that Frankel discovered that the trust gave Hoppy 50% ownership of the condo and the right to live there, rent free, for life. Frankel’s lawsuit against her estate planning attorney says this title change cost her massive attorneys’ fees and took three years to resolve. Frankel is suing her attorneys for $2 million.
While Frankel and Hoppy’s divorce took place in New York, had it taken place in California, Frankel’s condo would have presumptively been community property if it was purchased during the marriage (Family Code §770). However, Frankel could have rebutted the presumption with the prenuptial agreement if the agreement made clear that assets purchased with her separate funds remained separate property. But the trust, giving Hoppy 50% ownership, if not anticipated in the prenuptial agreement, would muddy the situation in California.
Nonetheless, a number of California family law cases (in particular, In re Marriage of Haines (1995) 33 CA 4th 277 and In re Marriage of Burkle (2006) 139 CA 4th 712) hold that any inter-spousal transaction that gives an unfair advantage to one spouse raises the presumption of undue influence by the other. This means that the burden would have been on Hoppy to show that Frankel entered into the trust freely and voluntarily with full knowledge of the facts and the effect of her action. (In re Marriage of Balcof (2006) 141 CA4th 1509).
If Hoppy could show that Frankel knew what she was doing when she entered into the trust, Frankel might be out of luck pursuant to In re Marriage of Holtemann (2008) 166 Cal.App.4th 1166. In Holtemann, a trust was held to transmute husband’s separate property into community property even though it was clear that the trust was for tax purposes only. Frankel’s only saving grace in California would be Family Code §2640, which would allow Frankel to be reimbursed her initial separate property investment.
The moral of the story for Frankel is to be careful about estate planning decisions because they can end up determining more than what happens to your property after your death.