New York Divorce Case Offers Lesson in Tax, Trusts, and Fairness

Trusts play a conflicting role in the high-net-worth world. They can be established to preserve wealth for family members or to shield wealth from family members. But what if circumstances change so that trusts designed for the first purpose end up serving the second? And how do taxes come into play when the line between a trust’s goals is blurry?

Trusts and other strategic investment structures are often set up for the sole purpose of avoiding estate taxes while preserving generational wealth. That was the intention of one couple whose recent divorce called into question how New York courts treat tax-efficient trusts.

With the assistance of an estate attorney, the couple (primarily the husband, with his wife’s consent) set up complex tax planning structures. About 20 years before their divorce, they placed most of their marital assets into two irrevocable trusts, intending to “shelter from estate taxes the majority of their assets accrued during the marriage.”

Over the years, the husband set up additional trusts and multiple LLCs, which he used to transfer and hold marital assets, including several residences.

At the time of the divorce, after nearly 24 years of marriage, the marital estate was valued at approximately $180 million, of which $111 million was in trusts. As the marriage frayed, the husband restructured the trusts, maintaining control while weakening his wife’s position. The husband used and controlled the trust assets so that they functionally belonged to him.

The question before the court was straightforward: Should the trust assets be included in the marital estate for the purpose of equitable distribution? If they weren’t included, the husband would retain them.

Until a few months ago, it seemed well established that a New York court wouldn’t interfere with these tax-efficient trusts, but this court did. Without dissolving or disturbing the trust assets, the court included them in the marital estate and divided the entire amount equally, awarding $90 million in assets to each spouse.

In doing so (as is expected in a divorce matter), the court relied on principles of equitable distribution to guarantee that the wife be treated fairly. That is where taxes arose—tax obligations and implications were key in ensuring equitable treatment.

The court placed particular emphasis on the lifetime estate and gift tax exemption. That federal exemption—limited to $13.99 million for 2025 and increasing to $15 million in 2026—is exhausted once met. Both husband and wife treated the marital assets transferred into the trusts during the marriage as gifts from the parties to the trusts and used their lifetime gift tax exemptions to defray the taxes on those gifts. They exhausted their exemptions.

It seems only fair that they both received the benefit of using their exemptions. If the court had ruled that trust assets weren’t marital property, the wife would have exhausted her exemption and, at the end of the marriage, have no claim to the trust assets for which she claimed that entire exemption. Such a result would be inequitable.

The same is true of the taxes paid on trust income. Both husband and wife used non-trust assets to pay taxes on the income generated by the trusts. Those non-trust assets were depleted to maintain the trust assets. Because both spouses spent non-trust assets for the benefit of the trust, it’s only fair that they both share in the value of the trust assets.

If the court had ruled that trust assets weren’t marital property, the wife would have spent the nearly 24-year marriage draining her assets to pay taxes for a trust that she has no right to access. That also would be inequitable.

Finally, the court turned to the tax implications of non-trust assets. The transfer of non-trust real property and investment accounts would have capital gains implications for the wife. If the wife were to sell her share of those assets, she would, of course, pay taxes on the proceeds.

If her share of the marital assets were limited to non-trust assets, her assets at divorce would all be subject to additional taxes, while the husband would be left with the trust assets, not subject to those taxes. That, too, would be inequitable.

Here—where assets are held in tax-efficient trusts—equitable tax treatment is inseparable from equitable distribution. According to at least one New York court, fairness demands that taxes be considered.

The case is C.S. v. R.H., 2025 BL 328594, N.Y. Sup. Ct., decided 9/8/25.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Jillian Gross is a founder and partner at Mosberg Stambleck Sharma & Gross in New York City.

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