Washington County District Court File No. F3995492
Considered and decided by Halbrooks, Presiding Judge, Klaphake Judge, and
1. For purposes of property division in a dissolution case, a party's non-marital remainder interest in an inheritance trust does not become divisible marital property by operation of an estate-planning device under which the party purchases stock from the trust in exchange for a promissory note secured by the stock itself.
2. For purposes of property division in a dissolution case, a party's interest in a Subchapter S corporation's retained-earnings account is non-marital property when the party is a minority shareholder, plays little to no role in the daily management of the corporation, and has no authority to call for a shareholder distribution.
3. In a dissolution action, spousal maintenance is unnecessary when a party has the ability to be self-sufficient.
4. In a dissolution action, awarding one party non-marital property that is owned by the other party is proper only when the party being awarded the non-marital property has demonstrated financial hardship.
The opinion of the court was delivered by: Halbrooks, Judge
In this marital-dissolution dispute, appellant John Zygmunt challenges the trial court's award of summary judgment to respondent Janet Robert. Appellant argues that the trial court erred or abused its discretion by concluding that (1) stock purchased from an inheritance trust in exchange for a promissory note secured by the stock itself was non-marital property, (2) respondent's interest in a Subchapter S corporation's retained-earnings account was non-marital property, (3) appellant was not entitled to spousal maintenance, and (4) appellant had not shown undue hardship warranting an invasion of respondent's non-marital property. We affirm.
The 21-year marriage of appellant John Zygmunt and respondent Janet Robert was dissolved by judgment and decree on April 19, 2000. The parties have one child, now emancipated. Respondent's family owns Siegel-Robert, Inc. (Siegel-Robert), a closely held corporation. Respondent's parents gave respondent several individual gifts of Siegel-Robert stock both before and during the parties' marriage and gave appellant individual gifts of stock during the marriage. The parties agree that these separate gifts of stock are the non-marital property of each party.
During their marriage, the parties lived a relatively modest lifestyle financed almost exclusively by respondent's distributions from her Siegel-Robert stock. By profession, appellant is a playwright and respondent an attorney, but during the marriage neither party worked full-time to support the family or established a career in any specific location. The parties typically held short-term jobs for little or no pay and relocated at will, living in various parts of the United States and Canada until settling near the Twin Cities in 1987.
Respondent's father died in 1996. His will directed that his entire estate, consisting primarily of Siegel-Robert stock, be held in a marital trust, with his wife (respondent's mother) acting as trustee. The will gave respondent's mother a life estate in the trust and divided the remainder interest equally among respondent and her siblings. The will authorized respondent's mother to enter into any transactions necessary to minimize the total tax liability of the estate and its beneficiaries.
Respondent's mother divided the marital trust into three separate trusts, including a qualified terminable interest property trust ("QTIP") that held a controlling interest of Siegel-Robert shares. The estate's tax planner determined that the estate's tax liability would be substantially reduced if the QTIP held only a minority interest in Siegel-Robert by the time respondent's mother died. The tax planner accordingly arranged a stock-purchase transaction whereby respondent and each of her siblings purchased an equal number of shares from the QTIP. The children each signed a promissory note with a 15-year term, a pledge agreement, and a redemption agreement. The promissory notes were secured by the shares to be purchased, which were held by the QTIP trust. The pledge agreement and redemption agreement provided that the children could redeem the shares held by the trust in order to pay the annual installments on the note.
None of the children's spouses signed any of the documents related to the stock-purchase agreement. At the time of trial, respondent had not made any payment on the note using marital or non-marital funds and had not commingled the QTIP stock with any marital asset. Instead, when the note's first and second annual installments came due, respondent redeemed shares held as security by the QTIP to meet her obligation on the note.
After respondent's father died, the Siegel-Robert board of directors further reduced the corporation's tax liability by voting to convert Siegel-Robert from a Subchapter C corporation to a Subchapter S corporation for tax purposes. See I.R.C. §§á301-385, 1361-1379 (2000) (defining and explaining Subchapter S and Subchapter C corporations). As a Subchapter S corporation, Siegel-Robert does not pay corporate-level taxes on its income. See I.R.C. § 1363. Instead, the corporation's income is taxed directly to its shareholders based on their ownership of corporate stock, whether or not the income is actually distributed to the shareholders. See I.R.C. §§ 1366-1368. A Subchapter S corporation monitors its retained corporate earnings using an accumulated adjustments account ("AAA"), which is used to determine each shareholder's basis for taxed but undistributed corporate income. See id. Siegel-Robert's AAA monitored the amount of income attributable to respondent's shares in the corporation. Although this undistributed income was taxed to respondent and appellant on the ...