One of the biggest NYC divorces in recent years has heated up with recent filings. John and Jenica Paulson have been married for 22 years and share two children. John Paulson is the head of the Paulson & Co hedge fund company. He initiated the divorce in September 2021 in Long Island. Jenica alleged that she first learned of the divorce from media accounts.
The Couple’s Assets
Assets at stake in the case total more than $4 billion and include real estate across the U.S. worth more than $200 million, including homes in Palm Beach, Aspen, and Southampton. Mr. Paulson has already reportedly sold an Upper East side home. However, the biggest contested issue brought forward is the existence of trusts.
Media reports state that Mrs. Paulson was offered a settlement she rejected. However, it is also reported that the settlement did not include a lump sum, only monthly payments. To date, an agreement has not been reached.
The Latest Allegations
In July 2022, Mrs. Paulson filed a complaint in Manhattan alleging that her husband set up three trusts between 2001 and 2009 with the purpose of shielding the assets from her reach. She is also suing the trustee and J.P. Morgan Trust Co. She claims that although their children are the beneficiaries of the trusts, she believes the trusts were an effort by Mr. Paulson to create a postnuptial agreement substitute and protect the assets from a possible divorce. She states in her complaint that fraud was involved in the creation of the trusts. She is seeking more than $1 billion in her claim.
Mrs. Paulson alleges she had no knowledge of the trusts until after the divorce was filed. She alleges in her filing that he secretly created the trusts and moved assets into them without her knowledge. Media reports state that the trust language benefits his “legal wife,” which would prevent Mrs. Paulson from having any right to the assets when the couple’s divorce is final.
Trusts and Divorce
At the heart of the dispute between the couple is ownership of the assets in the trusts. When assets are placed in a trust, they become the property of the trust. Because of this, trusts do not have to be probated upon the trustor’s death. Instead, the assets in the trust pass to the beneficiaries according to the terms of the trust. Trusts may distribute assets on certain dates or when specified events occur (such as graduation from college or marriage).
However, placing assets in trust during marriage does not shield them from equitable distribution, New York’s property distribution law. If a trust is created during marriage, the assets are scrutinized to determine if they were:
- Marital property (assets acquired during the marriage) or
- Separate property (assets the spouses brought to the marriage or obtained by gift or inheritance during the marriage).
The next question the court must consider is the type of trust that has been created.
- Revocable trust. A revocable trust, such as a living trust, can be altered during the trustor’s lifetime. If marital assets were placed in the trust, those assets can be removed for equitable distribution.
- Irrevocable trust. If the trust is irrevocable, it cannot be altered by the trustor or by the court. However, if marital assets were placed in the trust, the court can order the trustor to reimburse their spouse for their share of those assets.
Reports do not indicate what type of trusts Mr. Paulson created. However, in either instance, if any of the property placed into the trusts was marital property, it will likely be subject to distribution in the divorce.
According to media reports, the couple does not have a prenuptial or postnuptial agreement. If they had created such a document, it would have clearly designated how their assets would be divided, including trust assets.
Prenuptial agreements can direct:
- Which assets will be considered separate property and which will be considered marital property
- How marital property will be distributed in the divorce
- What types of spousal support payments will be made after a divorce
- How the couple will organize and distribute their property in their estate plans, including trusts
Creating a prenuptial agreement would likely have avoided most of the issues present in the Paulson divorce. If the couple did not execute an agreement before the marriage, they could have entered into a postnuptial agreement, created after the marriage date.