Establishing Imputed Income from Trust-Controlled Assets for Child Support Calculations: A New Precedent in Alaska

Introduction

This Judgment in the case of PETER CHAPMAN, Appellant, v. JULIA CHAPMAN, Appellee before the Supreme Court of Alaska represents a significant development in the interpretation of income for child support modifications. The case arises from a dispute over whether a material change in circumstances justified an increase in a father's child support obligation. In this matter, Peter Chapman, who had traditionally reported his income solely from his salary at Alaska Auto Rentals, Inc. (AAR), had subsequently acquired new businesses and created the Cephas Trust. This inter vivos trust, in which he retained significant control over the assets and distribution decisions, became central to the determination of his “actual available income.” Julia Chapman, the mother and appellee, argued that these previously undisclosed trust assets constituted a substantial change in financial circumstances warranting higher child support payments.

Key issues include the interpretation of “material change of circumstances” under Alaska Rule of Civil Procedure 90.3, the proper treatment of income derived from trust-held assets, and the appropriate calculation of imputed income when a parent intentionally limits personal income by reinvesting through a trust structure. The dispute raises larger questions regarding parent’s control over non-wage income and the role of asset management decisions in child support determinations.

Summary of the Judgment

The Supreme Court of Alaska affirmed the lower court's decision to modify the child support obligation. The court held that Peter Chapman’s acquisition of additional businesses and control over the Cephas Trust constituted a material change of circumstances sufficient to justify imputing additional income. Although Peter reported a modest salary from AAR, his 2021 federal tax return revealed a gross income of over $861,000, much of which was derived from assets held in the trust. The court relied on the fact that despite not drawing actual distributions, Peter maintained effective control over the trust and its funds, thereby justifying the imputation of income based on Rule 90.3’s income cap of $126,000. The court determined that his artificially low reported income on child support affidavits did not reflect his true financial capacity and increased his monthly obligation from $31.35 to $1,167.35.

Analysis

Precedents Cited

The Judgment makes extensive reference to several precedents that have laid the groundwork for the current interpretation:

Mitchell v. Mitchell – This case established that even if a parent withdraws funds (or in this case acquires assets) without an immediate cash distribution, the change in available assets can qualify as a material change of circumstances.
SHEPHERD v. HARALOVICH – This decision clarified the circumstances under which income may be imputed from underperforming assets or from decisions that artificially lower reported income. The analogy to a rental property sale was particularly instructive.
Fredrickson v. Button, Reilly v. Northrop, and Wilhour v. Wilhour – These cases provided guidance on the abuse-of-discretion standard and the necessity for a realistic estimate of a parent's total earning capacity, especially when income is intentionally diverted or not realized in the form of wages.
SEA LION CORP. v. AIR LOGISTICS OF ALASKA, Inc. – Although indirectly cited, this case serves to remind parties of the importance of timely raising issues regarding future obligations and modifications.

Taken together, these precedents strongly influenced the court’s determination that Peter’s indirect control over substantial trust assets demanded an imputation of income that more accurately reflects his financial resources.

Legal Reasoning

The court’s legal reasoning is anchored in two fundamental principles:

Material Change of Circumstances: Under Alaska Rule of Civil Procedure 90.3(h)(1), a modification of the child support order is warranted when there is a material change. The court observed that Peter’s acquisition of new businesses and the subsequent creation of the Cephas Trust—which effectively concealed additional income—constituted such a change. Notably, the transformation from solely receiving wages to having access to the trust’s resources, even if not actively distributed, was key to this finding.
Imputation of Income: The court explained that imputed income is legitimate when a parent's earnings are artificially low due to deliberate choices in structuring compensation and asset management. Here, Peter’s choice to channel income through a trust, coupled with his control over its independent trustee, made it reasonable for the court to treat the trust’s latent income as available to him for support purposes. The analytical framework, which encompassed considerations of work history, qualifications, job opportunities, and the nature of non-income producing assets, further solidified the decision to impute income up to the Rule 90.3 cap of $126,000.

It is crucial to note that the court did not find any clear error in the lower court’s facts or application of law, emphasizing that such decisions are within the trial court’s broad discretion when balanced against established precedents.

Potential Impact on Future Cases

This Judgment is likely to have significant ramifications in child support and family law litigation, particularly in cases involving complex financial arrangements and trust-controlled assets. Future cases will look to this decision as a persuasive authority for:

Incorporating undistributed trust income and other similar assets into a parent's calculated available income.
Broadly interpreting what constitutes “material change of circumstances,” especially where financial restructuring occurs post-judgment.
Confirming the discretion of trial courts in imputing income based on a realistic assessment of a parent's resource accessibility, even if such income is not directly drawn as wages.

Thus, it underscores the notion that creative financial planning cannot be used to understate income for the purpose of reducing child support obligations when such arrangements are within the parent's control.

Complex Concepts Simplified

Several complex legal concepts arise in this Judgment, which are clarified as follows:

Material Change of Circumstances: This refers to a significant change in the facts or financial situation after a support order is entered. In this case, the creation of a trust and the acquisition of new business assets were seen as material changes even though the income was not directly received.
Imputed Income: This is an income amount assigned by the court based on the potential earnings of a parent rather than the actual income reported. Imputation is justified when a parent intentionally underreports income or utilizes nontraditional income streams in order to lower support obligations.
Underperforming Asset: Although typically associated with assets that don’t generate expected returns, here the concept is applied by analogy. Peter’s decision to limit distributions from a high-yield trust is treated similarly to an asset that is not performing because its income is not being realized for support purposes.
Control Over Trust Assets: The court emphasized that effective control over a trust—even without actual receipt of funds—can suggest access to income. Peter’s control over the independent trustee and policy of reinvestment was a central finding.

Conclusion

In conclusion, the Supreme Court of Alaska’s decision to affirm the modified child support order represents a watershed moment in the application of Rule 90.3. By recognizing that a parent's control over undistributed trust income could—and should—be taken into account when calculating child support, the court has established a new precedent. Parties involved in future cases involving complex financial instruments and trusts will need to carefully consider how asset management decisions may transform their actual ability to pay child support.

This Judgment ultimately reiterates that the best interest of the child remains paramount. It reinforces that judicial discretion, supported by a solid foundation of case law and logical reasoning, must ensure that support orders accurately reflect a parent's true financial resources—even if those resources are concealed within seemingly innocuous financial structures.