The Massachusetts Supreme Judicial Court recently issued
its decision in the highly anticipated case of Pfannenstiehl v.
Pfannenstiehl providing clarity to the lower courts on whether
a spouse’s interest in a discretionary, spendthrift trust is subject
to division as a marital asset in a divorce proceeding. The
Supreme Judicial Court concluded that the husband’s interest in
an irrevocable spendthrift trust, created by the husband’s father
in 2004 for the benefit of the husband and his siblings and
their children, was so speculative as to constitute nothing more
than an expectancy which is not divisible as part of the marital
estate.
BACKGROUND
The parties were married for approximately ten years and had
two disabled children. Between 2008 and 2010, the husband
received distributions from the 2004 irrevocable trust in the
amount of $800,000. In the eight months prior to the filing of
the divorce action, the husband received monthly distributions
of $20,000. However, one month prior to the husband filing
the divorce complaint, the distributions to the husband ceased
while distributions to the husband’s siblings, also beneficiaries,
continued. The trial court found that the family’s expensive
lifestyle was connected to the distributions from the 2004 trust.
The trial court also found that the cessation of distributions on
the eve of the divorce “was a deliberate manipulation to erase
a major component of the husband’s annual income and to
silence his interest in the trust for a convenient time while the
divorce was ongoing.”
THE 2004 TRUST
The 2004 trust at issue in Pfannenstiehl is an irrevocable,
spendthrift trust that was established by the husband’s father.
The 2004 trust holds shares of stock in family-controlled
private corporations which, in turn, own and operate private
for-profit colleges. The trust was valued at almost $25,000,000
at the time of the divorce. The beneficiaries of the trust are the
husband, his brother and sister, and their children (at the time
of the divorce, there were eleven beneficiaries but the class of
beneficiaries remained open to expansion).
There are two trustees of the 2004 trust: the husband’s brother
and the family attorney. The court found that the husband’s
brother, as an officer and director of the corporations owned
by the trust along with his father, is able to manipulate what
dividends are to be paid to the trust, thereby influencing the
2004 trust principal and income available for distributions. The
family lawyer trustee, while allegedly an outside independent
trustee, was found by the trial court to be inextricably
interconnected and aligned with the husband’s family. The trial
court concluded that the 2004 trust had not been administered
impartially by the two trustees, and upon the filing of the
divorce, the “proverbial family wagons circled the family
money.”
The 2004 trust contains a standard “spendthrift clause.”
Specifically, it states that “neither the principal nor income
of any trust created hereunder shall be subject to alienation,
pledge, assignment or other anticipation by the person for
whom the same is intended, nor attachment, execution,
garnishment or other seizure under any legal, equitable or other
process.”
The 2004 trust also contains an “ascertainable standard” for
distributions that reads as follows:
(U)ntil the division of the Trust into separate shares
pursuant to Paragraph B below, the Trustee shall pay to,
or apply for the benefit of, a class comprised of any one
or more of the Donors then living issue such amounts of
income and principal as the Trustee, in its sole discretion,
may deem advisable from time to time, whether in equal
or unequal shares, to provide for the comfortable support,
health, maintenance, welfare and education of each or all
members of such class. In the exercise of such discretion,
the Trustee may take into account funds available from
other sources for such needs of each beneficiary. At the end
of each taxable year, any net income which is not disposed
of by the terms of this paragraph shall be added to the
principal of the trust estate.
DECISION
In the lower courts, the wife had successfully argued that the
irrevocable, spendthrift trust was an asset subject to division
in divorce. The Appeals Court reasoned that the ascertainable
standard in the 2004 trust supported the inclusion of the
trust in the marital estate because the husband had a present,
enforceable right to distributions from the trust. The trustees were obligated to, and did, in fact, make distributions from the
trust to the husband and other beneficiaries for such things as
their comfortable support, health, maintenance, welfare and
education.
The Supreme Judicial Court rejected the Appeals Court’s
reliance on the ascertainable standard to support the inclusion
of the trust in the marital estate and determined that the
ascertainable standard restricts the discretion of the trustee
to make distributions to a beneficiary based on objective
guidelines. Given that he must rely on the trustees’ exercise
of discretion and has no authority to compel distributions,
the husband has no present or enforceable right to the trust
income or principal. More importantly, in light of the fact that
the husband was one of eleven beneficiaries and the class of
beneficiaries could increase if additional grandchildren were
born, the Court found that the husband has an expectancy
which is too remote or speculative to be part of the marital
estate.
If the husband had been the sole current beneficiary of his
distinct trust fund (which is often the case in parents’ estate
plans), with the presence of the ascertainable standard it is
quite possible that the Supreme Judicial Court would have
included the trust fund, as an assignable marital asset.
PLANNING POINT
Taking a conservative approach, it may be preferable to allow
the trustees to make distributions to beneficiaries in their
sole, unfettered discretion, rather than directing them to make
distributions under an ascertainable standard e.g., for health,
education, support or maintenance (the most commonly used
standard). Under current case law, this absolutely protects
the trust assets from divorce and/or third-party creditors in
Massachusetts.