by Matthew Solomon
In one of the most awaited and watched divorce cases of this past year, the Supreme Judicial Court has overturned a lower court’s decision in the case Pfannenstiehl v Pfannenstiehl that a husband’s beneficial interest in an irrevocable, discretionary spendthrift trust should be included as a marital asset in a divorce. In its unanimous rejection of both the Appeals Court and the Probate judge’s rulings, the SJC has made a clear statement about trust interest and marital property in Massachusetts.
At the heart of the SJC’s decision was that the husband’s interest in the trust was merely an expectancy. The SJC found this to be so because the husband was a member of an open class of beneficiaries with changing needs. The class of beneficiaries was “open” as it consisted of all the issue of the husband’s father, in any generation (at present time 11). As such the number of beneficiaries could increase or (decrease) due to deaths and births. The court called it a “discretionary” trust which creasted “nothing more than an eligibility for distributions.” The SJC distinguished the present case from Comins v Comins, which the wife’s argument relied upon, because in Comins the divorcing wife was only beneficiary of the trust.
In addition, the SJC found that the language of the trust gave the trustees total discretion as to whether to make distributions to any of the beneficiaries and in unequal proportions. The beneficiaries had no right to income or principal, and the trustees could distribute funds to them in unequal portions. In fact, until the divorce, the husband and his siblings received distributions, the husband receiving a total of $800,000 from the trust during the period April, 2008 until August 2010. The husband’s distributions ended upon his filing for divorce.
The SJC’s ruling was in direct contrast to the Appeals Court’s decision. The Appeals court found that the trustees manipulated the trust by terminating the husband’s distributions upon the filing of the divorce complaint. One of the other important aspects of the lower court’s ruling was its determination as to how to value the husband’s interest in the trust. The lower court had ruled that the husband’s share of the trust should be calculated as 1/11 of the trust assets and awarded 60% of that value to the wife.
As discussed above, the fact that there was an open class of beneficiaries helped convince the SJC that the husband’s interest could not be determined. The SJC noted the discretionary aspect of the trust, and that the intent of the trust settlor was not to benefit the wife. The SJC further determined that the support language of the trust (the trustee had total discretion to use trust principal or income for a beneficiary’s “comfortable support, health, maintenance, welfare and education”) did not create a “present enforceable right to distributions” for the husband because there were 10 other beneficiaries who had changing needs as well as potential future beneficiaries. This made valuation of the husband’s share of the trust speculative.
The key distinction between the SJC and the lower court is what each focused on to determine the donor’s intent. The lower court’s decision that the ascertainable standard in the trust actually required that the trustees make distributions seemed to be based more on the unpleasant facts of the case then on the intent of the donor. The SJC examined that same language of the trust and found that this standard did indeed limit the trustees’ discretion and that it was the donor’s intent to benefit his children and later generations. By doing so, the SJC reaffirmed the established law regarding intent and trust language. This is a relief to those who draft trusts for the purpose of “asset protection,” as the lower court ruling seemed to question the reliable and standard language employed by these drafters to shelter their client’s assets.