Massachusetts Appellate Division Upholds Inclusion of GRAT in Equitable Distribution Calculation
Jones v. Jones, 103 Mass. App. Ct. 223 (2023)
This case is another chapter in ongoing interplay of trusts and divorce proceedings between husband and wife.
The wife’s mother made a variety of financial gifts and contributions throughout the years, including, but not limited to, settling a trust for the wife’s benefit (the “JJIT”).
More specifically, in 2015, the wife’s mother established an irrevocable grantor retained annuity trust (GRAT). Upon the annuity termination date, the GRAT assets remaining after the payment of the annuity were to be divided into equal shares and placed in separate trusts for the wife and her brother. The JJIT was governed by Michigan law.
The JJIT contained the following relevant provisions. The wife, who was the sole beneficiary of the trust, was entitled to receive two types of distributions: (1) discretionary distributions of trust income and principal that the trustee, in his sole and absolute discretion, considered to be necessary for the wife’s best interests and welfare; (2) a mandatory distribution of the entire trust corpus after the wife’s mother’s death (effectively terminating the JJIT).
The trust also granted the wife the power to appoint the trust corpus to the beneficiaries of her will if she died before receiving the mandatory distribution.
In lieu of outright distributions to the wife, the trustee was authorized to expend amounts for her benefit to avoid the reach of her creditors and “to give [her] the maximum possible benefit and enjoyment of all of the trust income and principal to which [she] is entitled.” Jones 103 Mass. App. Ct. at 228. The JJIT also contained two additional provisions designed to avoid the reach of creditors: a spendthrift provision prohibiting assignment of the wife’s interest in the trust (except in connection with the exercise of her power of appointment); and a “Postponement of Distributions” provision.
One of the central issues at trial was whether the wife’s interest in the JJIT was includable in the marital estate for purposes of equitable distribution.
The trial judge found that although the trust was a discretionary trust, with a spendthrift provision, the wife’s interest in the JJIT was a fixed and enforceable property right includable in the marital estate because the wife was entitled to the whole trust property, her share was not susceptible to reduction, and the primary intent of the trust was to benefit the wife.
The wife appealed, asserting that her interest in the trust was a mere expectancy and thus too remote and speculative for inclusion in the marital estate.
The appeals court determined that Massachusetts law governed the ultimate determination of whether the wife’s trust interest was included in the marital estate, since the divorce proceedings occurred in that state. However, Michigan law was to be applied to ascertain the nature of the wife’s interest in the trust, since the trust was governed by Michigan law.
The appellate court determined that the trust was not a pure discretionary trust, because it also provided for a mandatory distribution of the entire trust corpus – i.e., to the wife upon her mother’s death. Thus, the wife’s right to receive the mandatory distribution was enforceable. The court likewise noted that the trustee could postpone the mandatory distribution only for a compelling reason.
In summary, the appeals court found: the wife was the sole beneficiary (in a closed beneficiary class) of an irrevocable trust; her interest in the trust was not susceptible to reduction or divestment; she was eligible to receive discretionary distributions of income and principal that the trustee deemed in her best interests and welfare, and she could also have payments made on her behalf by the trustee (in lieu of outright distributions); her right to receive a mandatory distribution of the entire trust corpus upon her mother’s death was vested and fixed; and she had the power to appoint trust assets to the beneficiaries of her estate if she died before receiving the mandatory distribution. To the extent that the trustee had the discretion to postpone distributions for a compelling reason, that discretion was subject to judicially enforceable limits.
The appellate court thus affirmed the trial court and concluded that the wife’s interest in the JJIT was sufficiently fixed and enforceable to constitute a property interest (rather than too remote or speculative). Accordingly, the trial judge permissibly included the trust in wife’s estate, and assigned it to her for purposes of equitable distribution in the divorce.