Spendthrift Trust Protected in Divorce: Massachusetts Supreme Court Establishes a Bright Line Rule
The Massachusetts case, Pfannenstiehl v Pfannenstiehl, 475 Mass. 105 (Aug. 4, 2016), brought national attention to the issue of whether distributions of trust income, principal, or both may be included in the parties’ divisible marital estate.
In this case, Curt and Diane Pfannenstiehl were married for ten and a half years and had two children. Curt was a bookkeeper and his total income was around $190,000. Diane served in the United States Army Reserves and retired after only two years following the birth of their daughter. After a 10-year marriage, Curt filed for divorce.
Curt was the beneficiary of an irrevocable trust that was established by his father (the “Settlor”) in 2004, a few years after Curt and Diane married. The 2004 trust benefits an open class of beneficiaries that included the Settlor’s “issue” – Curt and his siblings – and the Settlor’s grandchildren. The trust provided that the trustees were to make distributions and“
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 of the members of such class.
Under Massachusetts law, the family court is permitted to make equitable division of the “marital estate.” The probate court included the value of Curt’s beneficial interest in the 2004 trust in the divisible marital estate. The probate court relied on Mass. Gen. Laws ch. 208, § 34, and included the 2004 trust in the marital estate. Specifically the trial court found, “the suspension of trust distributions occurred because [the husband] filed for divorce and the Trustees deemed it risky to give [the husband] money that might be shared with [the wife], a non-beneficiary.” 37 N.E.3d 15, 23 (Mass. App. Ct. 2015).
Curt appealed arguing that the trial judge abused her discretion by including the 2004 trust in the marital estate. In a divided opinion, the appeals court affirmed, and the Supreme Court of Massachusetts granted Curt’s application for further appellate review, limited to issues concerning the 2004 trust.
The central issue before the Massachusetts Supreme Court was to whether the present value of the husband’s beneficiary interest in the 2004 spendthrift trust may be included in the equitable distribution of the marital estate. The Court found that Curt’s interest in the 2004 trust is “so speculative as to constitute nothing more than [an] expectanc[y],” and thus that it is “not assignable to the marital estate.” 475 Mass. at 106.
The Court reasoned that Curt’s right to distributions from the 2004 trust was speculative, since: (1) the terms of the trust permit unequal distributions among an open class that already includes numerous beneficiaries, and (2) his right to receive anything is subject to the condition precedent of the trustee having first exercised his discretion in determining the needs of an unknown number of beneficiaries. Id. at 114.
Thus, the court vacated the order dividing Curt’s interest in the 2004 trust. The Massachusetts decision in Pfannensteihl is another example of safe guarding assets through the use of trusts in the divorce setting. Similarly, the New Jersey Supreme Court held that a spendthrift trust is not included in the equitable distribution of the marital estate. See Tannen v. Tannen, 416 N.J. Super. 248 (App. Div. 2010), aff’d, 208 N.J. 409 (2011).