How The New Jersey Uniform Trust Code Affects Tannen v. Tannen

In the case of Tannen v. Tannen, 416 N.J. Super. 248 (App. Div. 2010), aff’d, 208 N.J. 409 (2011), the New Jersey Supreme Court held that a spendthrift trust is not included in the equitable distribution of the marital estate.

Mark and Wendy Tannen were married in 1988, and by the time of their divorce proceedings they had two minor children.  In 2000, Wendy’s parents, Leonard and Gloria Phillips established a trust that provided substantial benefits to Wendy and her family in the form of income.  The trust included the standard “spendthrift” provision, which prevented the alienation of the beneficiary’s interest. The trustees were defendant, Wendy Tannen, and her parents.  Specifically, the provision provided,

Distribution of both income and principal shall be made as directed under the terms of this Trust, and the beneficiary shall not have the right to alienate, anticipate, pledge, assign, sell transfer or encumber such income or principal distribution without first procuring the written consent of the Trustees. Any endeavor of any such beneficiary to circumvent this direction in any manner shall be wholly disregarded  by the Trustees, and shall be null and void.

416 N.J. Super. at 256.

During the divorce proceedings, Mark asserted that the trust assets and trust income were resources used to enable them to maintain their standard of living.  The trial court agreed with Mark’s contention and ordered the trustees to make a $4,000 monthly payment to Wendy and to continue making payments for shelter-related expenses that it previously had made. Id. at 260. Based on that imputed income, the court calculated Mark’s permanent monthly alimony obligation at $4,500. Id.  The trial court reasoned that Wendy’s reluctance or failure to pursue income from the trust constituted a breach of fairness in her fiduciary duty, and therefore the court could interfere with the administration of the trust.  Id. at 258.

The Appellate Division reversed in part and affirmed in part.  The appeals court held that Wendy’s beneficial interest in the trust was not an asset “held” by her for purposes of the alimony statute.  The Appellate Division decision focused on the statutory analysis contained in N.J.S.A. §2A:34-23(b)(11) where in granting an alimony award, the judge must consider “the income available to either party through investment of any assets held by that party.”  (emphasis added).  Id. at 263.  In considering the circumstances, the appeals court noted that the trust assets were to be used only for Wendy’s “health support, maintenance, education and general welfare.”  Id. at 264.  While there was a limitation on the trustee’s discretionary authority, the appeals court concluded that the trust was not an asset held by Wendy. Id. at 273.

Moreover, the appeals court relied on the fact that the settlor to the trust, Wendy’s father, testified that his intention in establishing the trust was that Wendy would not be able to compel trust distributions.  He also testified that it was not his intent that Mark be relieved of his obligations to support Wendy or the children. Id. at 265.

Furthermore, the Appellate Division relied on Weidenmeyer v. Johnson, 106 N.J. Super. 161, 165 (App. Div.) aff’d, 55 N.J. 81 (1969) for the proposition that the trustees discretion should control, particularly when granted broad discretionary powers.  The appeals court also took issue with the lower court imposition of a “fiduciary duty” upon divorcing spouses as no reported decision in New Jersey has ever categorized each party’s obligation to the other party in a divorce proceeding as a “fiduciary duty.”  Id. at 263.

The New Jersey Supreme Court affirmed the decision for the reasons set forth in the appeals’ court decision.  208 N.J. 409 (2011).  The New Jersey Supreme Court’s holding seems to be consistent with the recent adoption of the New Jersey Uniform Trust Code (“UTC”)as the UTC did not adopt a provision that would allow a creditor to force distribution from a trust containing a spendthrift provision.  The UTC seems to go a step further, since it prohibits a creditor from compelling a distribution that is subject to the trustee’s discretion, “whether or not a trust contains a spendthrift provision.”  The relevant provisions from the UTC include:

 N.J.S.A. 3B:31-38 Discretionary Trusts

a. Whether or not a trust contains a spendthrift provision, a creditor of a beneficiary may not compel a distribution that is subject to the trustee’s discretion, even if:

(1) The discretion is expressed in the form of a standard of distribution; or

(2) The trustee has abused the discretion.

b. This section does not limit the right of a beneficiary to maintain a judicial proceeding against a trustee for an abuse of discretion or failure to comply with a standard for distribution.

c. With respect to the powers set forth in section 1 of P.L.1996, c. 41 (C.3B:11-4.1), the provisions of this section shall apply even though the beneficiary is the sole trustee or a co-trustee of the trust.

(emphasis added)

N.J.S.A. 3B:31-68 Discretionary Powers

Notwithstanding the breadth of discretion granted to a trustee in the terms of the trust, including the use of such terms as “absolute,” “sole,” or “uncontrolled,” the trustee shall exercise a discretionary power in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries.

In sum, the New Jersey UTC does not enable a spouse or former spouse the right to compel distributions as a creditor and remains consistent with the New Jersey Supreme Court ruling in Tannen and the Massachusetts Supreme Court ruling in Pfannenstiehl.