August 15, 2016
Authored by: Stacie J. Rottenstreich and Edward Peck
In the recent decision, Pfannenstiehl v. Pfannenstiehl, the Massachusetts Judicial Supreme Court overruled the appeals court decision and concluded that assets held in a discretionary trust created by a third party, where the husband is but one potential beneficiary of the trust, is not a marital asset to be divided on divorce.
The trust in question was set up by Curt Pfannenstiehl’s father in 2004 with his brother and a lawyer who represented the father as trustees. The trust provided in pertinent part as follows “[The trustees] shall pay to, or apply for the benefit of any one or more of the Donor’s then living issue such amount 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”. The trust also contained the following spendthrift language: “[N]either 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 to attachment, execution, garnishment or other seizure under any legal, equitable or other process.”
The Massachusetts Judicial Supreme Court emphasized that the husband had no enforceable beneficial interest in the trust. Rather, he had a mere expectancy to receive distributions from the trustees. Although, the trust contained some ascertainable standard language, the trustees in the end had sole and exclusive discretion as to whether to make distributions at all. In fact, in some years Curt Pfannenstiehl received no trust distribution. The standard in the trust did not create a present certain interest. The spendthrift language bolstered this argument, as Curt Pfannenstiehl could not pledge any interest he had in the trust in exchange for a loan, nor could it be reached in a claim against him for debts he may incur.
Mr. Pfannenstiehl was one of eleven potential beneficiaries of the trust, and potentially more, if he and his siblings have additional children or grandchildren. His remainder interest in the trust was also deemed as speculative by the Court, as it was unlikely that the trust would be terminated in his lifetime and he would receive a share.
The Court alluded to the fact that a different conclusion might have been reached if the facts were different. The take away from all this for a parent who is contemplating establishing a trust for his or her children and who wants to ensure that the trust assets not be reachable by a child’s spouse in divorce is to 1) include a spendthrift provision in the trust, 2) avoid any mandatory distributions or distributions based on an ascertainable standard, and instead give the trustee total discretion to make distributions and 3) create a spray trust for all children and future generations, rather than creating a trust for the benefit of any one child.