The Massachusetts Appeals Court recently determined that an
irrevocable spendthrift trust, created by the husband’s father
in 2004 and funded from his family’s operation of various
corporations for the benefit of the husband and his siblings, was
properly included in the marital estate and subject to division in
the husband’s divorce.
BACKGROUND
The parties were married in 2000 and lived together as
husband and wife until 2010. The parties are the parents of two
children, both of whom have significant special needs. At the
time of the divorce, the husband was employed as an assistant
bookstore manager at one of the family’s for-profit educational
universities, earning approximately $170,000 per year for a
position that the trial court determined generally pays between
$50,000 and $60,000 annually. The wife left the United States
military in 2004, just two years prior to the 20 years of service
required to receive a military pension. The decision to retire
was made after the birth of the parties’ daughter in 2004 and
was a result of pressure from the husband and his parents. At
the time of the divorce, the wife worked one day per week as an
ultrasound technician and earned less than $23,000 per year.
The trial court found that throughout the marriage, the wife
had been the primary homemaker and caretaker of the parties’
two children.
Between 2008 and 2010, the husband received tax-free
distributions from the 2004 irrevocable trust in the amount
of $800,000. In the eight months prior to the filing of the
divorce action, the husband received monthly distributions of
$20,000. However, one month prior to the husband filing the
divorce complaint, the distributions to the husband ceased
while distributions to the husband’s siblings, also beneficiaries,
continued. The trial court found that the family’s expansive
lifestyle was connected to the distributions from the 2004
trust. The trial court also found that cutoff of distributions
from the 2004 trust on the eve of the divorce “was a deliberate
manipulation to erase a major component of the husband’s
annual income and to silence his interest in the trust – for a
convenient time while the divorce was ongoing.”
THE 2004 TRUST
The 2004 trust at issue in the Pfannenstiehl case is an
irrevocable, spendthrift trust that was established by the
husband’s father. The 2004 trust holds shares of stock in the
family-controlled private corporations which, in turn, own
and operate private, for-profit colleges. The trust was valued at
almost $25,000,000 at the time of the divorce. The beneficiaries
of the trust are the husband, his brother and sister, and their
children (at the time of the divorce there were 11 beneficiaries,
but the trust remained open to expansion).
There are two trustees of the 2004 trust. The husband’s brother
is one trustee. The court found the husband’s brother – as an
officer and director of the corporations held in the trust, along
with his father – is able to manipulate what dividends are to be
paid to the trust, thereby influencing the 2004 trust principal
and income available for distributions.
The second trustee, a lawyer, while allegedly an outside,
independent trustee, was found to be inextricably connected
and aligned with the husband’s family. This trustee and his law
firm have represented the husband’s father and his businesses
since 1972, and his law firm represents the trustees of the
2004 trust. Based on this trustee’s testimony at trial, the court
found that he appeared unaware of the timing or level of the
distributions and had not scrutinized the distributions from
the 2004 trust as he should have. The court concluded the 2004
trust had not been administered impartially by the two trustees,
and upon the filing of the divorce, the “proverbial family
wagons circled the family money.”
The 2004 trust contains a standard spendthrift clause.
Specifically, it states, “neither 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 attachment, execution, garnishment or
other seizure under any legal, equitable or other process.”
The 2004 trust also contains an ascertainable standard for
distributions that reads as follows:
(U)ntil the division of the Trust into separate shares pursuant
to Paragraph B below, the Trustee shall pay to, or apply for the
benefit of, a class comprised of any one or more of the Donor’s
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 or all members of such class. In the exercise
of such discretion, the Trustee may take into account funds
available from other sources for such needs of each beneficiary.
At the end of each taxable year, any net income which is not
disposed of by the terms of this paragraph shall be added to the
principal of the trust estate.
DECISION
The Massachusetts Appeals Court, in a 3-2 decision, affirmed
the trial court’s decision as follows: (1) the husband’s beneficial
interest in the 2004 trust is a marital asset to be divided in the
divorce; (2) the husband’s interest in the 2004 trust is worth
1/11 (number of beneficiaries) of the corpus of the trust; (3)
the wife is entitled to receive 60% of the husband’s interest in
the 2004 trust; and (4) the husband shall pay to the wife her
60% interest in the 2004 trust, in addition to 60% of non-trust
assets, in cash, monthly over a two-year period. The appeals
court vacated the trial court’s finding that the husband was
guilty of contempt for subsequently failing to make the required
payments to the wife.
The Massachusetts Appeals Court held that a spendthrift
clause in a trust does not automatically shield it from equitable
distribution in the event of a divorce. In this case, the court
concluded that the cessation of trust distributions immediately
prior to the divorce after a lengthy period of substantial and
consistent distributions belies the invocation of the spendthrift
clause. In so concluding, the court cites a 1979 case: “The
law does not require that an obligor be allowed to enjoy an
asset – such as a valuable home or the beneficial interest in
a spendthrift trust – while he neglects to provide for those
persons whom he is legally required to support.”2
The appeals court then looked at the ascertainable standard
in the 2004 trust to support the inclusion of the trust in the
marital estate and found that the husband has a present,
enforceable right to distributions from the trust, in which the
trustees were obligated to, and did, in fact, make distribution
from the trust to the husband and other beneficiaries for such
things as their comfortable support, health, maintenance,
welfare, and education. It noted that the ascertainable standard
in the 2004 trust, and the requirement that distributions
be made, differs from wholly discretionary trusts, with no
ascertainable distribution standard, i.e., “distributions may
be made to the beneficiaries in the trustee’s sole discretion.”
Previous case law has excluded a purely discretionary trust
where no distributions had been made to the divorcing
spouse from the marital estate. Presumably, the trustees are
also required to observe the spendthrift clause in the trust for
the benefit of the beneficiaries but it is not apparent from the
decision that this point was considered.
In concluding that the 2004 trust is a marital asset subject to
division in the divorce, the court found that the substantial
distributions were woven into the fabric of the marriage. To that
end, “the 2004 trust distributions were integral to the family
unit, and the family depended upon the trust distributions
monies to meet their routine expenses and to maintain their
standard of living.”
Interestingly, and in apparent contradiction to its finding that
the husband has a present, enforceable right to distributions
from the trust, the appeals court vacated the trial court’s
judgment of contempt against the husband for failing to make
the required payments to the wife for her interest in the 2004
trust. The husband’s defense to the contempt action, which the
appeals court accepted, was that he did not have the ability to
pay the wife. He had requested the trustees to distribute trust
assets to him to pay the wife. Not surprisingly, the trustees
refused to make such distributions. Because the court found
that the husband “tried, or at least ostensibly tried, to do what
he was supposed to do,” he could not be found in contempt.
Since the trustees were not parties to the divorce case, the court
could not compel them to make distributions.
DISSENT
Two appellate court justices dissented. The dissent argues that
the 2004 trust is too remote and speculative for inclusion in the
marital estate because the ascertainable standard must be read
in context of the discretion of the trustees. The dissent further
argues that the valuation of the husband’s interest in the 2004
trust is erroneous because the number of beneficiaries may
change and distributions may be made in equal or unequal
shares in the trustees’ discretion. The dissent concludes that
“the fractional share methodology employed by the judge has
produced an arbitrary result.” In essence, the 2004 trust is too
elusive of valuation to be included in the marital estate for
purposes of equitable distribution.
The dissent rejected the majority’s focus on the machinations
on the part of the trustees to cease distributions to the husband
on the eve of the divorce filing. The dissent states that “the
primary focus of the instant inquiry should be the terms of the
trust instrument itself, not how those terms may be or have
been manipulated.”
CONCLUSION
The Supreme Judicial Court granted the husband’s application
for further appellate review and both sides delivered compelling
arguments for their positions at the oral argument on April
5, 2016. It will be interesting to see how the Supreme Judicial
Court tackles the intersection of divorce and trust law. While
the implications of the Pfannenstiehl case may not yet be clear,
it is safe to say that, for now, irrevocable, spendthrift trusts with
ascertainable distribution standards may not provide complete
protection in the event of a divorce.
