Lawyers Journal

Family feud, Pfannenstiehl-style

Divorce disputes involving a spouse's rights as a beneficiary of a third-party trust are often complex and bitterly contested. Typically, a beneficiary-spouse will argue that the settlor (parent) had no intention of subjecting the trust assets to a property division for the benefit of a former son-in-law or daughter-in-law, and that the terms of the trust expressly prohibit the court from invading the trust for this purpose. The non-beneficiary-spouse will likely argue that he or she made a substantial contribution to the marriage, and that the family relied on the trust funds to live, such that a division of some portion of the trust principal is both warranted and within the court's authority to divide pursuant to M.G.L. c. 208, § 34. What is a Probate Court to do?

The Most Recent Controversy

In Pfannenstiehl v. Pfannenstiehl, the Appeals Court recently upheld a Probate Court decision awarding a non-beneficiary wife a substantial portion of a marital estate, which included her husband's interest in a multimillion-dollar irrevocable spendthrift trust established by the husband's father.1 The Probate Court valued the husband's beneficial interest in the trust at approximately $2.3 million.2 Throughout the marriage, the husband received distributions of income and principal, which abruptly ceased upon the eve of his filing for divorce.3 The wife, who, at the urging of the husband and his family, gave up a military career and devoted herself to the care of the parties' two children, was told that the spendthrift provision of the trust prohibited the trustees from continuing to issue distributions to the husband.4

The Probate Court rejected the husband's interpretation of the trust.5 Appalled by the way the husband's family suddenly cut off all distributions and used the spendthrift provision as a shield in the divorce action, the Probate Court ordered the husband to pay to the wife 60 percent of his share of the trust, plus a sizeable award of attorney's fees.6 The Appeals Court upheld the Probate Court's ruling that the husband's interest in the trust was a marital asset for purposes of calculating an equitable division of marital property pursuant to M.G.L. c. 208, § 34, because the husband had a present, enforceable right to distributions based upon an ascertainable standard.7 The Appeals Court reaffirmed that a trust, even one with a spendthrift provision, may be included in a marital estate for purposes of equitable division under § 34.8 A strong dissent in Pfannenstiehl questioned whether the husband's interest was sufficiently definite, non-discretionary and properly valued, as to be includible in the marital estate.9

The case is now on further appeal to the Supreme Judicial Court.10 It has generated a great deal of debate within the bar over the extent to which trust assets like these can be protected from the claims of a non-beneficiary spouse.11

When is a Beneficial Interest in a Trust a Marital Asset?

The threshold issue is usually whether a particular beneficial interest is a marital asset, subject to division pursuant to M.G.L. c. 208, § 34. For the most part, this is a relatively well-settled question of law. Massachusetts appellate courts apply an "expansive," rather than a restrictive, approach to what constitutes marital property for purposes of § 34.12 A Probate Court is not bound by traditional concepts of title or property.13 "When the future acquisition of assets is fairly certain, and current valuation possible, the assets may be considered for assignment under § 34."14

There are many examples of cases involving beneficial interests in trusts found to be marital assets,15 subject to equitable division. In the oft-cited case of Lauricella v. Lauricella, a husband's beneficial interest in a spendthrift trust, which owned a two-family house that the husband had a vested right to use and a contingent right to legal title provided he survived his father by 21 years, was determined to be a marital asset.  The Supreme Judicial Court ruled that where the husband's interest in the trust property was "present, enforceable and valuable," his beneficial interest was includible in the marital estate.16 Many subsequent cases have relied on Lauricella in reaching the determination that a trust interest is a marital asset.17 More recent appellate decisions have excluded trust interests, but these have generally occurred in circumstances involving contingent beneficial interests, which are devoid of any history of the beneficiary spouse's receiving payments of income or principal, or trusts that are purely discretionary.18 On balance, beneficial interests in trusts, which are likely to vest and possible to value are considered marital assets, subject to equitable division in a divorce action.

Only the Beginning

The issues that arise in determining an equitable division of marital property in cases involving trust interests often only begin once the Probate Court determines that a spouse's beneficial interest is a marital asset. Other difficult issues then appear due to the interplay of trust and divorce law. These issues reflect the collision of interests between trust settlors and their beneficiaries, and those of non-beneficiary spouses.

For example, a ruling that a particular beneficial interest in a trust is a marital asset may be of little value to a non-beneficiary spouse if the Probate Court does not have the power to order the trustee to issue distributions of income or principal to the non-beneficiary spouse as part of an equitable property division. Must the non-beneficiary spouse wait until the trustee issues distributions to the beneficiary spouse before receiving any portion of the trust (that could be long wait)? Does a spendthrift provision, which prohibits distributions to creditors, or the discretionary nature of a beneficial interest in a trust, prevent the Probate Court from ordering the trustee to issue distributions to a non-beneficiary spouse, once the asset is included in the estate?

In Pfannenstiehl, the Appeals Court did not hold that the trustees of an irrevocable trust can be ordered to make distributions directly to the non-beneficiary spouse.19 As a result, it is unclear how the wife will collect her portion of the marital estate, and the husband has argued on appeal that the court's ruling, in effect, impermissibly gives the wife a right to compel distributions before they are issued to the husband.20

Other questions arise out of these disputes. What state law applies to the interpretation of the trust instrument? Does the non-beneficiary spouse have standing in a divorce action to challenge a trustee, who interprets the trust as prohibiting such distributions? Must the trustee and other beneficiaries be included as necessary parties in an action to determine the non-beneficiary's rights? What state law applies to determine the equitable division, if the trust is interpreted under the law of a state other than Massachusetts? These issues pit the power of the Probate Court to order equitable divisions of marital property against common law principles, which generally give effect to the intentions of trust settlors and recognize the enforceability of spendthrift provisions and other limitations on how monies placed in a trust may be used.

The dispute in Pfannenstiehl addressed some of these issues. The final decision will likely further develop the law in determining whether a broad ascertainable standard, like the one stated in the husband's trust, is too remote, indefinite or discretionary as to remove the trust interest from the marital estate. It may also provide guidance on complex valuation issues due to the open-ended nature of the beneficiary classes. Still, the case does not solve many of the problems that arise in equitably dividing a marital estate, once a trust interest like the interest in Pfannenstiehl is included, especially if there are no off-setting assets.

The Protection of Vested Interests

Massachusetts law has long considered spendthrift protections to be valid, whether a beneficiary's interest in the trust is in the income or the principal.21 Most arguments against the enforceability of spendthrift provisions in trusts subject to Massachusetts law have been rejected in favor of the view that a settlor ought to be able to dispose of his assets in trust as he wishes.22 Indeed, the Massachusetts version of the Uniform Trust Code provides that a creditor or assignee of the beneficiary may not reach the interest or a distribution by the trustee before its receipt by the beneficiary.23 Notably, the Legislature did not adopt those provisions of the Uniform Trust Code, which would have created exceptions to the enforceability of spendthrift provisions for certain preferred creditors, including children, spouses, and former spouses, who hold judgments or court orders against the beneficiary for support.24 This was true despite a growing trend to grant a spouse or minor child rights to trust property.25

Massachusetts Takes the Minority View

In this regard, Massachusetts law is out of step with the prevailing view. Principles articulated in the Restatement (Third) of Trusts, federal bankruptcy law and the Uniform Trust Code all support the view that a Probate Court has authority to order distributions from trusts to non-beneficiary spouses under certain circumstances. The Restatement (Third) of Trusts invalidates spendthrift provisions where a beneficiary has a non-discretionary right to withdraw or receive trust property, including exercisable, but unexercised general powers of appointment.26 The restatement provides that creditors may reach a beneficiary's right to withdraw trust property or to demand distribution of a stated or formula amount, including a power to periodically compel payments of stated or percentage amounts.27 The restatement treats a power to require periodic distributions as property of the beneficiary, even if the power has not been exercised, irrespective of the existence of a spendthrift restraint.28

Federal bankruptcy law has long been in accord.29 In In re Behan, the U.S. Bankruptcy Court for the District of Massachusetts applied the above principles to render a spendthrift clause unenforceable.30 The Bankruptcy Court ruled that a bankruptcy estate includes a debtor's interest in that portion of a trust, spendthrift or otherwise, that the debtor has an absolute right to receive.31

Finally, the Uniform Trust Code codifies the above principles.32 The creditor's rights provisions of the Code specifically render spendthrift provisions unenforceable and allow creditors to reach trust property where a beneficiary has a non-discretionary right to withdraw or receive trust property.33 As mentioned above, the code also recognizes exceptions for children, spouses and former spouses with judgments or court orders against the beneficiary for child and spousal support and maintenance.34

Applying these principles, the above sources of law support a Probate Court's authority to compel trust distributions to achieve an equitable division of marital assets for a non-beneficiary spouse, to the extent that the beneficiary spouse has non-discretionary rights to withdraw trust property or demand a distribution of a specified amount, regardless of whether the trust contains a spendthrift provision. At the same time, they balance that authority with limitations, which recognize that to the extent a beneficiaries' interest requires the exercise of a trustee's discretion (apart from the discretion associated with enforcing a spendthrift clause), the Probate Court may only divide those distributions as part of an equitable division of marital property, if, as and when the beneficiary spouse receives them.

Consequently, it is important that family law practitioners understand the creditor's rights provisions of the state law which govern their particular trust dispute. In Florida, for example, a state which adopted the Uniform Trust Code's creditor's rights provisions, a non-beneficiary spouse may reach trust assets to the extent the beneficiary has a general power of withdrawal, or a support or maintenance order, regardless of whether the trust contains a spendthrift provision.35 If Florida law governs the interpretation of the trust in a Massachusetts divorce, a beneficiary spouse's rights to trust distributions over which he or she may exercise control would not be shielded by a spendthrift provision.36

Conclusion

Divorce cases involving trust disputes are becoming more prevalent. The Supreme Judicial Court's decision in the Pfannenstiehl appeal will likely clarify the extent to which a beneficial interest in a trust may be included as a marital asset for purposes of calculating an equitable distribution. Beyond Pfannenstiehl, however, family law practitioners should be aware of the strong protections Massachusetts has enacted that can and often are used to thwart the Probate Court's enforcement of child and spousal support and maintenance orders and equitable property divisions. Practitioners should also be aware that many other states have enacted exceptions to the enforceability of spendthrift provisions, which provide non-beneficiary spouses and children greater rights to reach a beneficiary spouse's trust funds. While this awareness may not resolve the Pfannenstiehl family feud, it may shine light on others.

FOOTNOTES

188 Mass. App. Ct. 121, 122-124 (2015).

2Id. at 126.

3Id. at 125.

4Id. at 125 and 131.

5Id. at 131-132.

6Id. at 126-127.

7Id. at 131-134 (the Appeals Court ruled that where the trustees were obligated to and actually did distribute the trust assets to the husband, for such things as comfortable support, health, maintenance, welfare and education, the husband's interest in the trust was vested in possession, with a presently enforceable right to the trust distributions to support his lifestyle during his lifetime).

8Id. at 132.

9Id. at 137-142 (the dissent pointed out that the trustees made distributions in some years and not in others, such that the husband's interest in the trust stands on different footing from a party's interest in cases where interests are more clearly fixed and certain).

10Supreme Judicial Court Docket No. 12031.

11Marc A. Chorney, Pfannenstiehl v. Pfannenstiehl: Massachusetts Supreme Judicial Court Grants Petition for Certiorari in Unusual Property Division Involving Trust Interests, ACTEC Journal (2016); Lisa M. Rico and Judith A. Saxe, "The planning implications of 'Pfannenstiehl'," Massachusetts Lawyer's Weekly (December 17, 2015); William M. Levine, O Pfannenstiehl! Part 3: No Wonder We're All Confused (Be Careful What You Wish For)," http://levinedisputeresolution.com/divorce-mediation-blog/o-pfannenstiehl-part-3-no-wonder-we-re-all-confused-be-careful-what-you-wish-for (Oct. 28, 2015); Harry S. Margolis, "Does Pfannenstiehl Case Undermine Asset Protection in Massachusetts," http://www.margolis.com/our-blog/does-recent-divorce-undermine-centuries-of-spendthrift-trust-law (Sept. 22, 2015).

12Davidson v. Davidson, 19 Mass. App. Ct. 364, 371 (1985).

13S.L. v. R.L., 55 Mass. App. Ct. 880, 882-883 (2002).

14Williams v. Massa, 431 Mass. 619, 628 (2000).

15Lauricella v. Lauricella, 409 Mass. 211, 214 (1991).

16Id. at 216.

17See, e.g., S.L. v. R.L., 55 Mass. App. Ct. 880, 882-883, 884 (2002) (a wife's beneficial interest in numerous spendthrift trusts established by her father, contingent upon her surviving her 77-year old mother); Ruml v. Ruml, 50 Mass. App. Ct. 500, 511-512 (2000) (a husband's interest in a spendthrift trust established by the husband, in which the husband maintained a non-general power of appointment to withdraw trust income and principal); Comins v. Comins, 33 Mass. App. Ct. 28, 30 (1992) (a wife's beneficial interest in a discretionary trust established by her father with stocks, bonds and other securities, in which the wife had a testamentary power of appointment); see also Davidson v. Davidson, 19 Mass. App. Ct. 364, 371-372 (1985)(a husband's contingent remainder interest in a testamentary trust).

18See, e.g., D.L. v. G.L., 61 Mass. App. Ct. 488, 494-505 (2004); cf., Child v. Child, 58 Mass. App. Ct. 76, 82-84, n. 4 (2003).

19In Pfannenstiehl, the Appeals Court set aside a contempt judgment against the husband for failing to make payments of over $200,000to the wife, illustrating the very issues described above. See 88 Mass. App. Ct. at 136.

20See Brief of Appellant, Curt F. Pfannenstiehl, at pp. 20-22 (Feb. 19, 2016), 2016 WL 943890.

21See Boston Safe Deposit & Trust Co. v. Collier, 222 Mass. 390, 393-395 (1916); Broadway National Bank v. Adams, 133 Mass. 170, 173 (1882).

22See 23 Patricia M. Annino, Estate Planning § 13.13, n. 7 and 8 (2015 3d ed.) (and cases cited therein including Pemberton v. Pemberton, 9 Mass.App.Ct. 9, 19-22 (1980) (in which the Appeals Court refused to enforce an alimony and child support order from a father's trust funds, even in the face of strong public policy arguments favoring such a recovery).

23G.L. c. 203E, § 502(c).

2423 Patricia M. Annino, Estate Planning § 13.0.50 (2015 3d ed.).

2524 Patricia M. Annino Estate Planning § 28.13, n. 5 (2015 3d ed.) (and cases cited therein).

26Restatement (Third) of Trusts § 56 cmt. b; Restatement of Trusts § 58 cmt b.

27Restatement (Third) of Trusts § 56 cmt. a

28Restatement (Third) of Trusts § 56 cmt. b

29See 11 U.S.C. § 541(a) and (b).

30In re Behan, 506 B.R. 8,15-17 (2014); see also In re Dorsey, 497 B.R. 374, 386 (Bankr. N.D.Ga. 2013), citing Lunkes v. Gecker, 427 B.R. 425, 431 (N.D. Ill. 2010).

31Id.

32See Uniform Trust Code §§ 500, et. seq.

33Uniform Trust Code § 505 (unlike the version of the code adopted in Massachusetts, the Uniform Trust Code treats non-settlors that have a power of withdrawal as the settlor of the trust to the extent of the power).

34Uniform Trust Code § 503.

35F.L.A. § 736.0505; Miller v. Kresser, 34 So.3d 172, 175-177 (2010); Bacardi v. White, 463 So. 2d 218, 222 (Fla. 1985).

36Id.

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