Last month, the Supreme Judicial Court issued its much
anticipated decision in Pfannenstiehl v.
Pfannenstiehl, a divorce case in which a wife was awarded
60 percent of her husband's beneficial interest in an irrevocable
spendthrift trust established by the husband's father.1
Reversing the Probate and Family Court judge and the Appeals Court,
the Supreme Judicial Court held that the husband's interest in the
trust was so speculative as to constitute nothing more than an
expectancy, and thus it was not includable in the parties'
divisible marital estate.
The lower courts ruled that the trustees' authority to make
distributions for the husband's support, health, maintenance,
education, and welfare constituted an ascertainable standard, which
allowed the husband's interest to be valued and assigned as marital
property for purposes of equitable division pursuant to G.L. c.
208, § 34.2 The Supreme Judicial Court disagreed,
holding that this standard did not render the husband's future
acquisition of trust assets sufficiently definite to include them
in the marital estate.
For those watching this case make its way through the appellate
process, Pfannenstiehl presented another difficult battle
between those seeking to protect the hard-earned assets of an
earlier generation and those seeking equity for a lesser moneyed
spouse. Due to the increasing use of trusts to direct the
distribution of family assets between generations, these battles
are appearing with greater frequency throughout our Probate Courts.
See Family feud: Pfannenstiehl-style (Part I) in the
May/June edition of the Mass Bar Association's Lawyer's
Journal.3 Now that the Supreme Judicial Court has
decided Pfannenstiehl, it bears asking what lessons the
case holds for divorce practitioners dealing with beneficial
interests in family trusts.
1. Bad facts make bad law? Perhaps. In her
decision, the trial judge effectively marshalled the facts
supporting a disproportionate division of marital assets in favor
of the wife. The husband and wife had a 12-year marriage, with two
children, one of whom was born with Down syndrome. The wife, under
pressure from the husband's family, retired early from the Army
Reserves to care for the children, and in so doing, gave up her
right to receive a future military pension. At the time of the
divorce, she earned only $22,672 per year working as an ultrasound
technician. In contrast, the husband earned an artificially high
salary of $170,000 per year as an assistant book store manager due
to his father's ownership of the business. With money supplemented
by the husband's family, the parties enjoyed an upper middle class
lifestyle, including an expensive home, several vacations per year,
and membership in a country club. In the approximately two and a
half years before the husband filed for divorce, he received
distributions from the trust totaling $800,000. These distributions
ceased upon the husband's filing a divorce complaint because the
trustees considered them vulnerable to the Probate Court's ordering
the husband to share them with the wife.
In fashioning her decision to award 60% of the marital estate to
the wife, including the husband's trust interest, the judge relied
on the equities presented by a mid-length marriage, in which the
wife retired early from the military and limited her earning
capacity by caring for the family's two children. The Judge also
based her decision on the wife's limited opportunity to acquire
future income and assets as compared to the ongoing support the
husband would likely receive from employment in his family's
business and distributions from the trust. Finally, the Judge
emphasized the trustees' decision to suddenly impose the
spendthrift provision of the trust to freeze the wife out of
distributions previously relied on by the family.
In its reversal of the lower court decisions, the Supreme
Judicial Court did not conclude that the judge abused her
discretion in fashioning a disproportionate property division. Had
the husband's interest in the trust included a more definite right
to receive distributions of income and principal, the judge's
inclusion of the trust as a part of the marital estate would have
likely survived review. Rather, the court separated out the facts
relating to the marriage and the trustees' conduct from the terms
of the trust and reviewed the case as a matter of law, not
equity.
2. The Supreme Judicial Court reaffirmed familiar and
well-established legal principles applicable to equitable property
divisions in divorce actions. The court began its analysis
by restating the well-established principle that it is not "bound
by traditional concepts of title or property in considering whether
a particular interest is to be included in the marital estate. Like
many cases testing the limits of what may be included in a marital
estate subject to equitable division, the Supreme Judicial Court's
decision points to the broad range of property interests that have
been included in marital estates in prior cases, specifically
noting pension plan rights, rights to proceeds from successful
lawsuits, delayed compensation from stock options and other
intangible assets.
3. Yet, there are limits to what may be
included. When a property interest is so speculative as to
constitute nothing more than an expectancy, the court has ruled it
is not assignable to a marital estate. Interests treated as mere
expectancies have included future income from professional degrees,
patents, or inheritances from a living testator who may alter a
will. Such assets are not included because the owner accrues no
enforceable right to the asset during the marriage. Rather, these
interests are "anticipated but indefinite opportunities" to acquire
future assets or income.4 The Court stated that
interests in discretionary trusts are generally treated as
expectancies, too remote for inclusion in a marital estate because
the interest is not present and enforceable; the beneficiary must
rely on a trustees' exercise of discretion, does not have a present
right to use the trust principal, and cannot compel
distributions.
4. Read the Trust! Applying the above
principles, the court in Pfannenstiehl framed the issue as
follows: whether a spouse's interest in the trust may be included
in a divisible marital estate depends on "whether the husband's
interest is a fixed and enforceable property right, or whether it
is too remote or speculative to be included. This question turns on
the attributes of the specific trust at issue, rather than on
principles of general application, and therefore requires
evaluation of the facts and circumstances of each
case."5
The wife argued that the husband's trust was not a purely
discretionary trust because it was subject to an ascertainable
standard of distributing trust assets. The court rejected this
argument. It pointed out that the applicable provision of the
Uniform Trust Code, G.L. c. 203E, § 103, references the
"ascertainable standard" used in the husband's family trust as a
standard that requires a trustee to distribute funds to support a
beneficiary's "health, education, support or
maintenance."6 Rather than giving the husband a right to
compel distributions, however, the court explained that this
standard limits the discretion of a trustee, who is obligated to
make distributions with an eye toward maintaining the beneficiary's
standard of living.
In addition, the trust in Pfannenstiehl had an open
class of beneficiaries, which included eleven living beneficiaries
at the time of the divorce, as well as the possibility of more
being born into the class in the future. The trustees were required
by the terms of the trust to exercise their discretion to provide
for all the beneficiaries, even if that meant making distributions
in unequal amounts. It was therefore unclear whether the husband
would receive future distributions.
Ultimately, the court held that the husband's present right to
distributions from the trust was speculative because the terms of
the trust permitted unequal distributions among an open class that
already included numerous beneficiaries, and because the husband's
right to receive anything was subject to the condition precedent of
the trustees first exercising their discretion in determining the
needs of an unknown number of beneficiaries.
The lesson to be learned by divorce practitioners seeking to
include a trust interest in a marital estate is that the issue
poses a question of law, which requires the terms of the trust to
be carefully examined in search of any and all rights the
beneficiary spouse has to receive income or principal. Any
non-discretionary rights the beneficiary spouse has to withdraw,
appoint or compel distributions of may render the interest
sufficiently definite to include in the marital estate. Those
seeking to exclude trust interests from equitable property
divisions must make a similar search for trust provisions, which
render trust distributions discretionary in nature. To the extent
trust distributions require the exercise of a trustee's discretion,
they will likely be treated as expectancies. The trust document,
not the equities of the marital circumstances, will determine
whether the trust interest is a marital asset, a mere expectancy,
or a combination of the two.
Where the terms of the trust are undisputed, practitioners may
consider presenting the issue as to the nature of the trust, and
the limits of a beneficiaries' right to compel distributions, by
summary judgment in a declaratory judgment action related to the
divorce. Such a case would bring all interested parties into court
and allow the court to rule on whether and to what extent the trust
interest is includible in the marital estate subject to division at
an early stage of the divorce action, without the need for a
full-blown divorce trial.
5. Who Won? Who Lost?
As the dust settles on Pfannenstiehl, the husband and
his family may claim victory. They succeeded in keeping the
husband's interest in the trust from being included in the marital
estate. They further delineated the line between marital assets
that are sufficiently definite to include in a marital estate, and
those that are mere expectancies not subject to division. They
established another precedent in a line of cases, which limit a
judge's authority to compel trust distributions from a trustee of a
discretionary spendthrift trust, when the beneficiary spouse
himself has no right to compel those distributions.
Yet, this victory does not capture the totality of the Supreme
Judicial Court's decision. The court remanded the case for further
proceedings consistent with its ruling and stated that the judge
may consider the husband's expectancy interest in the trust as part
of an opportunity for future acquisition of capital assets and
income in determining a revised equitable division of marital
property. In a footnote, the court also commented that in light of
the judge's decision to divide the trust in lieu of awarding
alimony, it may be appropriate for the judge to revisit whether
alimony is now appropriate, and if so, in what amount, pursuant to
G.L. c. 208, § 53(a).
These statements signal that a disproportionate division of
assets favoring the wife may remain in order. They illustrate a
palpable tension between what is legally permissible and what the
equities of the case require. More to the point, on remand, the
judge may consider whether it is possible to achieve a similar
outcome by altering the division of assets and awarding alimony,
without overreaching into the trust. In this task, the judge may
consider rebalancing the prior asset division, awarding alimony
based on the disparity between the husband and wife's incomes, and
issuing an additional alimony order that requires payment to the
wife if, as and when the husband receives trust distributions.
The suggestions made by the court to the judge on remand serve
as a lesson to divorce practitioners on both sides of these cases
to seek property divisions and related alimony awards that achieve
equity, but which lie within the boundaries of what the law
permits, so as avoid protracted litigation.
6. Unresolved Issues. Difficult issues remain
for the parties in Pfannenstiehl, as well as for litigants
in other cases involving trust assets. Chief among them is how to
achieve equity without exceeding the limits on a judge's authority
to compel trust distributions from spendthrift trusts. Even if a
trust interest is included in a marital estate, prior Massachusetts
case law as well as the more recently enacted Massachusetts version
of the Uniform Trust Code, preclude a creditor or assignee of a
trust beneficiary from reaching the interest or a distribution
before a beneficiary receives it.7 A spendthrift
provision may not exclude a trust interest from a marital estate,
but under Massachusetts law, it will prevent a judge from
compelling a trustee to make discretionary distributions of income
or principal.
The Massachusetts 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.8 This was true despite federal bankruptcy law,
provisions of the Restatement (Third) of Trusts, and a growing
trend in other states to grant a spouse or minor child rights to
compel trust distributions.9 As a result, the tension
between a judge's obligation to fashion child support orders,
alimony awards and equitable property divisions, and the limits on
the judge's authority to enforce those orders or judgments against
trust assets lives on.
In addition, the Court in Pfannenstiehl did not rule on
the husband's objections to the judge's valuation of his share of
the trust. A strong dissent in the Appeals Court questioned the
judge's methodology of valuing the husband's interest as a fraction
of the interests of all living beneficiaries, where the beneficiary
class was open-ended, the trust allowed for equal or unequal
distributions, and a possibility existed of the trust assets losing
substantial value in the future.
Those heeding the lessons of Pfannenstiehl may use them
to help resolve their disputes over the division of marital
property in divorce actions involving family trusts. Those ignoring
them will continue to face Pfannenstiehl-style family
feuds.
Pfannenstiehl v. Pfannenstiehl, No. SJC-12031, 2016 WL
4131248 (Mass. Aug. 4, 2016).
Pfannenstiehl v. Pfannenstiehl, 88 Mass. App. Ct. 121,
133, 37 N.E.3d 15, 24, review granted, 473 Mass. 1106, 47 N.E.3d
684 (2015), and vacated and remanded, No. SJC-12031, 2016 WL
4131248 (Mass. Aug. 4, 2016).
Family Feud: Pfannenstiehl-style,
https://www.massbar.org/publications/lawyers-journal/2016/mayjune/family-feud,-pfannenstiehl-style.
2016 WL 4131248, at *4.
Id.
2016 WL 4131248, at *5.Pemberton v. Pemberton, 9
Mass. App. Ct. 9, 20 (1980); G.L. c. 203E, § 502(c).
23 Mass. Prac., Estate Planning § 13.0.50 (3d ed.).
24 Mass. Prac., Estate Planning § 28.13, n. 5 (3d ed.)
(and cases cited therein); see also Family Feud:
Pfannenstiehl-style,https://www.massbar.org/publications/lawyers-journal/2016/mayjune/family-feud,-pfannenstiehl-style.