In Levitan v. Rosen, 95 Mass. App. Ct. 248 (2019), the Appeals Court held that in the context of a divorce proceeding, a wife’s beneficial interest in a trust established by her father was a marital asset subject to equitable division pursuant to G.L. c. 208, § 34, but that a spendthrift provision in the trust precluded the Probate Court from assigning any portion of the wife’s interest to the husband. As explained below, the Appeals Court’s decision raises some troubling concerns for couples seeking clarity on how beneficial interests in trusts will be treated in divorce disputes.
1. The Appeals Court overlooked the applicable provisions of Florida’s version of the Uniform Probate Code.
The Appeals Court considered the main issue in Levitan to be whether the wife’s share of the trust was includable in the marital estate for purposes of equitable division pursuant to G.L. c.208, § 34. The wife argued it was not due to a spendthrift provision that required the trustee to withhold distributions that did not benefit the wife exclusively. The husband argued that the wife’s beneficial interest was a marital asset insofar as the wife had an unrestricted right of withdrawal giving her access to five percent of the trust principal, annually. The trial judge ruled that the wife’s right of withdrawal was not governed by the spendthrift provision and was therefore includable in the marital estate.
In reversing the trial judge’s ruling, the Appeals Court relied primarily on the language of the trust provisions. The court applied longstanding principles of Florida law governing the interpretation of trusts, and Florida’s public policy favoring the enforcement of spendthrift provisions. Analyzing the language of the right of withdrawal and the language of the spendthrift provision, the court ultimately found that the spendthrift provision was broader in scope than found by the trial judge and precluded the trustee from making any distributions to the husband, including those involving the wife’s annual right of withdrawal.
The Appeals Court rejected the trial judge’s reliance on a Florida Court of Appeals case and a case decided by the U.S. District Court of Appeals for the Eleventh Circuit, both of which invalidated spendthrift provisions in trusts because those trusts were self-settled for the settlor’s benefit. In other words, the Appeals Court limited the holdings of those cases to preventing a settlor from creating a trust for his own benefit in order to shield his assets from creditors.
The Appeals Court’s decision is troubling because it makes no mention of the applicable provision of Florida’s version of the Uniform Trust Code, which governed the interpretation of Florida trusts at the time of the divorce. The creditors’ rights provision of the Florida Trust Code invalidates spendthrift provisions and permits creditors, including husbands, to reach trust assets to the extent a beneficiary may exercise a right of withdrawal over them, notwithstanding the existence of a spendthrift provision in the trust. The Florida Code expressly provides for several instances where this is the case that are not limited to self-settled trusts. See Sections 736.0502, 736.0503 and 736.0505. Section 736.0503 carves out an exception for child support, alimony and maintenance orders. Section 736.0502 provides that a power of appointment overrules and cannot be limited by the terms of a spendthrift provision. Finally, Section 736.0505 carves out an exception for creditors to the extent of a beneficiary’s right of withdrawal. This last exception to the enforcement of spendthrift provisions fits the circumstances of the Levitan case. Accordingly, the Florida Trust Code expands on the holding of the caselaw distinguished by the Appeals Court rather than limits it. Yet, there is no mention of the creditors’ rights provisions in the Florida Trust Code anywhere in the Appeals Court’s decision.
2. The Appeals Court stretched the bounds of the commonly held view in Massachusetts that interests in wholly discretionary trusts are not generally included in marital estates.
After ruling that the spendthrift provision precluded the trial judge from assigning any portion of the wife’s interest in the trust to the husband, the Appeals Court then ruled that the wife’s entire beneficial interest in the trust should be considered a marital asset subject to equitable division under § 34, including the wife’s interest in receiving wholly discretionary distributions. In overruling the trial judge’s decision on this issue, the Appeals Court discussed a body of caselaw reviewed most recently in the Pfannenstiehl case (Pfannenstiehl v. Pfannenstiehl, 475 Mass. 105 (2016)) that supports the view that interests in discretionary trusts are generally treated as expectancies and too remote for inclusion in a marital estate. The commonly held view is that discretionary interests in a trust are not present and enforceable due to the fact that the beneficiary must rely on the trustee’s exercise of discretion, the beneficiary does not have a present right to use the trust principal, and the beneficiary cannot compel distributions.
The Appeals Court arrived at its ruling by contrasting the wife’s interest in the Levitan trust with trust interests in cases like Pfannenstiehl in which the beneficiary class was generational and open-ended in nature. Since the trust interest in the Levitan trust was fixed, unchanging and for her benefit, the Appeals Court did not view it as too remote for inclusion. This ruling and others like it cause uncertainty among estate planners who are seeking to protect a beneficiary’s trust assets using the vehicle of a discretionary trust. The Pfannenstiehl case holds that trust interests that are not subject to an ascertainable standard of distribution, and which involve open-ended beneficiary classes, are mere expectancies, not marital assets. In other cases, the Appeals Court has included discretionary trust interests in a marital estate, where a beneficiary either has some right to access the principal (like in Levitan), or where there is a high degree of certainty that the beneficiary will come into possession of the trust assets. The decision in Levitan will likely be used by other non-beneficiary spouses to argue that beneficial interests in wholly discretionary trusts are considered marital assets. It has become very difficult to determine to what degree discretionary interests in trusts are generally still too remote for inclusion in a marital estate.
3. The Appeals Court’s remand of the case raises difficult questions for the Trial Court.
The Appeals Court remanded the case to the Trial Court, stating that because the trial judge did not include the wife’s entire trust share in the marital estate when assigning property under § 34, the property division must be vacated and remanded. The Appeals Court further directed that in light of the spendthrift provision, the wife’s trust share must be distributed exclusively to her. Only the question of determining the proper division of the remaining assets, in this case the husband’s 401(k) account, was remanded to the trial judge.
The trial judge initially ruled that the wife would retain her annual right to withdraw five percent of the trust principal. Since the trial judge also ruled that the rest of the wife’s interest (i.e., her interest in receiving discretionary distributions) was not a marital asset, the wife had already been awarded her entire trust interest, valued at approximately $1.67 million. The trial judge awarded the husband his 401(k) account, valued at approximately $128,000, as it was the only other substantial asset in the marital estate. Accordingly, the remand of this issue appears unnecessary, since, according to the Appeals Court, the wife is to retain approximately 93 percent of the marital estate in the form of her beneficial interest in the trust. Given the disproportionality of this division, there is a question as to the need to remand this aspect of the case.
In addition, the Appeals Court vacated and remanded the trial judge’s child support order because of the intertwined nature of the property division and the child support determinations. In determining child support, the trial judge allowed the wife to keep her entire trust interest, but he treated the wife’s right to withdraw five percent of the trust principal as income to her for child support purposes. In its remand of the child support order, the Appeals Court questioned the trial judge’s treatment of the wife’s annual right to withdraw five percent of the trust principal as income. As grounds, the Appeals Court noted the established view that the practice of awarding one spouse a marital asset as part of an equitable division, and then considering it a source of income for purposes of imposing support obligations (i.e., double dipping), while not prohibited, is seemingly unjust.
Achieving equitable property divisions and fashioning support obligations in cases where one party must receive a largely disproportionate division of the marital estate because a non-assignable beneficial interest in a trust is the largest or only marital asset poses a difficult task for a trial judge. In hindsight, the trial judge’s initial judgment seems to have anticipated problems with dividing the wife’s beneficial interest in the trust. Rather than rule that some portion of the wife’s trust interest be assigned to the husband, a ruling that the Appeals Court subsequently and expressly prohibited, the trial judge allowed the wife to keep her entire trust interest, but ruled that her right to withdraw five percent of the trust principal would be considered an income stream to her. In light of the provisions of the Florida Trust Code that permit a husband to reach trust assets, the previously established view that interests in discretionary trusts are generally treated as expectancies, and the absence of any counterbalancing assets for the husband, it seems as though the trial judge undertook a careful look at the equities of the situation in determining that the wife’s right of withdrawal would be considered income to her for purposes of calculating child support. The trial judge issued a judgment that allowed the wife to keep her interest in the trust, as the grantor likely intended, and, at the same time, balanced the equities of the parties in setting a child support order that reflected the wife’s receipt of the lion’s share of the marital estate, as well as the parties’ resulting financial circumstances.
Steven D. Weil is a partner at Doherty, Dugan, Cannon, Raymond & Weil PC, where he specializes in family law and civil litigation. He is a member of the Massachusetts Bar Association’s Family Law Section Council. Weil served as trial counsel to the husband in Levitan v. Rosen
.