Dear Clients and Friends:
On August 27, 2015, the Massachusetts Appeals Court ruled that a husband’s interest in a lifetime trust can be included in the marital estate and be subject to division in a divorce proceeding. The case, Pfannenstiehl v. Pfannenstiehl, has significant ramifications for those clients seeking to protect their children’s inheritances from divorces.
In the case, the husband was the beneficiary of a lifetime trust established by his father that gave the trustees the discretion to make distributions to the husband based on an ascertainable standard of comfortable support, health, maintenance, welfare and education. For four years the trustee made significant distributions to the husband based upon such standard of payment until just before the divorce was filed. The Appeals Court held that the ascertainable distribution standard obligated the trustees to distribute trust assets to the husband to satisfy his needs and that the distributions he received were part of the “husband income stream.” On such basis, the Appeals Court ruled that the husband’s trust interest is part of the marital estate and subject to division with his wife in his divorce despite the existence of a spendthrift provision in the trust and despite the fact that there were other beneficiaries of the same trust. Importantly, the court distinguished the case from those cases involving a wholly discretionary trust with no ascertainable distribution standard. The court has ruled that wholly discretionary trusts with no standard are not included in the marital estate in a divorce.
While this issue will be appealed, it underscores the importance of establishing lifetime wholly discretionary trusts for children and grandchildren when clients wish to protect gifts and inheritances they make to children and grandchildren from divorces. Since 2009, in those estate plans where our clients have chosen to implement multigenerational lifetime trusts for children and descendants, we have included wholly discretionary distribution provisions for each trust share. If you have questions about whether your existing plan contains wholly discretionary lifetime trusts for your children or if you would like to learn more about this planning, please contact us.