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August 11, 2016

Legal Update
Alisa L. Hacker

Supreme Judicial Court on inclusion of discretionary trusts in marital estate

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In a closely watched case involving the division of assets in a divorce, the Massachusetts Supreme Judicial Court has reversed a divided Appeals Court and reaffirmed the longstanding rule in Massachusetts that discretionary trusts are generally not considered part of the “marital estate” for asset-division purposes.

In the case, Pfannenstiehl v. Pfannenstiehl (August 2016), the husband was one of eleven beneficiaries of a discretionary trust established by his father for the benefit of his children and grandchildren. The husband had no control over the trust, but at the discretion of the trustees had (along with other class members) received sizeable distributions during the last two years of the marriage.

Judges in the Probate and Family Court have broad statutory authority to make equitable division of marital property, after deciding which property should be included in the marital estate. Mere expectancies as to future receipt of assets or income are generally excluded from a marital estate because their value is speculative, since it is unknown whether or when the spouse may receive the benefit. And it has been was well established that a spouse’s interest in a discretionary trust is a mere expectancy and thus not to be included in the marital estate.

The probate judge and the Appeals Court in Pfannenstiehl both saw the trust at issue as different because rather than leaving the matter of distributions entirely to the trustees’ discretion, it instructed the trustees to make distributions “to provide for the comfortable support, health, maintenance, welfare and education of” members of the beneficiary class. This was a sufficiently “ascertainable standard,” in the courts’ view, to allow treatment of the trust interest as an asset. The courts awarded the wife approximately $1.4 million, or 60% of what they determined to be the value of the husband’s interest in the trust.

The Supreme Judicial Court disagreed. It pointed out that the trust’s beneficiary-class was open, meaning that new children born to the family who met the entry requirements would become beneficiaries, thereby reducing the amount of income available to the other beneficiaries. And the spendthrift language in the trust prevented anyone from compelling the trustees to make distributions. Finally, the existing class of beneficiaries was large enough, and the distribution needs of the class members sufficiently complex, that it would be too speculative to attribute any definable interest to the husband.

The court noted, however, that a divorce judge may consider a spouse’s interest in a discretionary trust on a separate issue: as an opportunity for future acquisition of capital assets and income.

 

This Alert was prepared for the clients and friends of Sugarman, Rogers, Barshak & Cohen, P.C. It is provided for educational and informational purposes only and is not a substitute for professional advice on your specific legal situation.