The Power of a Trust in Divorce

by: Christina Pashou, Esq.

The Massachusetts case of Pfannenstiehl v. Pfannenstiehl could have lead to a court decision that would have negatively impacted the estate planning goals of families who wish to protect trust assets in divorce cases.

In 2015, the Massachusetts Appeals Court ruled that a portion of a trust created by the parents of Curt Pfannenstiehl for his benefit and that of his siblings would be considered as a marital asset in his divorce from Diane Pfannenstiehl. Diane argued that the trust was a "support" trust and not a traditional spendthrift "discretionary" trust, and that she was entitled to one-half of Curt's share of the trust.

This carefully watched divorce case focused on the issue of trusts assets as marital property in divorce proceedings. The August 4, 2016 Supreme Judicial Court decision overturned the 2015 Appeals Court decision where the trial judge required Curt Pfannenstiehl to pay his ex-wife approximately $1.4 million that was attributed to 60% of his interest in a discretionary spendthrift trust established by his father. The Supreme Judicial Court ruled that the trust was not a marital asset, and therefore not subject to equitable division.

The definition of "marital property" in Massachusetts is extremely broad. Consequently, in divorce proceedings, the court may assign any part or all of a spouse's "estate" to the other spouse. This generally may include premarital property as well as property acquired during the marriage, and may also include vested interests in an estate or trust. In Pfannenstiehl, although the husband’s expectancy of future acquisition of income from the 2004 trust was found to not be part of the marital estate, on remand, a judge, pursuant to G. L. c. 208, § 34, may consider such expectancy as part of the marital estate, if there is no spendthrift clause within the trust.

Pfannenstiehl highlights the power of the spendthrift trust.  This type of trust is generally managed by an independent but friendly trustee with authority to decide how trust funds are disbursed.  Significant trust law has held that because funds are not under the control of the beneficiary, the trust cannot be invaded to benefit the beneficiary's creditors or in the case of divorce, their ex-spouse.

Following the Pfannenstiehl Supreme Judicial Court decision, Massachusetts courts must now find future acquisition of assets from the trust sufficiently certain for the acquisition be included in the marital estate under G. L. c. 208, § 34. Remainder interests, such as that of the husband in Pfannenstiehl are equally speculative and not subject to G. L. c. 208, § 34.

 

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