Family feud: Pfannenstiehl-style, part II

Issue September/October 2016 By Steven D. Weil

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.