What Happens to a Beneficial Trust Interest in a Divorce?

Whether a beneficial interest in a trust is includable in the marital estate for divorce purposes is a question that has typically led to big disputes between divorcing parties.

While the answer to that question still rests on the particular facts and merit of a particular case, a new decision by the Massachusetts Appeals Court, Jones v. Jones, suggests that Probate and Family Court judges should be leaning towards including more and more beneficial trust interests in the marital estate when a beneficiary is getting a divorce.

In this case, the wife’s mother had established a grantor retained annuity trust, of which the wife (her daughter) and the wife’s brother were the sole beneficiaries. Upon the mother’s death, the trust corpus was to be divided into equal shares that were placed in separate trusts for the benefit of the wife and her brother.

This provision was the apparent tipping point as the Court tried to determine whether the wife’s beneficial interest was fixed enough to be considered an enforceable right, or whether it was a mere expectancy and thus too remote and speculative for inclusion in the marital estate. The Court determined that the former argument held more sway, even though the wife had never received a distribution from the trust, the trust had a spendthrift provision, the trust was irrevocable, and the trustee had sole and absolute discretion as to whether or not to make distributions in any amounts.

The Court reasoned that the class of beneficiaries was closed, the mandatory distribution of the trust corpus at the mother’s death was enforceable, and any power that the trustee had to postpone any distributions to the mother was limited by law and the terms of the trust itself – as such, the wife’s interest was not subject to reduction nor divestment. She also had the power of appointment. The Court thus concluded that the trust was includible in the marital estate. So as not to affect the spendthrift clause, and to avoid defeating the intent of the settlor to have the trust assets benefit the mother, the Court assigned the value of the trust in its entirety to the Wife and ordered an offsetting payment to Husband.

Many families establish trusts as estate planning vehicles. Some of the trusts are designed to “protect” family assets in the event of a divorce. The Jones decision, and other prior decisions such as Levitan v. Rosen might be characterized as whittling away at that power. It is difficult to argue that the reported decisions, in evaluating whether a trust is includible in the marital estate, have been putting less weight on factors such as spendthrift provisions, irrevocability, trustee discretion, and whether or not the trustees have made distributions. It is also difficult to argue that, to some degree, the Court is disregarding the intent of the trust’s settlor by including the value of the trust (albeit not the trust interest itself) in the marital estate and making it subject to division.

What remains true, however, is that the decision-makers are still charged with making judgements on a piecemeal basis based on the specific facts of the case and the particular attributes of the trusts at issue. That was true before the seminal Pfannenstiehl case, before the Levitan case, before the Jones case, and remains true today. If a divorcing spouse has a beneficial interest in a trust, a careful analysis is needed to determine the most equitable result, and the strategy that best aligns with a client’s needs.


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