57 Bedford Street, Suite 106
Lexington, MA 02420
In Pfannenstiehl, the Massachusetts Appeals Court held that the husband’s beneficial interest in an irrevocable spendthrift trust, set up by the husband’s father and funded with stock in a private family business, was properly included in the marital estate and divided in the divorce.
The parties were married in 2000 and lived together until August, 2010. The parties had an eleven year old son, who had dyslexia and Attention Deficit Disorder (ADD), and an eight year old daughter with Down syndrome, who required “around the clock supervision.” The wife, age forty, was a stay-at-home mother to the parties’ children. The wife had been an officer in the U.S. Army Reserves but, after pressure from the husband following the birth of their daughter, left two years shy of twenty years of service that would have entitled her to a pension. At the time of trial, the wife was employed as an ultrasound technician earning $22,672 a year.
The husband, age forty-two, who had dyslexia and ADD, came from a family of substantial means. The husband had a beneficial interest in a 2004 irrevocable trust established by his father. The trust was funded with stock from a private family business, namely for-profit colleges. The husband’s twin brother and an attorney, who has represented the husband’s father and his business for decades, were the trustees. The trust contained a spendthrift provision which provided: “[n]either the principal nor income of any trust created hereunder shall be subject to alienation, pledge, assignment or other anticipation by the person for whom the same is intended, nor to attachment, execution, garnishment or other seizure under any legal, equitable or other process.”
From 2008 to 2010, the husband received $800,000 in distributions from the trust, including monthly distributions of $20,000 in the first eight months of 2010. However, payments to the husband stopped one month before he filed for divorce in August, 2010, while disbursements to his siblings continued. At the time of the divorce, the husband was employed as an assistant bookstore manager for one of the for-profit universities earning $170,000. During the marriage, the family enjoyed an upper middle class lifestyle, in large measure due to trust distributions, gifts from the husband’s father, and the husband’s salary.
The trial court found that the trust was not administered impartially, and expressly found that as the divorce began “the proverbial family wagons circled the family money.” The judge specifically cited the cessation of the husband’s distributions one month prior to the filing of divorce, while his siblings continued to get disbursements. The trial court also considered the “unusual” testimony of the “independent co-trustee” who testified that the distributions were discontinued out of a concern for the intent of the donor (husband’s father) to keep funds within the family. The trial court set the total value of the marital estate, including the trust, at $4,305,380 and allocated sixty percent (60%) to the wife and forty percent (40%) to the husband. The judge found the total value of the trust to be $24,920,217 and that the husband’s one-eleventh interest (which was formulated on the basis of the current beneficiaries) was $2,265,474. The judge allocated $1,133,047 to the wife to be transferred via twenty-four monthly payments of $48,699. The court further ordered the husband to pay $175,000 towards the wife’s attorney’s fees. Both parties appealed.
Following entry of the judgement, the wife filed a complaint for contempt based on the husband’s failure to make the monthly payments. The husband alleged that he had written to the trustees for disbursements to cover the payments, but the trustees declined to do so. The husband was found guilty of contempt for failing to pay the wife $200,634 and was ordered to pay the wife’s legal fees. The husband was ordered to jail for sixty days unless released earlier by payment of the amounts due. The husband appealed.
Concluding that the trial court properly included the husband’s interest as part of the marital estate, the Appeals Court first addressed the inclusion of the trust in the marital estate. The Court began by noting that in D.L. v. G.L., 61 Mass.App.Ct. 488, 492-811 (2004), it held:
[s]eparate from the division of assets within the estate is the question whether certain assets properly are considereda part of the estate. In making the determination … the judge is not bound by traditional concepts of title or property.`Instead, we have held a number of intangible interests (even those not within the complete possession or control of their holders) to be part of a spouse’s estate for purposes of § 34.’ Baccanti v. Morton, 434 Mass. 787, 794 (2001), quoting from Lauricella v. Lauricella, 409 Mass. 211, 214 (1991). `When the future acquisition of assets is fairly certain, and current valuation possible, the assets may be considered for assignment under § 34.’ Williams v. Massa, 431 Mass. 619, 628 (2000).
Combing through the trust background, the Appeals Court noted that one trustee, the husband’s twin brother, together with the father, serve as officers and directors of the corporations, such that they decide and control what dividends are paid to the trust. As a result, this impacts the funding and, in turn, the principal and income available for distributions. The Court further noted that the second trustee, who was “ostensibly an outside trustee” was “inextricably interconnected with, and aligned with husband’s family.” This trustee “manifested not only hands-off administration, but also little, if any scrutiny of the  trust distributions” and “appeared unaware of the level of, or timing of, the distributions.” The Appeals Court agreed that the records showed that the trust was not administrated impartially.
The Appeals Court found that the cutoff of distributions to the husband was “a deliberate manipulation to erase a major component of the husband’s annual income and to silence his interest in the trust….” The Court found that “[t]his pattern of distribution—substantial…before the divorce, then zero as the divorce loomed—belies the husband’s invocation of a spendthrift provision to exclude the…trust from his marital estate.”
Finding that the interest was properly included in the estate, the Appeals Court noted that “[i]t is well established by law that a trust, even one with a spendthrift provision, may be included in a marital estate,” quoting Krokyn v. Krokyn, 378 Mass. 206, 213-214 (1979), the Court stated:
[c]ommon sense and basic concepts of fairness support the notion that ownership of a valuable asset demonstrates ability to pay without further inquiry as to whether payment can be enforced directly against the asset. . . . The law does not require that an obligor be allowed to enjoy an asset —such as a valuable home or the beneficial interest in a spendthrift trust — while he neglects to provide for those persons whom he is legally required to support.
The Court further noted that in Lauricella v. Lauricella, 409 Mass. at 219 a trust with a spendthrift clause was includable in the marital estate under § 34, and in Davidson v. Davidson, 19 Mass.App.Ct. 364, 371 (1985), a remainder interest subject to a valid spendthrift clause was included in the martial estate for property division.
The Appeals Court found that the income stream was not too remote or speculative, nor purely discretionary. Nmely, since the trust provided that the trustee could make distributions “for the comfortable support, health, maintenance, welfare and education” of the beneficiaries, that the husband had a “present enforceable right.” The Court reasoned that the trust differed from wholly discretionary trusts with no distribution standards regarding support, health, maintenance, welfare or education. The Court distinguished the trust at hand from D.L. v. G.L., 61 Mass.App.Ct. at 488, in which the trust was wholly discretionary, and, as a result, excluded from the marital estate. The Court further noted that in D.L. v. G.L., neither income nor principal had ever been distributed to the party at issue. The Court concluded that the “trust had an ascertainable standard pursuant to which the trustees, as fiduciaries, were obligated to, and actually did, distribute the trust assets to the beneficiaries for such things as comfortable support, health, maintenance, welfare, and education.” The Court noted that in Marsman v. Nasca, 30 Mass.App.Ct. 789 (1991), quoting from Woodberry v. Bunker, 359 Mas. 239 (19171) it was held that:
language directing trustees to pay a beneficiary such amounts as they ‘shall deem advisable for his comfortable support and maintenance’ has been interpreted to set an ascertainable standard, namely to maintain the life beneficiary ‘in accordance with the standard of living which was normal for him before he became a beneficiary….’
Further, under Dwight v. Dwight, 52 Mass.Ap.Ct. 739 (2001), the Court had found an ascertainable standard whereby the “trustee would be under a duty to provide income from the trust to the husband should the trustee determine, upon inquiry, that the husband needed it.” The Court found that the husband’s interest is “vested in possession, with a presently enforceable right to the trust distributions to support his lifestyle during his lifetime including for maintenance, welfare, education….” The Court specifically found that the pattern of distributions up until the time of the divorce fall within the ascertainable standards.
Most notably, the Court found that income distributions from the trust were woven into the fabric of the marriage and that the family had depended upon the distributions to meet routine expenses and maintain their standard of living. The Appeals Court found that income from the trust allowed the family to maintain their home, cover expenses for the children’s special needs and live well beyond the husband’s bookstore income.
The Court further noted that upon termination of the distributions from the trust, the husband would receive a share equal to his siblings, such that he had a “vested beneficial interest subject to inclusion in the marital estate.” The Appeals Court noted that under Davidson v. Davidson, 19 Mass.App.Ct. 364 (1985) “[e]ven a remainder interest under a testamentary trust…constituted a sufficient property interest to make it part of the estate for consideration in connection with a property division under § 34.”
The Appeals Court found that once the value of the trust was included in the estate, the judge had “broad discretion” in how to divide the asset equitably. Quoting from Lauricella v. Lauricella, 409 Mass.App.Ct. 211 (1991), the Court noted that: “the fact that the value of a vested, but not yet distributed, interest may not be susceptible of precise calculation ‘does not alter its character as a divisible asset.’”
With regard to legal fees, the Appeals Court held that the award of fees to the wife was reasonable given the husband’s discovery violations and failure to list a value for the trust (other than “uncertain”).
The Appeals Court, however, concluded that the contempt judgment could not stand. Since the husband wrote to the trustees requesting distributions, the Court found that the husband “did, or at least ostensibly tried to do, what he was supposed to do.” The Court found that “[a]lthough one might be disposed to question the genuineness of all these machinations given the bias of the two trustees and the husband’s father” it was not proved by clear and convincing evidence that the husband willfully and intentionally violated the order.
In a dissenting opinion, two justices of the Court believed that the husband’s interest in the trust was “too remote and speculative, too dependent upon trustee discretion and too elusive of valuation to have been included in the marital estate for purposes of division.” The dissent found “serious problems” with respect to the trial court’s determination that the husband has a one-eleventh interest and the resulting valuation “which should not stand,” since the trust contained an open class and the trustees had the ability to make distributions in equal or unequal shares, in addition to being able to consider funds available from other sources for the needs of each beneficiary. The dissent disagreed with placing a value on the husband’s share in light of the possibility of additional beneficiaries or a deterioration of the corpus of the trust, “which appears not unlikely given the scrutiny of ‘for profit’ educational institutions by the Federal government.” The dissent found that the: “fractional share methodology employed by the judge has produced an arbitrary result.” Finding that the majority was too focused on the cessation of distributions, the dissent believed that the primary focus “should be the terms of the trust instrument itself, not how those terms may be or have been manipulated.”