A Beneficiary Has an Interest in a Trust… Are Those Assets Included in a Divorce Equitable Settlement?

questionMany parents create trusts which benefit their children and grandchildren. Often, the trustee’s decision as to what to distribute to a child or grandchild is fully discretionary. Alternatively, the trustee can be directed o distribute for health, education, maintenance and support. To what extent may these trust assets be used in calculating the equitable division of assets in a beneficiary’s divorce proceeding?

As discussed in a prior blog, the lower court, in Pfannenstiehl v. Pfannenstiehl, determined that discretionary distributions to a beneficiary, Mr. Pfannenstiehl, COULD be considered in calculating the equitable division of assets in Mr. Pfannenstiehl’s divorce.  Fortunately (for Mr. Pfannenstiehl),  the Massachusetts Supreme Court overruled the lower court decision.

In Pfannenstiehl, the trust terms provided that  the trustees could pay to the grantor’s children (of which Mr. Pfannenstiehl was one), grandchildren and more remote descendants, “such amounts of income and principal as the Trustee, in its sole discretion, may deem advisable from time to time, whether in equal or unequal shares, to provide for the comfortable support, health, maintenance, welfare and education of each or all members of such class.”

The Massachusetts Supreme Court reversed the lower court  decision and determined that, because Mr. Pfannenstiehl was one of eleven living beneficiaries, his right to distributions from the trust was too speculative. The trust terms permitted unequal distributions among a class that included numerous beneficiaries. Further, Mr. Pfannenstiehl’s right to receive any distribution was subject to the trustee first exercising his discretion. Thus, Mr. Pfannenstiehl’s interest could not be taken into account in calculating the equitable division of assets.

ADVICE:  When drafting discretionary trusts for beneficiaries, avoid having standards and make sure the trustee’s power is fully discretionary.  It appears that the more discretion granted to the trustee and and the more beneficiaries, the more likely a court will find that such a speculative amount is NOT included in an  equitable distribution calculation. This case is to be distinguished from the Berlinger case (previously discussed in this blog) as Berlinger’s spouse already had an alimony judgment which was garnished from Berlinger’s interest in a discretionary trust. The Florida Real Property Probate and Trust Law Section  is currently working on amendments to the trust code to clarify the reach of Berlinger.

WORD OF THE WEEK:  Discretionary means a power to do or not to do an action. Generally, if a trustee has a discretionary power to distribute assets to a beneficiary, the  trustee has the “unfettered” right to determine when and the amount of the assets to distribute. A discretionary power, however,  is NOT absolute. A trustee is always a fiduciary and depending on state law, such a power may be subject to court review if such a power is exercised in bad faith.

GENEROSITY IS A KEY TO HAPPINESS …REACH OUT AND HELP SOMEONE TODAY! 😎

 

 

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