Massachusetts’ highest court rules that an interest in an irrevocable, discretionary trust with an open class of beneficiaries is not subject to equitable division in one of the beneficiary’s divorce proceedings.  Pfannenstiehl v. Pfannenstiehl (Mass., SJC-12031, Aug. 4, 2016).

In 2004, Curt Pfannenstiehl’s father created an irrevocable trust for the benefit of the father’s issue.  The trust was funded with life insurance, stock in two for-profit education companies and cash.  According to the terms of the trust, the trustees could, in their sole discretion, use the trust funds for the support of any member of the class of beneficiaries.  The trust also contained a standard spendthrift provision.

In 2010, Curt filed for divorce from his wife, Diane, with whom he had two children, both with special needs.  In the judgment of divorce, the court decided that Curt’s interest in the trust was worth $2,265,474.31, one-eleventh of the total value of the trust, because Curt’s father had eleven children and grandchildren at the time.  The court went on to award Diane 60 percent of the value of Curt’s interest in the trust.  Curt appealed, claiming that the trust should not be subject to division in the divorce because it was a discretionary trust that benefited an open class of beneficiaries and it also contained a valid spendthrift clause.  An appeals court ruled against Curt and he appealed.

The Massachusetts Supreme Judicial Court, the state’s highest court, overturns the lower courts.  The court finds that “Curt’s present right to distributions from the 2004 trust is speculative, because the terms of the trust permit unequal distributions among an open class that already includes numerous beneficiaries, and because his right ‘to receive anything is subject to the condition precedent of the trustee having first exercised his discretion’ in determining the needs of an unknown number of beneficiaries.”  Therefore, the trust should not be treated as a property interest subject to division.

To read the full text of the court’s decision, go to:  http://www.mass.gov/courts/docs/sjc/reporter-of-decisions/new-opinions/12031.pdf

For a blog post on the ruling by Harry S. Margolis, click here