Divorce and estate planning.

In a case that received national attention from practitioners in the estate-planning field, the Massachusetts Supreme Court has reversed the state’s Court of Appeals decision that allowed a divorce spouse to attach part of the assets in a $24.9 million discretionary trust. The case developed when Curt Pfannenstiehl filed for divorce from Diane Pfannenstiehl, his wife of 12 years, in September 2010. The couple had two children—an 11-year-old son and an eight-year-old daughter who had Down syndrome. During the divorce proceedings, Diane attempted to force a distribution from an irrevocable inter vivos trust Curt’s father created that benefited all of his living “issue”—not just Curt—or a total of 11 beneficiaries. The trust, which included a spendthrift provision, gave the trustees the power to make distributions for the descendants’ “comfortable support, health, maintenance, welfare and education.” The trust named both Curt’s brother and the family’s attorney, arguably not adverse parties, as trustees. In the divorce, Diane contended that, based on both a recent pattern of distributions and in light of the named trustees, a court should determine that Curt’s proportionate share in the trust assets were marital assets. The trial court agreed, concluding that Curt’s share of the trust was approximately 1/11th of all its total value, or about $2.3 million. Based on that determination, the trial court ordered him to pay Diane close to $1.2 million. In a divided opinion, the Court of Appeals affirmed. But late this Summer, the state’s Supreme Court overturned that ruling. In reaching that outcome, the Court said Curt’s interest was “nothing more than [an] expectanc[y]” (citing Adams v. Adams, 459 Mass. 361 (2011). According to the Supreme Court, because Curt’s interest was only an expectancy, he had no right to demand the trustees make a distribution, and because he didn’t have that right, neither did a former spouse.

--Pfannenstiehl v. Pfannenstiehl, SJC-12031, Mass. S.Ct. 8/4/16 (Slip Op.)

Observation: Neither legal practitioners nor financial advisers with a goal of asset protect should take complete solace in this decision. That’s because the Supreme Court also said that, “[a]though Curt’s expectancy of future acquisition of income…is not part of the martial estate, on remand, the judge…may consider that expectancy as part of the ‘opportunity each [spouse] for future acquisition of capital assets and income’” (quoting Mass. G.L.c. 208, Sec. 34, as amended by St. 2011, c.124). In addition, the Court ruled, trusts are not automatically excluded from the marital estate simply because the assets are held in trust. Instead, the Court wrote, whether any particular trust should be considered as a marital asset “turns ‘on the attributes’ of the specific trust at issue” (quoting Lauricella v. Lauricella, 409 Mass. 211 (1991) (emphasis added).