Massachusetts Appeals Court Weakens Trust Protections in Divorce (Prenups are now more important than ever)

Massachusetts Appeals Court Weakens Trust Protections in Divorce (Prenups are now more important than ever)

As a parent, you constantly worry about your children. Will they graduate from college, will they find love, will they get married and finally give me some grandchildren? Each of these milestones is cause for celebration. But decades of wisdom make parents keenly aware of the possibility that a child’s marriage could one day, unfortunately, end in divorce.

Savvy parents often use trusts to ensure that their children’s inheritance is protected in a divorce scenario. Trusts for children typically include “spendthrift” provisions, which state that the trust is unreachable by a beneficiary’s former spouse. Indeed, protecting beneficiaries is the number one reason that people create trusts.

Unfortunately, in its recent decision in Levitan v. Rosen, the Massachusetts Appeals Court ruled that a discretionary spendthrift trust was a marital asset of the divorcing beneficiary. As a result, the trust beneficiary is far less likely to obtain a favorable property division in her divorce.

Despite the poor outcome, the Appeals Court did offer some guidance in the opinion that is helpful for estate planners in avoiding the same outcome for their clients. Generally speaking, a trust is protected if the beneficiary’s interest is remote and speculative, but unprotected if it is fixed and enforceable.

In determining whether a trust is fixed and enforceable, and therefore a “marital asset” in a divorce, the court mentioned these six factors:

1. Were trust distributions subject to an ascertainable standard? If trust distributions are to be made for maintenance and support, then the trust is more likely to be used for the regular expenses of the beneficiary, and is therefore more akin to a fixed property right.
2. Is the class of beneficiaries open or closed? If there are more than one beneficiary, then the amount that the divorcing beneficiary may receive is more speculative.
3. Does the beneficiary have a power of appointment over trust assets? The more control the beneficiary has, the easier it is to ignore the trust.
4. Is the trust intended to benefit future generations? If so, then the trust is better protected from the current generation’s divorce.
5. What is the history of past distributions to the divorcing spouse? Regular, predictable distributions make it look like the trust is just a shell for the divorcing spouse’s own property.
6. Does the beneficiary have withdrawal rights? If the beneficiary has direct access to trust principal, then the trust is less protective.

Strangely enough, even though the court ruled that the trust was a marital asset, they still respected the literal effect of the spendthrift clause by ruling that the trust must be allocated to the beneficiary spouse. It’s difficult to conceptualize the practical effect of this distinction. But for this to have any real meaning, it would follow that allocating trust assets to the beneficiary spouse must result in other, offsetting, non-trust assets being allocated to the non-beneficiary spouse. The end result here is that the trust beneficiary gets less than they otherwise would have if the court respected the trust.

Earlier in the decision, in an open display of hypocrisy, the court cites a common legal principal that trust disputes should be resolved according to the intent of the trust grantor. Clearly this is just lip service, as the grantor’s intent was almost certainly to shield the trust from his daughter’s potential divorce. Nonetheless the court ignored this intent, merely because the trust was essentially there for the daughter without sufficient risk that other beneficiaries would get the money first.

So, all of this begs the question: what should parents do to protect their children’s inheritance from a potential divorce?

There are two answers to this question.

First, parents could ensure that their trusts are drafted ultra-conservatively, so that each of the six considerations listed above lean towards the trust’s protection. While this sounds easy to do, it may require significant tradeoffs with other estate planning goals. Client’s often want to preserve flexibility or provide clarity in their estate planning. Drafting a trust rigidly to achieve one specific goal makes this overall approach more problematic.

Second, parents should encourage their children to enter into prenuptial agreements. Since trust are no longer guaranteed to protect an inheritance from divorce, prenups are more important than ever before.