Will Spendthrift Language In A Trust Always Be Respected or Not?

Will Spendthrift Language In A Trust Always Be Respected?

The unequivocal answer to the question is: it depends.

The grantor’s purpose for including spendthrift language in a trust is to protect the trust assets set from the beneficiary’s creditors and to prevent the beneficiary from selling or assigning his or her interest in the trust.

Pfannenstiehl

Pfannenstiehl is a Massachusetts divorce case that made its way to the state’s highest court where   the lower court decision was affirmed by a 3-2 vote. The husband’s parents established the trust for their three children and funded the trust with stock of a closely held corporation. The father and his twin brother are officers and directors of the corporation and the brother is one trustee. The other trustee is the family attorney.

The trial court held the trust was not administered impartially as distributions were cutoff as the divorce loomed. The trial court held that the husband had a present enforceable right to distributions and his interest was vested in possession. The court felt that the ascertainable standard in the trust instrument obligated the trustees to maintain the standard of living of the beneficiary and there was an established pattern of making substantial distributions prior to the divorce. The distribution figures were between $50,000 and $80,000 for five years before the divorce.

Furthermore, the statute gives the trial judge discretion, based on a number of factors, what property to include in a marital estate and it may include intangibles and assets to be acquired.

Tannen v. Tannen

In New Jersey, Tannen v. Tannen,   raised the issue when counsel for a divorcing husband convinced a trial judge that the trust, created for his wife by her parents, should be deemed available to the wife for purposes of reducing the husband’s support obligation. The court relied on language in the fourth revision to the Uniform Trust Code (UTC) that created a vested right. The decision was reversed on appeal and the court held that, until the legislature adopts the fourth revision of the Uniform Trust Code, the prior version of the UTC remains in force.

The take-away

What do these cases teach us? First, state law matters. Second, whether a state has adopted a restated version of the Uniform Trust Code may be significant. Third, does administration of the trust lie in the hands of family or a professional trustee? Would the Pfannenstiehl trust have fared better if the trustees moved the trust to Delaware engaged a professional trustee before resigning? We may never know but consideration should be given to a change of situs to a state with a directed trust statute. The father and his brother could have continued to manage the business leaving the trustees to deal with distributions.

One other point should be noted is that husband and wife had two children with disabilities. Clearly, the wife, as custodial parent, was a sympathetic figure to the trial court. Another point is that the court awarded the wife $1.3 million notwithstanding that the class of beneficiaries was not closed to descendants of the grantor’s children. One dissent argued it was not possible to determine the husband’s interest with the certainty required for division of a marital asset.