Trust Issues

Trusts are a source of much uncertainty in division of marital assets, calling for caution and compromise by divorcing parties.  Nowhere is that principle better illustrated than in the case of Pfannenstiehl v. Pfannenstiehl, a case initially decided by the Massachusetts Appeals Court, 88 Mass. App. Ct. 121 (2015), and recently overturned by the Supreme Judicial Court. 475 Mass. 105 (2016).  (The Appeals Court case was previously discussed by Jonathan E. Fields, Esq., in the Fall 2015 edition of Family Mediation Quarterly, a publication of the Massachusetts Council on Family Mediation.

After a ten-and-a-half-year marriage, Curt and Diane Pfannenstiehl separated and later divorced.  Both in their 40s, they were in good health and had two children.  At the behest of Curt’s family, Diane primarily cared for their disabled younger child and had given up her army reserve job to work part time, earning about $30,000 per year, including rental income. 

Curt, in turn, worked for his Father’s for-profit educational corporation, Educor Inc., earning a remarkable salary for a bookstore assistant, $190,000 per year. (Educor Inc., owns Bay State College, among other schools and for-profit educational ventures). The family also received financial support from Curt’s father, and substantial payments (“distributions”) to Curt from the family trust, created by his father in 2004. This combined income enabled the Pfannenstiehls to own a home worth over $700,000, take several vacations a year and belong to a country club.

The controversy’s source was the 2004 Trust.  As soon as Curt filed for divorce, distributions from the trust to Curt abruptly stopped, although they continued to be paid to his siblings. 

Finding Curt’s interest in the trust to be marital property, the trial court awarded sixty percent of it to Diane.  The court further ordered Curt to pay Diane 24 monthly installments of roughly $48,700, totaling close to $1.2 million including interest.  Curt tried to follow the trial court’s order, borrowing money from his father to pay Diane, but stopped after his father refused to loan him additional money and the trustees refused to disburse funds. 

Although the Appeals court found that Curt was not in contempt of the trial court’s order because he could not force the trust to disburse funds, it affirmed the trial court’s decision that the trust interest was marital property. This was, it found, largely because Curt had received distributions right up until the eve of divorce, and the trustees stopped paying out to Curt in order to prevent Diane from obtaining trust proceeds in what the Appeals Court found to be a “deliberate manipulation.”

The Appeals Court also found that because the trust had an “ascertainable standard,” meaning that the trust income was not wholly speculative or purely discretionary, that Curt had a “vested,” (current, enforceable) right, to the distributions. This was because the trustee had to pay amounts to provide for the beneficiaries’ “comfortable support, health, maintenance, welfare and education….”  In addition, the Appeals Court found that the trust funds formed an integral part of the Pfannenstiehls’ marital finances, and given the history of payouts, Curt was likely to receive additional distributions after his divorce.

Rejecting the Appeals Court’s focus on the way that the funds were distributed, the Supreme Judicial Court (“SJC”) instead looked at the trust terms themselves.  Although the trust had an ascertainable standard for disbursement based on the beneficiaries’ needs, the SJC found that Curt’s interest in further distributions was still “too remote and speculative.” This is because of the following:

  • The trustee had to consider the trust’s long-term needs and assets; the value of the funding stock was unpredictable and had previously resulted in losses and no payouts;
  • The trust already had eleven beneficiaries and could grow larger as it had an “open class;”
  • The trust terms permitted unequal distributions among the beneficiaries (in fact, Curt received less than other beneficiaries in some years and none in others); and
  • The trustee had to consider the needs of an unknown number of beneficiaries before deciding whether Curt would receive anything.

The SJC also found that Curt’s “remainder interest” in the trust, meaning what he would get when the trust principal was disbursed, was equally speculative.  Because the trust was designed to benefit future generations, the trustees would be unlikely to terminate the trust and distribute the remainder during Curt’s lifetime.  (Indeed, the dissent to the Appeals Court opinion had noted that the majority decision was almost certain to result in future litigation by the other trust beneficiaries.)

Most significant, the SJC found that the trial court order dividing the trust to benefit Diane could not create a right in Curt to force the trust to make distributions in her favor, when he did not otherwise have the right to compel distributions on his own behalf.  (Although the Appeals Court had applied this logic in its reversal of the contempt order against Curt, for whatever reason it did not in its main holding.) 

Reversing the Appeals Court, the SJC sent the decision back down on “remand” to the trial court with the directive that the 2004 was not marital property subject to division.

In the one bright spot of this otherwise bleak decision for Diane, the SJC also held that even though the trust was too remote and speculative to be considered divisible marital property, the trial court may on remand consider the trust proceeds as an “expectancy” of Curt’s future assets and income. In other words, the court may consider trust income something that Curt would be likely to receive after divorce, that the court may take into consideration in deciding what proportion to divide the marital assets between Curt and Diane.

The moral of this story is that trust construction is highly discretionary, uncertain, and can result in different outcomes on all decision making levels.  Given the variability of judicial outcome when dealing with trusts, parties would indeed be on safest ground by understanding that this area of the law is fraught with unpredictability and that settlement is their best bet.