After a year of living with the uncertainty caused by the Massachusetts Appeals Court’s decision in Pfannenstiehl v. Pfannenstiehl, on August 4, 2016 the Massachusetts Supreme Judicial Court reversed the decision, representing a major win for the asset protection features of trusts in Massachusetts.
In August 2015, the Massachusetts Appeals Court issued the unprecedented decision in Pfannenstiehl allowing a husband’s beneficial interest in a discretionary spendthrift trust with an ascertainable standard to be included in his marital estate and divisible in a divorce proceeding.
The 2015 decision sent shockwaves through the Massachusetts estate planning community, casting uncertainty upon all discretionary spendthrift trusts, especially those that employed an ascertainable standard for distributions, i.e. “comfortable support, health, maintenance, welfare and education,” such as the trust at issue in Pfannenstiehl. Although, many estate planners in recent years have had reservations about employing ascertainable standards for this very reason, there had been no prior case in Massachusetts which specifically included a discretionary trust with an ascertainable standard in a beneficiary’s marital estate in the event of divorce until Pfannenstiehl. Historically, a spouse’s interest in a discretionary spendthrift trust has been excluded from the marital estate because the interest is considered to be too remote and speculative to be deemed an asset. This is because distributions to beneficiaries are generally within the trustee’s discretion even if subject to an ascertainable standard.
However, on August 4, 2016, the Massachusetts Supreme Judicial Court reversed the Appeals Court’s decision, holding that the beneficiary’s right to receive distributions from the trust was “speculative” and did not render his right to future distributions from the trust to be “sufficiently certain such that it may be included in the marital estate.” As a result, discretionary spendthrift trusts with ascertainable standards are once again safe, for now, from being included in a marital estate in the event of divorce.