Wednesday, November 11, 2015
In his recent blog entry about the Massachusetts Appeals Court case, Pfannenstiehl v. Pfannenstiehl, at http://www.margolis.com/our-blog/does-recent-divorce-undermine-centuries-of-spendthrift-trust-law, Boston estate-planning counsel Harry S. Margolis, wrote that:
This ruling, which undermines centuries of established trust law, was based in part on the equities of the situation and in part on a misunderstanding of wording commonly used in trusts.
Who are we to argue with Mr. Margolis’ observations about trust law? They sound about right to us. Today, instead, we are focused on the equities, and ask did they trump the law of trusts in the courts?
The facts that the Appeals Court highlighted shone harshly and disparagingly on the husband and his family. The decision recited the relaxed and informal manner in which biased trustees (sibling and family accountant) administered the trust, and their divorce-eve cut off of family benefits, in great detail and with considerable care. The court trashes the trust as a sham, and the husband’s advocacy, as disingenuous at best. The husband’s overpaid, no show, family business job (as in four years of paid leave) is reported, even if marginally relevant. The court also details the wife’s considerable burdens, including her care responsibilities for a Downs child, and the husband and family’s pressure for her to exit military service, just shy of her pension vesting.
The trial court’s action was extraordinary in many ways. After determining that the trust is a devisable marital asset (we don’t find that part surprising), the court completely disregards any of the ways that this generational trust restricts beneficiary access to trust resources. It simply divides the corpus by 1/11, despite those restrictions, and the fact that the beneficiary class is subject to expansion. The court ordered a 24-month cash buy out of the wife’s adjudged interest, irrespective of liquidity, taxation and access issues.
But, beyond that, the court then divided the husband’s family trust interest disproportionately against him, in tandem with an unequal split of the non-trust estate, in the same proportions.
It is not unusual in a case of trust-divorce case, for the court to split the non-trust estate in favor of the non-beneficiary spouse. This is usually a form of compensation for a disproportionate split of the trust asset in the beneficiary’s favor. But, here, the judge favored the wife with 60% of the whole estate, trust included. It is entirely fair to argue, that by valuing the trust as if it were cash in the bank, rather than a discretionary vehicle of future distributions, that the net asset split to the wife is substantially greater than the surface 60%.
How does this square with Moriarty v. Stone, still good law that establishes that “contribution” remains “touchstone” of asset division? Neither party created the trust wealth, so the only contributory link is the husband’s lineage. Do the wife’s overall contributions echo Williams v. Massa, the famous case of the multi-hatted (economic and non-economic) contributor, who kept his trust interest? Not really.
In the end, it does look like the trial court punished the spouse whom she took to be the bad actor, and advanced the interests of the needier, and perhaps more virtuous spouse, notwithstanding the law of trusts. The Appeals Court decision, and its machinations to get a majority, does nothing to dispel that view.
In our next blog, we will turn to how the Supreme Judicial Court may look at the situation, should it accept the case.
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