The Massachusetts Supreme Judicial Court in Curt Pfannenstiehl v. Diane Pfannenstiehl recently came to an important decision regarding how Massachusetts treats spendthrift trusts in divorce. By doing so, the court overthrew the controversial decisions of the lower courts, which would have radically adjusted the way trusts are viewed in Massachusetts. The function of these trusts is to protect beneficiaries from outside creditors and overspending, so it may be a relief to many that the Massachusetts Supreme Judicial Court has chosen to interpret the trust as the settlor intended it, rather than, as the lower courts did, viewing it as “property” that can be divided as a marital asset in divorce.
The case concerned a husband and wife who had an arrangement during the marriage to fund their daily living expenses from the husband’s trust. The husband’s income wasn’t sufficient to cover these expenses, and the wife had given up her career in order to look after the couple’s children. The couple used the trust to fund their lives year to year.
The Appeals Court relied upon the trusts “ascertainable standard” to determine that the trustees were “required” to make distributions to the husband Curt Pfannenstiehl. The reasoning behind this was that the trust was to provide for the welfare of the beneficiaries, and during the marriage, it was used to provide for the family’s living expenses. However the court’s interpretation seemed extreme, given that trustees generally have discretion in their distributions rather than being compelled to pay out. In addition, the Massachusetts Supreme Judicial Court disagreed with the lower courts’ opinion that the trust was a certain interest for Curt, instead viewing it as too speculative to be considered “property”. The Supreme Court also disagreed that Curt was entitled to a quantifiable fraction of the trust (the lower courts valued his interest as a simple 1/11th piece because it was shared with 11 other people) because of the history of how the trustees used their discretion to make unequal payments or no payments at all, and of course, the spendthrift clause, which means the trust isn’t supposed to benefit creditors or ex-spouses in the first place.
It was a good thing for Curt Pfannenstiehl that the courts ruled the way they did. When after trial, he was ordered to pay his ex-wife Diane approx. $1.4 million that he didn’t have and couldn’t earn, he was prosecuted for contempt after he couldn’t pay the judgement, and put in shackles. The Appeals Court reversed based on inability to pay, and the Supreme Court eventually decided not to treat the trust as marital property, but there was a brief moment when the protection the trust had seemed to offer Curt evaporated. Pfannenstiehl v. Pfannenstiehl shows that divorce has the potential to derail even the most painstaking plans parents have made for future generations. Thankfully, even in such a fraught situation, the courts have chosen to acknowledge that the original purpose of such a trust is to provide for future generations, and that this should be safeguarded.
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