Court Issues Yet Another Ruling Casting Doubt on the Ability of Irrevocable Trusts to Protect Assets in Divorce.

In Jones v. Jones (2023), the Massachusetts Appeals Court followed a long line of cases in deciding when a third-party trust (one not created by the beneficiary) will be considered a marital asset in the context of divorce.  

The Court upheld the lower court ruling that a trust that allows for discretion to pay a beneficiary, where the beneficiary is the primary beneficiary during her lifetime and the trust must eventually be paid to her, must be counted as a property right and therefore subject to equitable division under Massachusetts divorce law. 

The Court found that a trust with the absolute discretion to distribute to a married beneficiary, where the beneficiary is the sole beneficiary during her lifetime and her benefit is “fixed and enforceable” was a marital asset. Had her interest been “too remote or speculative” to be counted as a property interest the result would have been different. 

Trust drafters and trustees should take heed.  

It’s not enough to have an independent trustee, or even have the independent trustee approve discretionary distributions or attempt to withhold discretion.  

Based on Jones, the following factors proved fatal to the trust: 

• Distribution to a beneficiary, required under the terms of the trust, even if it can be postponed during times of crisis, will be counted. 
• Intent to provide for the beneficiary to the exclusion of others turns out to be a negative when going through divorce because it establishes an enforceable right. Intent is a two-edged sword. Apparently being too protective may create a “fixed and enforceable” property right. 
• Presence of a power of appointment in the beneficiary (meaning the beneficiary has the ability to direct where the trust contents are distributed at death or during life) is going to be looked at even if it is if limited in scope and only a quasi-property right. (The Jones court did not provide clarity on this point but mentioned the power as though it was a factor.) 
• Facts indicating that the beneficiary and her spouse were heavily reliant on distributions from the trust in their family finances will be persuasive that the trust was treated as though it was marital property. 
• Even a trust created by a deceased spouse for the surviving spouse containing spendthrift provisions, especially a marital trust, may not be protected in a subsequent divorce in Massachusetts when (a) there is an ascertainable standard for distribution and (b) preservation of principal to pass down is not a priority. 

What can drafters and trustees do to protect trusts for their intended beneficiaries? 

• Draft or decant to a new jurisdiction for trust administration when the intent of the trust grantor is clear to preserve assets for the bloodline. This move will give the trustee a fighting chance to protect the assets of the trust. 
• Draft or decant (during periods of no ongoing or imminent crisis) to include other beneficiaries besides the primary one. 
• Consider advising surviving-spouse-beneficiaries and children-beneficiaries to exercise their power of appointment to give gifts from their marital trust to their children or charities on occasion so that the power to appoint has real meaning. 
• Omit children’s spouses from being recipients of power of appointment unless requested by the Grantor.  
• Remove “liberal” distribution terms in favor of wealth preservation and wealth building provisions. 
• Routinely draft with an independent trustee who has total and absolute discretion to benefit the beneficiary, their children or other beneficiaries, as in Pfannenstiehl (2016).
• Give a trust protector the ability to add beneficiaries in the bloodline, or charities.
• Omit ascertainable standards for distribution when possible. These have caused trust assets to be considered marital property since the case of Commins v. Commins (1992).
• Advise that the signing of enforceable pre-nuptial agreements is more important than ever.