Caution for Divorcing Spouses Who Are Trust Beneficiaries

“Caution for Divorcing Spouses Who Are Trust Beneficiaries,” that is the subject of today’s ACTEC Trust and Estate Talk.

Transcript/Show Notes

This is Travis Hayes, ACTEC Fellow from Naples, Florida. A 2023 Massachusetts divorce case, Jones v. Jones, illustrates that parents who support their married children need to be cautious with trust assets as they may be vulnerable in a divorce.

ACTEC Fellow Daniel Hayward of Wilmington, Delaware, joins us today to explain what went wrong in the Jones case, the differences between some states’ laws, and the takeaways for estate planning professionals. Welcome, Daniel.

Overview of Jones v. Jones

Daniel Hayward:  Thank you very much. The Jones v. Jones case provides an interesting intersection between asset protection and divorce and certain things that family members, in particular divorcing spouses and their family members, should be aware of, in particular with respect to certain jurisdictions, as to what may or may not be considered a property right. In the Jones v. Jones case, we’re specifically talking about a trust interest that the wife- the divorcing wife- had in a trust created by her mother.

So, to give a little bit of background on the case, Dylan and Julianna Jones were married in Michigan and were living in Massachusetts at the time that the divorce was filed for. And one of the facts that winds its way through the case in which the Massachusetts Appellate Court really focuses on is the fact that the married couple was very much financially supported by Julianna’s mother. She had provided gifts and other funding in order to allow the husband and wife to maintain their lifestyle, a lifestyle which the court noted they would not have otherwise been able to afford without the mother’s funding and the mother’s gifts.

One of the key gifts that the mother provided for her daughter was a trust known as the JJIT Trust. And the details of that trust are very important and really the focus of the Appellate Court’s decision.

Creation of the JJIT Trust

So the trust was created- it was a Michigan trust created- for the benefit of Julianna by her mother. That trust provided that during Julianna’s lifetime, income and principle could be distributed by the trustee to Julianna for her welfare and best interests. The trust included a spendthrift provision. It also gave Julianna a testamentary power of appointment to appoint the assets pursuant to her will or some other document that took effect upon Julianna’s death.

The key provision for purposes of the court decision was the fact that the trust provided for a mandatory distribution to Julianna of the remaining corpus of the trust upon the mother’s death. However, although it was worded as a mandatory distribution, there was a provision, a postponement provision in the trust agreement, which gave the trustee the sole and absolute discretion to postpone the distribution of the corpus of the trust to Julianna for a variety of reasons. And the provision stated that it had to be a compelling reason and gave a non-exclusive list of possible reasons where the trustee could postpone the distribution, but the language was clear that this was at the trustee’s sole and absolute discretion as to whether to exercise the postponement power or not.

Family Court’s Ruling on Jones v. Jones

The family court ruled that Julianna’s interest in the trust was a property right subject to equitable division as part of the divorce. It ruled that it was not a mere expectancy and that it was a fixed and enforceable right that should be considered a property right for purposes of the divorce. Julianna appealed to the Massachusetts appellate court, arguing again that her interest in the trust was simply a mere expectancy because the trustee had the sole and absolute discretion to postpone what seemed to be a mandatory distribution of the remaining corpus of the trust upon her mother’s death.

Appelate Court’s Ruling on Jones v. Jones

The appellate court upheld the lower court’s decision and ruled that the interest was fixed and enforceable enough for it to be considered a property right despite the postponement provision. It held that although there was a postponement provision, which stated that the trustee had sole and absolute discretion to postpone the mandatory distribution, that even though the trustee had sole and absolute discretion, that alone did not cause Julianna’s interest in the trust to be a mere expectancy and held that right- the right of Julianna to receive the full corpus of the trust upon her mother’s death- was a right that could be enforced in court if Julianna or someone else could establish that the trustee did not postpone the distribution for a compelling reason.

So, the most important part of the court’s decision was that despite the language stating that the trustee’s discretion was sole and absolute relating to the postponement, that alone was not enough to cause the interest not to be a property right. Julianna argued that it was possible for the trustee to postpone the distribution for Julianna’s entire life, meaning that she could never receive, or it was possible that Julianna could never receive the interest in the trust and the remaining corpus of the trust even after her mother’s death.

The court ruled that the existence of Julianna’s testamentary power of appointment was enough to overcome that fact, that the trust was still held solely for her benefit, which was, I think, an interesting conclusion given that if the distribution was postponed, Julianna could exercise her testamentary power of appointment but would never benefit directly from those funds.

Takeaways for Drafting Trusts

One of the key takeaways, especially in a jurisdiction like Massachusetts where the case law states that the fact that the trustee has sole and absolute discretion isn’t alone enough to cause a trust interest to be a mere expectancy, is to be careful about drafting trusts for the benefit of other parties, especially in the context of a potential divorce. In this case, what caused the trust interest to be included as a property right in the context of the divorce was the mandatory distribution provision. Even though there was the ability to postpone that distribution, the existence of the mandatory distribution was enough in the court’s mind to cause the trust interest to be fixed and enforceable enough to be included as a property right.

It’s interesting that some other jurisdictions have enacted statutes to deal with this issue. For example, the state in which I practice, Delaware, has a statute which makes it clear that even if a trust has an enforceable standard for distributions- for example, an enforceable right subject to health education, maintenance and support- that if the trustee still has discretion to determine whether a distribution for health education, maintenance and support should be made, the existence of that discretion will cause the trust interest not to be a property right, and she’ll still be deemed to be a mere expectancy. There are several other jurisdictions which have similar statutes or which have case law, which get to that same concept. In this case, the Massachusetts court found that despite the fact that there was discretion on the part of the trustee, it was not enough to cause the trust interest not to be a property right for purposes of the divorce. So, ultimately, the Massachusetts court upheld the lower court. And although the trust interest still had to be held for the benefit of Julianna, the value of the trust could be considered as part of the marital estate for purposes of division pursuant to the divorce.

Travis Hayes: Thank you, Daniel, for discussing the Jones v. Jones case and what estate planning professionals should take away from the ruling.

 

Additional Resources

• How to Protect Inherited Assets from a Beneficiary’s Creditors in the Event of a Divorce (Jan 2021)
• Marriage, Divorce and Asset Protection (Jul 2019)
• The Impact of Tax Reform on Trusts After Divorce (Nov 2019)

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