Take-Away: A divorce court’s equitable powers in some cases can circumvent the clear terms of the Michigan Trust Code that a beneficial interest in a purely discretionary trust is not a property interest that is subject to division in the divorce.

Background: Several years ago I reported on the Massachusetts Appeals Court decision in Pfannenstiehl v Pfannenstiehl, (February 11, 2014 and August 27, 2015) where a trial court included the beneficiary’s interest in an irrevocable trust in the divisible marital estate. That decision was affirmed at the appeals court, but was subsequently reversed by the Massachusetts Supreme Judicial Court on the basis that the beneficiary’s interest in that trust was speculative based on the trust’s terms authorizing unequal distributions among an open class of beneficiaries, and the spouse’s right to receive a distribution was subject to the trustee’s discretion. As a result, the trust was not subject to division as part of the marital estate in that divorce. However, the Massachusetts Supreme Court did find that the trust could be considered as an expectancy of future acquisition of capital assets and income when determining what disposition to make of the property that is subject to equitable division in the divorce proceedings. Well, the Massachusetts’ divorce courts are back in the news again,  with yet another decision where a Michigan trust was included, so to speak, in the divisible marital estate.

Jones v. Jones, Massachusetts Court of Appeals, No 21-P-655 (September 12, 2023)

Facts: Juliana and Dylan were married in Michigan in 1998. Dylan filed for divorce in Massachusetts in 2017. They had two children (now adults). While both spouses were employed outside the home and each contributed equally to raising the children. Juliana’s mother made several financial gifts and contributions to the couple throughout their marriage. The mother: (i) created an irrevocable discretionary Trust for Juliana; (ii) gifted substantial funds that were deposited by Juliana in UBS CD’s;  (iii) granted Juliana a 99% interest in an LLC that held title to the couple’s marital home and a ½ interest in Michigan real estate; and (iv) in 2015 created GRAT that provided a 50%-50% division of the GRAT’s remainder to Juliana and her brother. The Trust created for Juliana was governed by Michigan law and was managed by an independent trustee. At the time of the divorce trial Juliana had never received any distributions from the Trust.

Trust Terms: Juliana is the sole beneficiary of the Trust her mother created. Juliana could receive discretionary distributions of income/principal that the trustee, in its sole and absolute discretion, considered to be necessary for her ‘best interest and welfare.’ The Trust also provides for the mandatory distribution of the entire corpus upon Juliana’s mother’s death. Juliana also has a testamentary  limited power of appointment to the ‘beneficiaries of her Will’ [? A general power of appointment if anyone could be named under her Will, including her creditors?]. The Trust also contains provisions that: (i) allows the trustee to expend amounts for Juliana’s benefit to avoid the reach of her creditors and ‘to give [her] the maximum possible benefit and enjoyment of all of the trust income and principal to which she is entitled.’ In addition, the Trust, besides containing a spendthrift prohibition, also includes a ‘postponement’ provision that identified situations where there was a compelling reason for postponement of any required distribution, with one example cited being the possibility of a divorce, such that Juliana’s right to the Trust’s corpus on her mother’s death was not assured.

Juliana’s Claims: Juliana claimed that her interest in the discretionary Trust is a mere expectancy which is too remote and speculative for inclusion in the marital estate.

Trial Court: The divorce judge found the value of the Trust at the time of the trial was $1,285,263.  When the property division was made: (i) Juliana was awarded her interest in the Trust and the LLC; (ii) Dylan was awarded 60% of the CDs (gifted from Juliana’s mother); and (iii) as a property award (not spousal support) Dylan was awarded the sum of $1,173,166 to be paid over ten years, with interest. To justify this award to Dylan the trial judge focused on the important role that Juliana’s mother played to establish the marital couple’s lifestyle and expectations.

  • “[Mother] showered the family with gifts, whether monetary or experiential. She created an LLC which purchased the marital home and paid for its associated real estate taxes and major repairs/renovations. The parties did not have to budget to meet those expenses and instead put those funds towards frequent travel, summer camp, and a lifestyle they would not otherwise have been able to afford. The wife always knew that there was additional money available to meet the family’s needs and whims, which she used to supplement their lifestyle. But for the mother’s generosity and this money, the parties would not have been able to maintain the lifestyle they did on their income from employment alone. The wife’s mother gifted funds during the marriage and the family enjoyed a lifestyle throughout the marriage. This was not a situation where, as the wife attempted to maintain, the funds were completely segregated and never accessed by the parties.”
  • The trial judge also noted  that Juliana and Dylan contributed to retirement only minimally “likely due to the wife’s anticipated inheritance and the significant gifts the parties received during the marriage” and that they “did not save significantly during the marriage” to pay for their children’s college education.
  • The trial judge emphasized that the financial accounts, solely in Juliana’s name, ‘were utilized throughout the marriage…and were woven into the fabric of the marriage…and that given the length of the marriage and the parties’ equal contributions, it was not equitable for these assets to be excluded from the marital estate.”

Dispute: Juliana appealed the trial judge’s division and order. She asserted that her interest in the Trust was too speculative to constitute marital property, and because the three assets [the Trust, CDs and LLC] were gifts to her, they should be classified as her separate property and not be treated as marital property.

Appeals Court: The trial judge’s property settlement award to Dylan was sustained by the Massachusetts Court of Appeals. This Court observed that:

Sole Beneficiary: As sole beneficiary of the Trust, Juliana was entitled to receive two types of distributions: (i) discretionary distributions of income and principal that the trustee, in his sole and absolute discretion, considers to be necessary for her best interests and welfare; (ii) a mandatory distribution of the entire Trust corpus after Juliana’s mother’s death. In addition,  Juliana held a testamentary power of appointment. Apparently most important to the appeals court was the mandatory distribution provision after Juliana’s mother’s death, despite the provision that gave the trustee the authority to postpone that distribution right in the event of spelled out circumstances, such as a divorce. Restated, the appeals court found that Juliana’s interest in the Trust was sufficiently fixed and vested to constitute a marital asset.

Spendthrift Prohibition: The appeals court noted the presence of the spendthrift provision that precluded an assignment of Juliana’s interest in the Trust to her creditors or her ex-husband. But the trial judge’s inclusion of the value of the Trust in the marital estate was affirmed, by using its value to ‘equalize’ the assets awarded to each spouse, reflected in the installment payments to Dylan, over ten years, but with interest as a way to circumvent the spendthrift prohibition.

Trust Not “Invaded” to Satisfy Award: Finally, the appeals court noted that Juliana did not need to request a distribution from the Trust in order to make the equalization payments to Dylan over the next 10 years, which would have been, arguably, an indirect award of the Trust’s assets to Dylan, contrary to the spendthrift prohibition.

Comment: Of interest is that the appeals court decision does not make any reference to the fact that the Trust is governed by Michigan law, and that under the Michigan Trust Code, Juliana does not currently possess a property interest since she is the beneficiary of a discretionary trust. [MCL 700.7815;  MCL 700.7103(d).] While the Trust was ‘awarded’ to Juliana as part of the property division, it was nonetheless treated as a marital asset as indicated by the installment payment property award to Dylan. Consequently, in Michigan, Juliana would not be treated as possessing an interest in property subject to quantification and division, while the Massachusetts courts view her beneficial interest, albeit in a purely discretionary trust, as being a vested property interest, since at some future point in time, i.e., the mother’s death, Juliana would then possess the legal right to compel the distribution of the remaining trust assets. More than an expectancy but something less than an actual right to receive property from the Trust. See also In re Antonia Gualtieri Living Trust, Michigan Court of Appeals,  No. 341816 ( March 19, 2019) where the Michigan Court of Appeals found that a beneficiary’s interest in a discretionary trust was not a property interest subject to attachment.  It is unclear if Michigan’s treatment of an interest in a discretionary trust is not a property interest was ever argued in the Massachusetts trial court. Michigan should have the final say if the beneficial interest is property or not.

Practical Observation: You have to wonder what the result would have been in Jones if Juliana was not the sole beneficiary of the Trust. If, for example, if a class of beneficiaries consisting of Juliana and her two children were all discretionary beneficiaries, then arguably the children would have had legal standing to object to including part of their beneficial interest in their mother’s divorce proceeding. Valuing Juliana’s interest in the Trust would have been a lot more speculative if there were other trust beneficiaries with similar claims with respect to distributions from the Trust.

Conclusion: In some respects the Jones decision reflects the fact that a divorce court’s equitable powers can provide an ‘end-run’ around the clear statement of Michigan law in the Michigan Trust Code  that a beneficial interest in a purely discretionary trust is not a property interest. Perhaps the result might have been different if the divorce court in Jones (or the Court of Appeals) had found that Juliana could not have made the installment payments to her ex-husband over the following ten years without invading the Trust, or seeking a distribution from the Trust in order to make the installment payments. Clearly Massachusetts has a more liberal view of the marital estate than does Michigan which continues to exclude separate property from the marital estate except in extenuating circumstances described in two Michigan statutes.