Irrevocable Trusts and Divorce: Massachusetts Ruling Raises Concern for Inheritances
A 2023 Massachusetts appellate court case, Jones v. Jones, casts doubt on the ability of irrevocable trusts to shield assets from division in divorce. The latest in a string of rulings, the court ruled that a trust solely benefiting the spouse during her lifetime, with discretionary distributions made by an independent trustee, still qualifies as a marital asset subject to equitable division.
Jones 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 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.
This ruling highlights potential pitfalls for trusts intended to protect assets from divorce:
- Discretionary powers with enforceable benefits: Even with an independent trustee, if the beneficiary has a guaranteed, even if delayed, payout, the trust might be considered marital property.
- Intent to exclude others: Protecting a beneficiary exclusively can backfire in divorce, creating a “fixed and enforceable” right.
- Beneficiary’s reliance: Extensive reliance on trust distributions by the beneficiary and their spouse strengthens the case for it being marital property.
- Marital trusts: Trusts favoring surviving spouses may not be protected upon remarriage, especially if provisions prioritize distribution over long-term wealth preservation.
Recommendations for trusts to protect assets from divorce:
- Diversify beneficiaries beyond the primary child or grandchild.
- Utilize powers of appointment (authority to direct the trust) strategically. Give to 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.
- Prioritize wealth preservation and wealth building terms over liberal distributions.
- Employ independent trustees who have total and absolute discretion to benefit the beneficiary, their children or other beneficiaries, as in Pfannenstiehl v. 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).
- Consider administering the trust in a jurisdiction that favors asset protection.
Since court rulings can change long-standing irrevocable trust principles, it’s so important to have a qualified estate planning attorney review your trusts to ensure they will continue to do what you intend. This is one of the reasons that 95% of our clients participate in our ongoing support program, TrustSupport™.
Have questions? Let us help you with the legal considerations by reaching out to one of our paralegals for a free 15-minute consultation.
