Just about everyone knows what the phrase "tools of the trade" means. It's a pretty important concept, implying a meaning that goes beyond its literal definition. It suggests that there are special, sometimes unique, tools that enable the tradesperson or professional to practice her vocation, while being unable to do so without them.
The tools we trust lawyers use to practice our profession are not tangible like a scalpel or a saw, but rather the established laws, principles, precedents and rules regarding trusts developed over decades by the courts and legislatures.
Unfortunately, Massachusetts courts in some recent cases have modified some of the most basic, well-established, and commonly used tools we have, virtually ignoring well-settled law.
One such law in particuar, and perhaps one of the most important rules in trust law, is the so-called "spendthrift trust rule." Simply stated, this is the rule that allows the settlor of a trust to provide that the trust assets will not be subject to the debts and liabilities of the beneficiary of the trust.
In 1875, the US Supreme Court held that spendthrift trusts were valid in Nichols v. Eaton (91 US 716), and a few years later, the highest Massachusetts court agreed in Broadway National Bank v. Adams (133 Mass. 170,1182).
In Adams, the court said: "The rule of public policy which subjects a debtor's property to the payment of his debts, does not subject the property of a donor to the debts of his beneficiary and does not give the creditor a right to complain that, in the exercise of his absolute right of disposition, the donor has not seen fit to give the property to the creditor, but has let it out of his reach." (Id. at 174).
That has been the law used repeatedly and effectively by lawyers in Massachusetts and throughout the United States for almost 150 years. Recently, however, the Appeals Court has decided to ignore this well-settled rule to reach a convenient decision. In Levitan v. Rosen, Case No. 18-P-847 (Appeals Court, May 5, 2019), a husband and wife were divorcing and the issue was the amount of the couple's assets that would be "subject to equitable distribution" under G.L.c. 208, Section 34.
The relevant facts were that, more than 30 years ago, the wife's father established an irrevocable trust for her, naming her as the sole beneficiary during her lifetime with remainder to her issue. The wife's benefits under the trust were at the sole discretion of the trustee without an "ascertainable standard," and the trust contained a spend-thrift provision.
The wife was given a limited annual right to withdraw trust prinicpal (5 percent). The wife's trust contained about $1.6 million of assets, while the husband's assets were dramatically less. (Althought the wife's assets outside the trust were not noted, it would appear the reason was they were not significant. We also note that the trust was a Florida trust, but the court stated that relevant Florida law was the same as Massachusetts law.)
The central issue in the case was whether the assets in the wife's trust were "includable in the marital estate for purposes of equitable distribution."
In analyzing the question, the lower court held that the amount the wife had the power to withdraw from the trust would be subject to division, but the remaining assets of the trust, clearly beyond not only the wife's access and control but beyond her creditor's access and control uner prevailing Massachusetts law, would not be subject to division. The spendthrift trust was outside the marital estate.
Unfortunately, the Appeals Court decided to sidestep prevailing law and get creative in order to reach what the court apparently felt was a more equitable result.
The court reviewed the enforceability of the spendthrift provision under Florida law, but then it did an unconvincing segue into the recently Pfannenstiehl case (discussed in an earlier Turst-worthy Advisor column), attempting to distinguish that case (decided on considerably different facts), using the distinction as a reason to hold that in this case the wife's trust assets should be subject to division. This was mainly on the basis that, unlike Pfannenstiehl, the wife's interest in the trust assets was not susceptible to reduction as she is the sole beneficiary of her share presently held in trust."
In supporting its decision, the court relied heavily on trust language stating that the wife "shall be primarily provided for" (of course, because she was the sole beneficiary!) and that "the trustee shall have no liability in favoring (the wife) - to the complete exclusion of the remainderman of this share."
Again, unfortunately, the court failed to note that no matter how broad the trustee's discretion, and no matter that there were no other beneficiaries during the wife's lifetime, it was still a disretionary spendthrift turst, and there were remaindermen (five children) to consider who had interests after the wife's death.
For the court to downplay those facts and the clear and applicable precedents in the law turns a tried and true tool of the trade into an unreliable contrivance.
One could envision the court taking a similarly aggressive position in other cases, as it erodes the protection of a third-party spendthrift trust. To help avoid that result, it may be a good idea for drafters to add one or more other beneficiaries (along with a spendthrift provision, of course, for what it may be worth), and perhaps a special power of appointment and maybe a trust protector to take the assets out of harm's (the appeals court) way. Just saying.....
