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Highlighted in re Jones v. Jones, 103 Mass. App. Ct. 223 (2023)

In a troubling ruling that potentially could impact estate planning across the country, a Massachusetts appellate court ruled that the corpus of a discretionary trust created by a parent in Michigan, for the benefit of an adult child living in Massachusetts, could be considered that child’s own property in the context of a divorce action.  A close reading of the opinion suggest that the court was motivated by facts unrelated to the trust, namely that the wife’s mother had been a primary source of support for the marriage.  However, the broad language of the decision runs counter to core tenets of trust law, and unless it is narrowed or overruled, it highlights the risk for estate planners and their clients.

The Case

In Jones, an appellate court approved a matrimonial court’s finding that the wife, who was the beneficiary of a family trust, has a present and “vested” property right in the trust assets – as if the wife owned the assets on her personal balance sheet – notwithstanding that the trustee had complete discretion over distributions and that the wife had never received a distribution from the trust. In fact, the court went further in fashioning its property division:  in a marriage with minimal assets, and where neither party had requested alimony, the court ordered the wife to pay the husband $1.2M over a 10-year period, with interest.  (The trust corpus was $1.3M.) 

The trust at issue had several features that estate planners might describe as “asset protection” features, with one notable exception.  A Michigan grantor (the wife’s mother) had created the trust – an irrevocable gifting trust funded by the “winnings” of a GRAT – for the benefit of her daughter, who lived in Massachusetts. The trust had fully discretionary distribution standards, it was administered by an independent trustee, and it was governed by Michigan law.  The Massachusetts court conceded that the trust is a “discretionary trust, with a spendthrift provision,” and it conceded further that the wife had never received any distributions from the trust.  Nevertheless, the court pointed to the termination provisions of the trust, which direct an outright distribution of the corpus to the wife on her mother’s death, if the wife survives her mother – a term that most planners would agree does not represent maximum asset protection planning.  The court did not mention that the mother is still alive, and it dismissed the terms of the trust granting the trustee authority to retain assets in trust beyond the mother’s death for a “compelling” reason, which expressly included a divorce. On these facts, the court upheld a ruling that the trust corpus is the present and “vested” property of the wife.

The Court’s Analysis

This appears to be a classic case of bad facts making bad law.  Moreover, the court in Jones made errors in its understanding of the trust terms and its interpretation of the governing law of the trust (Michigan).  Despite the bad facts and shaky analysis, the implications for planners across the country could be very real, as noted below. 

From the outset, the court seemed moved by facts entirely unrelated to the terms of the trust agreement or administration of the trust.  In particular, the court noted in detail that the mother had made substantial gifts directly to the wife and husband during their marriage and had supported their lifestyle, to the extent that the wife and husband had not saved for retirement and could not maintain themselves in their standard of living. There was no prenuptial agreement. The court expressed a belief that the wife and husband had relied on the promise of an inheritance from the wife’s mother to support them in old age. A fair reading of the case might be entirely separate from the ruling on the trust:  that the court effectively ordered the wife’s family to pay alimony to the husband.

When turning to the trust, the court focused on the ultimate termination of the trust on the mother’s death, with an outright distribution to the wife if she survives her mother. The court dismissed the provision giving the trustee discretion to retain assets in trust for compelling reasons, including a divorce, as well as the fact that the mother is still alive.  Most troubling, the court incorrectly described the termination provision as an “ascertainable standard.” The court then cited Michigan law that property subject to an ascertainable standard or a required distribution (e.g., mandatory income), for which the date for distribution had passed, was reachable by creditors.  Here, the court appears to have misinterpreted Michigan law for multiple reasons. Not only was the categorization incorrect (the trust did not have ascertainable standards), but the mother is still alive, such that the date for distribution had not yet been reached.  Moreover, the court did not review Michigan law generally on the protections afforded to trusts. 

Nevertheless, on that reasoning, the court affirmed a substantial monetary judgment directly against the beneficiary, seemingly well beyond her ability to satisfy that judgment absent trust distributions.

Potential Practical Outcome of Court Ruling

In Jones, it is interesting to speculate on how the trustee may manage the trust going forward.  The wife has an obligation to make payments to the husband of approximately $10,000 per month, but it appears that she does not have sufficient personal assets to do so, absent sizeable trust distributions, which ultimately would draw down nearly all assets of the trust.  The trustee has no obligation to make those distributions while the wife’s mother remains alive (and even arguably after her death); but the functional result of not making distributions would be to quickly impoverish the wife.  The wife might then plead poverty and an inability to pay.  Does this judgment compel the wife to move in with someone (her mother?) and never hold assets in her own name?  Does the mother redo her estate plan to skip her daughter?  Does the husband return to court and attempt to seek a judgment against the trustee?  Does the trustee attempt to decant the trust, if Michigan law permits, and extend the duration of the trust, as in the Ferri case?

Potential Implications for Estate Planners Across the Country

Estate planners frequently are asked by clients how to protect family assets in the event of a child’s divorce.  And of course, children do not always stay within the borders of our jurisdiction.  Even if the impact of Jones remains restricted to Massachusetts, a child could move to Massachusetts or may in fact already live there.

When sophisticated estate planners advise clients on the protections afforded by trusts in the context of a divorce, we look first to the trust terms and how the trust has been administered.  The trust in Jones will seem familiar to most estate planners as having several elements of “asset protection” planning: an independent trustee; wholly discretionary distribution terms; a spendthrift provision; and a right to retain assets in trust in the event of a divorce.  And the trust administration seems to meet best practices:  there were no distributions from the trust by the independent trustee.

Most troubling, perhaps, is the court’s loose reference to “ascertainable standards” giving rise to a vested property right.  It is a reminder that courts can misinterpret trusts, and that matrimonial cases are a wildcard, with judges exercising powers broadly. 

Sophisticated estate planners will be accustomed to seeing matrimonial courts skew the division of marital assets where one spouse stands to inherit family wealth. Jones takes a step beyond, fashioning a judgment that immediately creates a difficult situation for the trustee, who will be forced to make distributions to benefit a creditor or see a beneficiary suffer under a hefty judgment. Jones looks as if the court is forcing the wife’s family to pay alimony. 

Practical Planning in Light of Jones

What specific lessons can planners draw here?  First, an outright distribution on a parent’s death (or at a threshold age) is risky, creating an expectation (though not a certainty) that the beneficiary ultimately will receive the assets. For asset protection, planners should consider lifetime trusts. Similarly, a planner should consider drafting trusts with a broader class of beneficiaries, including successive generations, to undermine the notion that the trust property is “vested” in a single beneficiary.  Although this may be too technical for a matrimonial court, the allocation of GST Tax exemption suggests an intent to benefit the bloodline rather and to preserve assets beyond the first generation.  Another consideration may be whether, if a client has a child in Massachusetts, to remove all ascertainable standards for trust distributions, noting again that the trust at issue in the Jones case did not actually have ascertainable standards, but the court mentioned ascertainable standards as a basis for its holding.

There could be other ways to differentiate Jones.  Most notably, the case involved bad facts, with the wife and husband relying on the wife’s mother to support their lifestyle, with no prenuptial agreement.  Where a parent is a primary source of support for a child’s marriage, a matrimonial court may fashion more aggressive judgements to support the non-moneyed spouse.

Final Thoughts

Asset protection trust planning remains one of the best protections for family wealth.  The Jones case reinforces the need for deeper conversations with clients seeking to protect family assets.  That conversation could include a discussion of the wildcards – for example, a child moving to another state, and a court misinterpreting a trust – and the best practices around trust administration, including not allowing a trust (or other family money) to be a primary source of support for the marriage.  And, of course, that conversation should emphasize the value of prenuptial agreements as a backstop to trust planning.

Consider speaking with your Wiggin and Dana attorney to determine how best to address the concerns highlighted in this advisory to reduce exposure of your estate plan to divorce actions.