In an unusual context, the Massachusetts Supreme Judicial Court recently answered questions put to it by the Connecticut Supreme Court about its view of whether the decanting of a divorce litigant’s trust assets to another trust, with spendthrift provisions, was permitted by Massachusetts law.
The SJC concluded that the trustee’s maneuver, which likely placed the trust assets outside the equitable division reach of the non-beneficiary’s divorcing wife, respected the probable intent of the settlor, making the asset transfer permissible, even though under the original trust’s terms, the beneficiary-husband had the unfettered right to withdraw 75% of the trust res at the time of decanting.
This seems a harsh result from the spouse’s perspective. We wonder how this situation really differs from the case of a self-settled revocable trust, the contents of which are uniformly treated as unfettered marital assets because the grantor can seize the trust assets at any time; therefore, for divorce purposes, the trust is a nullity. Mr. Ferri, too, could demand and receive 75% of the original trust corpus, too, so how is that different, at least regarding that portion? Yet, the Ferri ruling will presumably put those same assets out of reach for Ms. Powell-Ferri, and the divorce court.
Did the SJC elevate form over substance?
The SJC’s answer, at the bottom line, is “no”, because the beneficiary had not in fact, taken control of the trust principal, and the trust instrument established the settlor’s intent that, the trustee’s obligations of asset protection and control persist until distribution of the trust corpus, irrespective of the beneficiary’s prior withdrawal rights.
So, as the trust instrument compelled the trustee to shield the trust corpus from others, could decant (i.e., transfer the entire trust asset base to a new, more restrictive trust) to further the settlor’s wish.
Yet, Chief Justice Gants clearly recognized, the mischief that this decision might work in Massachusetts divorce world: encouraging divorce planning by spouses and fiduciaries, and resulting disruption to the commonwealth’s generally policies in favor of broad marital asset identification and against prejudgment manipulation.
Thus, in a rare concurrence, he (with Justices Lenk and Budd) “[wrote] separately” to emphasize what the SJC did not decide:
… whether Massachusetts law will permit trustees in Massachusetts to create a new spendthrift trust where the sole purpose of the transfer is to remove the trust’s assets from the marital assets that might be distributed to the beneficiary’s spouse in a divorce action.
Exactly what the Ferri trustee had done in Connecticut, now blessed by the SJC.
Justice Gants girded his caution on the Massachusetts Uniform Trust Code’s prohibition against trusts that violate public policy (M.G.L., ch. 203E, §404), and common law, suggesting strongly, while not explicitly stating, that decanting for the sole purpose of divorce planning just – might – well – be such a violation. While not cited by the him, procedural rules of the Probate and Family Court, common bench and bar understanding and perhaps an ethics-based view, all support Justice Gants’ caution.
In the end, what the Ferri family and trustee got away with in Connecticut, will likely not pass muster in future Massachusetts. The Ferri concurrence may be its most influential part: a bright, flashing yellow light, with a red light against trustee divorce planning likely to follow.