The Massachusetts Appeals Court recently reviewed the decision of a Superior Court judge on the question of whether or not a spendthrift trust settled for the benefit of a disabled person, created and funded with a divorce settlement - assets transferred to the trust by his (ex-) wife – was a “self-settled” trust as a matter of law, and hence, reachable by a potential tort-creditor of his estate. The husband’s court-appointed guardian signed the separation agreement and trust instrument on his behalf.
The trust named the wife as the settlor; and it appointed the husband’s guardian, his sister and a bank as trustees, with broad discretion. The wife funded the trust with assets exceeding $4 million in value; and the husband transferred some $120,000 from his own name into the trust.
The husband appears to have later caused an automobile collision, in which he died, while seriously injuring the occupants of another other car, resulting in a lawsuit for damages, seeking, in part, a declaration that the husband’s trust assets are available to the plaintiffs for potential damages. The Superior Court judge ruled that the plaintiffs could only reach that part of the trust corpus that the husband’s own cash funded, which the judge deemed to be the trust “self-settled”. The plaintiffs appealed.
Justice Amy Blake wrote the opinion of the Appeals Court, with clear analysis and expression. “Self-settled” trusts, or those where the creator and the beneficiary are the same, she observed, cannot serve as a firewall against creditors as a matter of public policy, at least to the extent that distributions are permitted to the beneficiary in a “support or discretionary trust”. The case turned, then, on whether or not the portion contributed by the decedent’s wife as a divorce settlement should also be deemed “self-settled”.
Justice Blake wrote of the need look past the labels of a trust to determine its true character. Remember that the wife was the named settlor of the trust, and she literally paid in 98% of the trust holdings. But, the court reasoned that her transfer was not a gift, but rather a disgorgement of marital assets to which the husband was equitably entitled under M.G.L., ch. 208, §34.
The court then invoked the law of contract, reasoning that in return for the wife’s recognition of the husband’s equitable property rights, he (by his guardian) consented to the trust’s creation, thus, providing consideration. In so doing, the husband, substantively, even if not in form, settled the trust. She then drew on analogy, comparing this to a pair of cases involving Medicaid and bankruptcy wherein a conservator created a trust, the other was funded by inheritance, each deemed to be “self-settled” despite literal trust nomenclature.
In the end, the spouses’ intent to shield the assets from creditors fell to the public policy that bars a creditor from a self-interested embargo of assets.
As we read this decision, we fully expected the opposite outcome, but by the end, we said “of course”. All in all, a really good appellate read.