Many clients choose to leave inheritances to their children in trust rather than outright in order to protect the property in the event of divorce or bankruptcy, or on the child’s death to keep the property in the family. In our practice, we call these “family protection” trusts. A recent Massachusetts Appeals Court case, Dylan Jones v. Juliana Jones (Mass. App. Ct. No. 21-P-655, September 6, 2023), highlights how carefully these trusts must be drafted.
A Generous Mother
Juliana and Dylan Jones married in 1998 and divorced in 2019. Throughout their marriage, Juliana’s mother showered them with gifts which enabled them to live a lifestyle far more opulent than they could have based on their own earnings. Juliana’s mother also created the Juliana Jones Irrevocable Trust (JJIT) for Juliana’s benefit. The probate court included this trust in divvying up assets between Dylan and Juliana. On appeal, Juliana challenges a number of the decisions made by the probate court, but the crux of the appeal has to do with the JJIT.
Creditor Protection Trusts
It has long been the law that anyone can create a trust for someone else, a so-called “third party” trust, that will be protected from creditors and from divorcing spouses. Due to the creditor protection, these are sometimes called “spendthrift” trusts. The main rule for these trusts to work is that the trustee must have complete discretion on whether or not to make distributions to or for the benefit of the beneficiary.
This is what the JJIT provided, at least until the mother’s death. At that point, the JJIT is to end and the trust property distributed to Juliana. The probate court ruled that due to this provision, Juliana will ultimately receive the trust property and as a result it should be included in the division of marital assets.
The Postponement Provision
Juliana argues that this was a mistake due to another feature of the trust which permits the trustee to postpone the distribution to her for a “compelling reason,” which is defined to include many possibilities, including “serious disability, drug or alcohol abuse, … failure to enter into an appropriate prenuptial agreement, the possibility of divorce, … failure to pursue a college education or vocation commensurate with [her] ability . . . , potential or pending creditor claims.”
The Appeals Court finds that because this exception to the trustee’s obligation to distribute the JJIT assets to Juliana upon her mother’s death is so narrow and specific, Juliana has a legally enforceable right to the trust property. “To the extent that the trustee has the discretion to ‘postpone’ distributions for a ‘compelling reason,’ that discretion is subject to judicially enforceable limits.” This is in contrast to a standard discretionary trust in which the beneficiary has no enforceable right to distributions.
Speculative vs. Enforceable
The Appeals Court in making its decision reviews other divorce cases involving trusts. Those cases distinguish between interests that are “too speculative to constitute a property interest” and thus are not includible in the marital estate from those that are “deemed sufficiently fixed and enforceable for inclusion in the marital estate.” One significant factor in addition to the trust language governing distributions is whether the divorcing spouse is the sole beneficiary of the trusts, as is the case with the JJIT, or one of several beneficiaries. In the latter case, the divorcing spouse’s interest may be found to be speculative since the trust might be entirely depleted through distributions to those other beneficiaries.
The moral: keep it simple. If a purpose of the trust is divorce and creditor protection, make the distributions completely and permanently discretionary. Don’t get fancy by directing distributions except in certain situations.