Over $1.1 Million Preserved by ‘Spendthrift Trust Provision’

Spendthrift trusts are commonly used to protect a family’s assets. Below is just one story that illustrates how powerful these trusts can be and the underlying complexity surrounding this area of law.

In 2004 a wealthy family put assets into an irrevocable trust for their children in order to protect them from credi­tors. However, in 2012, one of the beneficiaries, Curt Pfannenstiehl, was involved a divorce and in 2015 the Massachusetts Appeals Court ruled that Curt’s interest in the trust could be divided given the specific circumstances.

At the time, the family trust was worth about $25 million. Curt and his wife Diane had a son with dyslexia and ADD and a daughter with Down syndrome. Curt worked for his family’s business and earned $170,000 a year for a job that usually pays about $50,000. Diane had been an Army Reserve officer, but Curt’s family pressured her to give up her job shortly before she completed the 20 years of service that would have earned her a military pension. Diane became the primary homemaker and took care of the children, whose needs were very demanding. About half the family’s income came from trust distributions.

The distributions were controlled by Curt’s brother and a lawyer for the family business. Once a divorce was filed, the trustees immediately stopped all distributions to Curt (but not to the other family members), and the family took what a judge called a very tough, “scorched earth” approach to fighting Diane financially in court. This was true even though Diane would have custody of the couple’s daughter and a very limited ability to earn a living due to the daughter’s special needs.

The Appeals Court (in a 3-2 vote) sympathized with Diane and said she should be entitled to a portion of the value of Curt’s interest in the trust. Since Curt was one of 11 beneficiaries listed in the trust, it was argued that his interest was in the trust was over $2.2 million, sixty present of which was deemed to go to Diane. This decision surprised many, as Spendthrift Trusts such as this one are expected to avoid this outcome to protect the grantor’s intention that such assets only be distributed to named beneficiaries.

However, in August 2016, the Massachusetts Supreme Court overruled the decision. The reason being that the Trust is not part of Curt’s ‘marital estate’ and therefore is not subject to division by their divorce.

This case shows the importance of not only setting up an asset protection trust, but why you need the assistance of an expert to make sure it is done right. Otherwise your family’s assets may end up in litigation similar to the Pfannenstiehl’s.

If you have questions about asset protection trusts or would like to discuss your estate plan with an experienced attorney at Simmons & Schiavo, call (781) 397-1700.