Dear Clients, Colleagues, and Friends,
The doorbell rings around midnight. Heading to bed, James and Victoria worriedly check the peephole. Their grown son Brian and his much disliked girlfriend-of-the-month Elle wait outside.
James opens the door asking, “Aren’t you supposed to be in Vegas for the weekend?”
Elle thrusts her hand in their faces. “We were!” she screams, showing off a huge diamond ring.
“You’re engaged?” asks Victoria, crestfallen.
“No, silly, we’re married!” screeches Elle, jumping up and down.
James and Victoria’s hearts drop as they realize that Brian’s uncouth, classless, gold-digging girlfriend is now part of the family. They can see it plain as day, like a freight train bearing down on their son: this marriage is doomed. But what can they do to protect him?
Parents cannot prevent a grown child’s disastrous marriage, but they can protect their assets against their son’s future contentious divorce.
James and Victoria consult with their lawyer and learn that they can create a spendthrift trust. These types of trusts are generally managed by an independent but friendly trustee with authority to decide how trust funds are disbursed. Hundreds of years of trust law has held that because funds are not under the control of the beneficiary, the trust cannot be invaded to benefit the beneficiary’s creditors or in the case of divorce, their money-grubbing ex-spouse.
While this trust vehicle has been effective at preventing care-free beneficiaries from quickly blowing through trust funds and keeping family money from falling into the hands of creditors and greedy exes, recent court cases signal a sea change that such protective “firewalls” are being eroded, even after hundreds of years of solid case law.
Take the Massachusetts case of Pfannenstiehl v. Pfannenstiehl, for example. Curt and Diane Pfannenstiehl were married in 2000. At Curt’s request, Diane left her career to take care of their two children just two years before her military pension would have vested. Curt could not support the family on his salary, so the trust his father established for him and his siblings made regular distributions totaling half their yearly income under its “health, education, maintenance and support” (HEMS) clause. Right before their divorce was filed, trust distributions ceased. Diane argued that the trust was a “support” trust and not a traditional spendthrift “discretionary” trust, and that she was entitled to one-half of Curt’s share of the trust. In a 3-2 decision, the Massachusetts Court of Appeals agreed, reasoning that Curt could not hide behind the trust to shirk his familial obligations.
This is a cautionary tale that opens the door to similar results in other states, like “touchy feely” fair minded California judges. With a jurisdiction focused on the equities of the case, a highly sympathetic ex-wife, and — like many trusts formed today — HEMS language that blurred the line between “support” and truly “discretionary” trusts, the court’s decision put into question the viability of thousands of similar trusts that have been in place for decades.
So if your spendthrift trust has the standard HEMS clause, it may not be so iron clad as you may have thought or your lawyer may have advised. After all, how would he or she have known a case like Pfannenstiehl could have happened? So, what can parents do to protect grown children from a contentious divorce?
The answer lies in hiring a highly qualified lawyer who can draft a trust using language aligned with the law that would have prevented the outcome of the Pfannenstiehl case and advising about the proper way to administrate such a trust. If your spendthrift trust is already in place with the dreaded HEMS language, fear not. It can be fixed. We fix broken trusts all the time using the decanting statutes of our neighboring state, Nevada. After all, don’t we want our trusts to survive a child’s spouse’s matrimonial challenge? If the trust has weaknesses, we can determine whether it is a candidate for decanting, allowing it to be more favorably structured.
Whether you want to form a new trust or evaluate the efficacy of an old one, we can help. Protecting the prodigal child from a problem marriage is achievable, and for parents like Brian and Victoria just makes good sense.