By: Sheryl Seiden and Kaitlyn McCracken[1]
- Introduction
New Jersey’s landmark decision in Tannen v Tannen provides protection for trust beneficiaries whereby a trust agreement does not provide the beneficiary with control over the distribution of the assets. Tannen v. Tannen, 208 N.J. 409, 410 (2011) Other states, however, have adopted a broader view that may expose the income generated by trusts interests to be considered for support considerations. Estate planning attorneys must therefore anticipate the risk that a beneficiary may reside in another jurisdiction less shielding than New Jersey.
This article will explore the national landscape on the reachability of discretionary trust interests in family law matters, examine the significant of Tannen and offer practical drafting strategies to assist estate planners to protect the trust assets from exposure in the event of a divorce.
- Imputation of Income When Determining Support in New Jersey
In New Jersey, in determining “an appropriate alimony award, the trial judge may impute income when a spouse is voluntarily unemployed, underemployed, or when a spouse’s investment decisions cause an asset to generate less income than might be earned via an alternative investment.” Tannen v. Tannen, 416 N.J. Super. 248, 274 (App. Div. 2010). In Miller, the Court considered “whether income should be imputed from a supporting spouse’s investments for the purpose of determining his . . . ability to pay alimony . . . .” Miller v. Miller, 160 N.J. 408, 421 (1999).
In fact, in Miller v. Miller, the New Jersey Supreme Court found that the husband “could invest his substantial capital assets to yield more than the . . . interest he [wa]s currently earning. . . .” Id. at 423. “Given that both income earned through employment and investment income may be considered in a court’s calculation of an alimony award, it follows that there is no functional difference between imputing income to the supporting spouse earned from employment versus that earned from investment.” Ibid.; see also Donnelly v. Donnelly, 405 N.J. Super. 117, 130, (App.Div.2009) (“The trial court must consider . . . what is equitable and fair in all the circumstances. This requires not only an examination of the parties’ earnings but also how they have expended their income and utilized their assets.”) (citation omitted); Stiffler v. Stiffler, 304 N.J. Super. 96, 102, (Ch.Div.1997) (noting that the supporting spouse could not “insulate his inheritance from the alimony calculus by transforming it into a non-income producing asset”); Arribi v. Arribi, 186 N.J. Super. 116, 118 (Ch.Div.1982) (“[O]ne cannot find himself in, and choose to remain in, a position where he has diminished or no earning capacity and expect to be relieved of or to be able to ignore the obligations of support to one’s family.”).
- New Jersey’s Consideration of Trust
Income When Determining Support– Tannen v. Tannen
In Tannen v Tannen, the New Jersey Supreme Court held that the income generated by a pure discretionary trust is generally not reachable for the purposes of support considerations. The Court emphasized that because the beneficiary spouse had no right to demand distributions, and because the trust included a spendthrift clause protecting it from creditors, any income that the beneficiary received from the trust corpus could not properly be imputed to her in considering spousal and child support. See Tannen, supra.
The Court affirmed the Appellate Division’s decision adopting its conclusion that the beneficiary’s interest was too remote and speculative to constitute her income. It declined to treat the pattern of prior trust distributions as creating de facto right to receive future payments. The decision centered around the lack of control that the payee spouse had in determining whether she would receive the trust income from the trust.
While the Supreme Court’s opinion is the controlling legal conclusion, the substantive reasoning lies in the Appellate Division’s decision, which lays out the factual context, the structure of the trust, and the analytical steps leading to the conclusion that the trust was not divisible. Accordingly, we will discuss the Appellate Division’s decision for a closer examination.
As stated by the New Jersey Appellate Division, in Tannen, immediately preceding the scheduled trial date, the judge “ordered plaintiff to join four trusts in which either defendant or the couple’s children were beneficiaries as third-party defendants.” Tannen, supra, at 253. Defendant appealed various portions of the trial court’s ruling, including the portion of the decision which required the trustees of the trust to pay Plaintiff $4,000 per month.
Additionally, the Trust Defendants appealed and contended that:
the judge erred in ordering that they be joined in the action and by forcing them to proceed without discovery; 2) plaintiff lacked standing to bring any claims against them; 3) the judge erred in ordering the WTT [The Wendy Tannen Trust ] (“WTT”) to distribute $ 4000 per month to defendant; 4) the alimony award to defendant was based upon an “improper[ ] calculat[ion] [of] the amount of income available to [plaintiff]”; 5) any claims against the Children’s Trusts should have been dismissed; 6) the judge erred in concluding defendant owed a “fiduciary duty to the spouse divorcing her”; 7) plaintiff’s claims should be dismissed based upon his “unclean hands and dishonesty during . . . trial”; and 8) the Trusts should be awarded counsel fees on appeal.
The Court provided a recitation of the background of the matter, which they identified as being “corollary” to the contentions raised by the parties. Id. at 255. Although both parties had previously been involved in real estate sales and marketing, Defendant had left the workforce when the couple married. After their marriage, the parties moved into a house that was owned by Defendant’s father. Two years after the parties were married, Defendant’s parents, settled:
the WTT, an irrevocable trust [the (“Trust”)] with defendant as the sole beneficiary and defendant and her parents as co-trustees. Section 3 of the WTT provided
The Trustees shall apply and distribute the net income and corpus of the Trust . . . to the beneficiary . . . in the following manner:
(A) The Trustees . . . shall pay over to or apply for the benefit of the beneficiary’s health, support, maintenance, education and general welfare, all or any part of the net income therefrom and any or all of the principal thereof as the Trustees shall determine to be in the beneficiary’s best interests, after taking into account the other financial resources available to the beneficiary for such purposes that are known to the Trustees. The term “best interests” shall include, without limitation and in the Trustees’ sole discretion as to need and amount, payments from the Trust to help meet educational expenses, medical expenses or other emergency needs of the beneficiary, to enable the beneficiary to purchase a home, and to enable the beneficiary to enter into a business or profession . . . The time or times, amount or amounts, manner and form in which said distributions shall be made, or sums so expended, shall be left to the sole discretion of the Trustees and shall be made without court order and without regard to the duty of any person to support such beneficiary . . .
(C) Notwithstanding any other provision in this Trust Agreement to the contrary, it is the express intention of the Grantors in creating this Trust that the beneficiary shall not be permitted, under any circumstances, to compel distributions of income and/or principal prior to the time of final distribution.
[Emphasis added.]
The [Trust] also contained a “spendthrift” provision, Section 14, which provided:
Distribution of both income and principal shall be made as directed under the terms of this Trust, and the beneficiary shall not have the right to alienate, anticipate, pledge, assign, sell transfer or encumber such income or principal distribution without first procuring the written consent of the Trustees. Any endeavor of any such beneficiary to circumvent this direction in any manner shall be wholly disregarded by the Trustees, and shall be null and void.
[Emphasis added.]
When trial commenced the corpus of the Trust included ‘shares of mutual funds and stock valued at $1,155,877, a commercial property located in Clifton from which the trust received rental income’ and the marital residence that had been conveyed from Defendant to the Trust. The Trust paid various carrying costs associated with the residence as well as capital improvements on the house. The Court noted that, on average, in the four years prior to the trial in the matter, the Trust generated ‘at lease $124,000 per year in investment and rental income.’” Id. at 256.
The Trust also paid for the children’s private school tuition for two years. Defendant and her father testified that the only time Defendant had made a request for funds from the Trust was for a trip with her friends, but her father (a grantor along with her mother) refused at that juncture.
Defendant’s parents also settled trusts for the parties’ two children, both of which were irrevocable. Defendant’s father had originally been the trustee of the children’s trusts; however, shortly before the trial, Defendant had been substituted as the trustee. “Each trust instrument clearly indicated that the creation of the Children’s Trusts, and any distributions made therefrom, were not intended to relieve the parties from their legal obligations to support their children. At the time of trial, there had been no distribution from either of the Children’s Trusts.” Id.
The day before trial was scheduled to commence, Defendant sought via motion in limine to “exclude any income generated by the Trusts as an asset for alimony and child support purposes.” Id. at 257. The trial court issued two orders that day: (1) denying Defendant’s motion in limine; and (2) ordering that the Plaintiff file a third-party complaint to join the Trusts to the action.
The trial court espoused that alimony determinations must consider not only actual income but also the ability to earn and imputed income. Further, they noted that divorcing spouses owe each other a “fiduciary duty” and that, as such, Defendant had a responsibility to pursue income under the terms of the Trust. In considering the same, the trial court found that the Wife’s failure to do so amounted to a breach of that duty, and the trial court found her “’reluctance or failure to pursue income from the [Trust]’” to be unreasonable and inequitable. Id. at 258 (citing the lower court’s reasoning). Therefore, the Court noted that it properly imputed to her the income from the Trust and factored it in calculating alimony to Plaintiff.
The Trial Court espoused that it had the authority to compel distribution of income from the Trust, in stating that “[w]here a trustee acts outside the bounds of reasonable judgment, the court will interfere with the administration of a trust.” Id. at 258. In rendering this determination, the judge noted that although New Jersey courts have generally followed the Restatement of Law, they have also determined that the Court is within its authority to compel trust distributions when the beneficiary is choosing to not provide for his or her family or contract for services or goods but not remit payment. The trial court noted that Defendant would be unjustly enriched if she were to keep the Trust income and also have a minimal support obligation, or receive support.
The judge noted that under the Restatement (Third) of Trusts § 50 comment d (2) (2003), the terms “support and maintenance and the language of the trust require[d] the trustee to disperse [sic] such sums as are necessary to maintain the lifestyle of the beneficiary. . . . This language also supporte[d] a conclusion that benefits from the trust must be first considered before an alimony obligation is determined.” Id. The judge indicated that if the trustees of the instant Trust failed to “comply with th[e] Court’s directive that [defendant] receive[ ] [monthly income] toward her health, maintenance, support and general welfare, that refusal w[ould] be deemed . . . an abuse of discretion and . . . the trustees w[ould] be ordered to make such distributions.”
The trial court ordered, inter alia, that the Trust (1) make a $4,000 payment per month to Defendant; and (2) “continue making payments for the marital residence.” Further, it ordered that if the Trust did not follow the terms set forth in its decision, it would be considered an abuse of the Trust’s discretion. The court further imputed $25,000 or earned income to Defendant and set Plaintiff’s “permanent monthly alimony obligation at $4,500.”
Defendant and the Trusts appealed, arguing, inter alia, that the Trusts were improperly joined and income derived from same was improperly imputed to them.
The Appellate Division rejected the trial court’s finding that Defendant had a fiduciary duty to Plaintiff to seek distributions from the Trust to support her lifestyle after the divorce. The Court noted the instances where New Jersey courts have sanctified the imputation of income to one party, which includes but is not limited to, when a party is voluntarily underemployed or unemployed or when “a spouse’s investment decisions cause an asset to generate less income than might be earned via an alternative investment.” The Court cited Miller v Miller, to support the proposition that when one party failed to invest substantial capital assets to earn more income and they failed to do so, the court was within its authority to impute the potential income to them. Miller v. Miller, 160 N.J. 408, 413 (1999)
The Court also cited cases where courts in New Jersey have ruled that the court may impute income for investment just as it may employment; the court must examine how the expended income and utilized assets [2] and that a party cannot insulate their inheritance by transferring it to a non-income producing asset [3] . The Court noted that although the trial court improperly deduced from these principles that spouses have a fiduciary obligation to each other, there is precedential authority which recognized valid public policy concerns requiring a divorcing spouse to deal fairly with each other. Kay v. Kay, 405 N.J. Super. 278, 285, (App.Div.2009), aff’d 200 N.J. 551, (2010); see also Moore v. Moore, 376 N.J. Super. 246, 251, (App.Div. 2005) (recognizing a “pre-existing duty which runs between spouses who have been in a marriage which has failed”) (quotation omitted), certif. denied, 185 N.J. 37, (2005).
The Appellate Division identified that imposing a fiduciary duty upon a spouse, is not the same imputation of responsibility as was addressed in the cited cases. Further, the Appellate Division referenced that Black’s Law Dictionary defines a “fiduciary duty” as the requirement to “act primarily for another’s benefit”, which was an inappropriate designation for a spouse. Black’s Law Dictionary, 563 (5th ed. 1979).
The Court noted other New Jersey cases “have recognized in other contexts that an asset is properly considered to be on the economic ledger sheet of one divorcing party if that party controls the asset.”[4] Mey v. Mey, 79 N.J. 121, 125 (1979) (finding that the husband’s interest in trust principal was acquired by him when he had unimpaired control and “totally free use and enjoyment” of the trust upon his 25th birthday).
The Appellate Division analyzed the language of the Trust to determine if Defendant’s beneficial interest in the Trust was (1) income from assets held by her; or (2) whether she had control of the income generated by the Trust.
The Court noted that the search . . . for the probable intention of the . . . settlor[,] . . ., [w]e confine [our] inquiry to the four corners of the document and the language therein, and then consider the circumstances surrounding its execution and other extrinsic evidence of intention.” In re Trust Under Agreement of Vander Poel, 396 N.J. Super. 218, 226, 933 A.2d 628 (App.Div.2007) (citations omitted), certif. denied, 193 N.J. 587, 940 A.2d 1219 (2008). “The extent of the interest of the beneficiary of a trust depends upon the manifestation of intention of the settlor. . . .” Restatement (Second) Trusts § 128 (1959); accord Restatement (Third) of Trusts, supra, § 49 (“Except as limited by law or public policy . . ., the extent of the interest of a trust beneficiary depends upon the intention manifested by the settlor.”).
The Appellate Division noted that the Trust afforded the Trustee with the “sole discretion” to pay principal and income for the benefit for Defendant “after taking into account other financial resources available to Defendant. Additionally, the Trust provided that Defendant was not permitted “under any circumstances, to compel distributions.” “Lastly, paragraph 14, provides that defendant had no ability ‘to alienate, anticipate, pledge, assign, sell, transfer or encumber’ distributions from the trust.”
Defendant’s father testified that that it was his intention that Defendant should not be permitted to compel distributions and that it was not his intention in settling the Trusts to relieve Plaintiff of his duty to support. Plaintiff testified that the language of the Trust did provide the trustees with total discretion and Defendant cannot compel distributions. Alternatively, Plaintiff submitted that the Trust must be read with evolving standards, meaning that, in the instant matter, the trustee’s duty would be to maintain the beneficiary’s alleged fiduciary duty.
The Court determined that the Trust granted the trustee’s sole discretion to distribute income or principal for the beneficiary from compelling distributions. The Court determined that their discretion aligned with the Restatement (Second) of Trusts §§ 128 and 155, which limit a beneficiary’s enforceable rights in such a trust.
The Appellate Division examined both the Restatement (Second) of Trusts and the Restatement (Third) of Trusts. Under the Second Restatement, a discretionary trust is one where the trustee has uncontrolled discretion, and the beneficiary has no enforceable right to compel distributions — principles the court found consistent with the Trust’s terms in the Tannen matter. The trial court, however, had relied on provisions of the Third Restatement, which expands a beneficiary’s rights and allows for judicial review of a trustee’s discretionary decisions to prevent abuse or misinterpretation. The Appellate Division declined to adopt the Third Restatement, noting that New Jersey courts had not expressly embraced its broader view of beneficiary rights and that such a shift would be more appropriately made by the state Supreme Court. The Supreme Court affirmed the Appellate Division’s application of the Restatement (Second) of Trusts, and determining that the WTT was not an “’asset held by her’ for purposes of NJSA 2A:34-23(b)(11) of the alimony statute… [t]hus … no income from the [WTT] should have been imputed to” Defendant. Further, the Supreme Court affirmed the Appellate Division’s reversal and remanding of the trial court’s findings as to, inter alia, child support.
- Other States’ Use of Trust Income in Determining Support
The Tannen Decision has not been adopted in other states. In Pfannenstiehl v Pfannenstiehl, the Massachusetts Supreme Court reversed the lower court’s determination to include the Husband’s interest in a discretionary spendthrift trust in the marital estate, and award the Wife 60% of what the trial court determined to be the value of the Husband’s share of the trust. The trial court ordered the Husband to pay the Wife monthly payments of approximately $48,000 for her share of the trust proceeds for 24 months plus 3% interest. . Pfannenstiehl v Pfannenstiehl , 475 Mass. 105 (2016). The trust, which allowed distributions for the beneficiaries’ support and education at the trustees’ “sole discretion”, named an open class of beneficiaries and barred assignment through a spendthrift clause. In determining that it should not be included in the marital estate, the Massachusetts Supreme Court noted that the Husband had no present enforceable right to compel distributions, and the trustees retained full discretion over payments. The Court noted that although the interest was up to the discretion of the trustee, it was not a “pure” discretionary trust, as distributions from the trust were subject to an “’ascertainable standard.’ Which governs the trustee’s discretion”. The Court cited that:
Under § 103 of the Uniform Trust Code, an ‘ascertainable standard’ refers to a trust provision that requires a trustee to distribute funds to support a beneficiary’s needs “relating to an individual’s health, education, support or maintenance.” General Laws c. 203E, § 814 (b) (1), provides that, unless otherwise indicated, the “ascertainable standard” is incorporated into the distribution provisions of every trust governed by Massachusetts law. See G. L. c. 203E, § 103. This standard limits the discretion of the trustee, who is obligated to make distributions with an eye toward maintaining the beneficiary’s standard of living in existence at the time the trust was created. See Dana v. Gring, supra, discussing Woodberry v. Bunker, 359 Mass. 239, 241-243 (1971).
The Wife’s argument largely relied on a Massachusetts Court of Appeals case, Comins v Comins, where the Court ordered that discretionary trust with an ascertainable standard was deemed sufficiently certain to include the trust in “the marital estate”. Comins v. Comins, 33 Mass. App. Ct. 28, 30-31 (1992). In Comins, the Wife argued that the judge improperly included in the marital estate her interest in a trust which was settled and funded by her father. Further, the Wife argued that the lower court failed to consider that they kept the trust separate from their other marital assets and that the Husband made no contribution to the trust. The Appellate Court found that that the language of the trust provided that the trust should be paid to the wife for her “’comfort, welfare, support, travel and happiness”. Further, the Court noted that the Husband did not contribute toward the “acquisition or preservation” of the Trust instrument, the “substantial insurance policy against economic hardship” the Trust provided allowed the parties to utilize their income toward maintaining a higher standard of living than their incomes would permit otherwise. As distinguished from the Pfannenstiehl matter, in Comins, the Wife was one of two beneficiaries of the Trust and held a power of appointment over the Trust upon her death. In Pfannenstiehl, there were 11 living beneficiaries, and the Court examined whether the interest in the trust is “speculative or remote rather than fixed and enforceable, and thus more properly characterized as expectancy.” Thus, the interest lacked the certainty necessary to be treated as divisible property and she had no control over the distributions for support purposes.
In Speed v. Speed, the Supreme Court of Georgia ruled that a spendthrift provision in a self-settled trust where the settler was also the sole beneficiary was invalid. In this matter, the parties were involved in an automobile accident that left the Husband a quadriplegic. The Husband transferred his portion of the settlement, which was an annuity of $100,000 per year, into an irrevocable trust with himself as the sole beneficiary, which instructed the trustee to distribute the trust principle and interest for the beneficiary’s maintenance and support. The Wife also sustain injuries from the accident and received a settlement of an annuity of $10,000 per year. The Husband’s trust also contained a provision that provided that the trust could not be used to satisfy the Husband’s debts. In determining that the provision was invalid, they cited the Husband’s access and discretion over the trust and found that it was subject to equitable distribution. Speed v. Speed, 263 Ga. 166 (1993). Specifically, the Court noted that “The invalidity of self-settled spendthrift trusts stems from the idea that no settlor, disabled or otherwise, should be permitted to put his own assets in a trust, of which he is the sole beneficiary, and shield those assets with a spendthrift clause, because to do so is ‘merely shift[ing] the settlor’s assets from one pocket to another, [in an attempt to avoid creditors,]’ 76 AmJur2d 164, Trusts, § 129.”
Additionally, in Arizona, the Court has invalidated trusts that were established on the eve of the parties’ marriage without the wife’s knowledge and in which grew in value substantially during the marriage and to which the Wife claimed he contributed marital assets. In re O’Donnell v. O’Donnell, although the trust document was written so that the Husband’s sister would exercise discretion and control over the trust distributions, the Arizona Court of Appeals cited that the evidence suggested that the Husband had significant influence over the trusts and that his sister had likely acted in alignment with his interests. In re O’Donnell v. O’Donnell, 2013 Ariz. App. Unpub. LEXIS 235, “the day before their marriage, and shortly thereafter”, the Husband, as settler, established 12 irrevocable trusts naming his sister as Trustee. The Arizona Appeals Court upheld the probate court’s decision and noted that “although the trust documents contained a choice of law provision that specified Missouri law would govern the interpretation, construction, and administration of the trusts, Trustee was an Arizona resident and administered the trusts in Arizona.” Testimony established that the Husband created the Trust for a number of reasons, including to trace premarital assets and to protect the monies from creditors as he had a number of high-risk investments. During the marriage, he had the Wife sign a number of waivers that she signed without question. Also during the 18 year marriage, the Trust grew from a value of $3 million to a high of $170 million and a low of $102 million. The Arizona Court of Appeals found that the probate court properly found that at least part of the Trust was marital due to how the monies were directed into the Trust and by the evidence of Husband’s control over same.
- Whether New Jersey Law Would be Applied
to Interpret the Trust Provisions in a non-New Jersey case.
Whether a court outside of New Jersey would apply Tannen v. Tannen to interpret and determine the legal consequences of a discretionary New Jersey trust interest in a matrimonial proceeding pending outside New Jersey would likely rest on two issues:
(1) which state’s law governs the interpretation of the trust terms, and
(2) Whether that law will also govern the classification and reachability of the trust income in the context of support.
First, we would look at the forum state’s choice of law approach. Specifically, we would likely need to determine whether it follows the Restatement (Second) or Restatement (Third) of Conflict of Laws, and the extent of the trust’s connection to New Jersey, such as the grantor’s domicile at the time of creation or the trust’s situs and administration.
If the question before the out-of-state court concerns construction of the trust (such as the scope of the trustee’s discretion or the enforceability of a standard) courts generally apply the law governing the trust instrument. Under Restatement (Second) of Conflict of Laws §§ 268(1) and 270, courts should apply the law designated in the trust instrument unless that law would contravene the strong public policy of the forum state. In the absence of a choice of law provision, §§ 268(2) and 270 instruct courts to apply the law of the state with the most significant relationship to the trust’s creation and administration.
If the grantor was a New Jersey resident when the trust was created, or if the trust is administered in New Jersey, the court may find sufficient contacts to apply New Jersey law to interpret the trust. If so, the court would likely apply the holding in Tannen v. Tannen, which (relying on the Restatement (Second) of Trusts) held that a beneficiary cannot compel distributions from a discretionary support trust, and thus has no enforceable right or property interest in the trust corpus.
There is not a definitive number of states that follow the Second or Third Restatement of Conflict of Laws, as courts may adopt sections selectively.[5]
The second question is whether Tannen applies not only to interpret the trust’s discretionary terms, but also to determine whether the trust distributions are reachable in the divorce proceeding itself that is considered a resource for alimony or child support.
Some courts may apply forum law to this second issue, as they may distinguish between the law governing trust administration and the law governing family property classification. This approach is more likely in states that have adopted the Restatement (Third) of Trusts or the Uniform Trust Code (UTC).
Under Restatement (Third) of Trusts §§50 and 60, courts may compel distributions from discretionary trusts to satisfy a beneficiary’s support obligations. Similarly, UTC § 504 permits certain “exception creditors,” such as former spouses, to reach discretionary trusts for support and maintenance claims.
According to the Restatement (Second) of Trusts 3, which was used by the Appellate Division in Tannen v. Tannen4, a discretionary trust prevents a spouse from accessing the trust income or incorporating trust income in the calculation of alimony because a distribution cannot be compelled by the beneficiary or the courts. Thus, the trustee of a discretionary trust, and not the beneficiary, has all of the decision-making ability, including if, when and how much income should be distributed to the beneficiary.
The Restatement (Third) of Trusts and the Uniform Trust Code, both affect the legal implications of a discretionary trust in the event of divorce. Courts have found that the Restatement (Third) of Trusts 5 permits the court to order the trustee to make distribution for the dependent spouse’s support. The Uniform Trust Code 6 expressly permits a spouse to be a creditor with the special ability to access the trust. The Uniform Trust Code has been adopted by approximately 36 states [6]; however, section 504 has been modified by most.
New Jersey has not adopted the Uniform Trust Code in full nor the Restatement (Third) of Trusts.
The Uniform Trust Code, as opposed to the version adopted in New Jersey, provides that there are certain creditors (i.e., “exception creditors”) that can attach a trust with a spendthrift provision. No creditors can compel distribution from a trust. The exception creditor can attach distributions once made to the beneficiary. These “exception creditors” include: child support; a spouse; a former spouse who has a judgment for support or maintenance; a judgment creditor who has provided services for the protection of a beneficiary’s interest; and government claims. However, the insertion of additional protected classes — in the matrimonial setting and in the area of special needs trusts — as exception creditors has drawn national criticism. The New Jersey version of N.J.S.A. § 3B:31-37 deleted the UTC provision entirely and in its place included a provision clarifying issues relating to “special needs trusts” at N.J.S.A. § 3B:31-37
Thus, an out-of-state court applying New Jersey law to both the interpretation and legal treatment of a discretionary trust may find that the beneficiary’s interest is not reachable, like in Tannen. However, if the forum court applies New Jersey law only to the trust’s application there would likely be differing results.
- What Protective Measures can a New Jersey Estate Planning Attorney
Use To Protect Trusts From Being Considered in Support Awards
When a New Jersey estate planning attorney is representing a grantor in drafting a trust, where the beneficiaries reside outside the state of New Jersey or may in the future reside outside the state of New Jersey, there are a number of steps that New Jersey precedent as well as case law from other states demonstrate may protect the beneficiaries from future distribution from the trust.
Analyzing the level of discretion afforded to a beneficiary under the terms of a trust instrument, is a common approach courts across many states take when determining whether the beneficiary’s interest constitutes a property right subject to equitable distribution or support obligations.
In contrast, as cited in Pfannenstiehl v Pfannenstiehl, in Comins v Comins, the Massachusetts Appellate Court determined that the Wife’s interest in a discretionary trust “with an ascertainable standard was deemed sufficiently certain to include the trust in the marital estate”. The Court noted that, inter alia, she held the power of appointment of the trust upon her death. Comins v. Comins, 33 Mass. App. Ct. 28, 30-31 (1992). It is important to draw the distinction though that the question before the New Jersey Courts in Tannen was not whether the trust assets would be included in the marital estate, but rather, whether the trust distributions could be considered for the purposes of support.
Including a carefully drafted choice of law provision in the trust instrument may help protect the beneficiary’s interest, in the event they reside outside of the state of New Jersey or may do so at a later date. Specifically, the provision should expressly state that New Jersey law governs not only the interpretation and administration of the trust, but also the classification and reachability of the beneficiary’s interest.
Additionally, as demonstrated in the discussed cases, a carefully crafted and concrete spendthrift provision can further shield the beneficiary’s interest by limiting the ability of spouses to access trust assets.
The document should utilize unequivocal discretionary language. By way of example, in Tannen, the Court cited the trust’s language providing numerous times that any distribution from the trust (including what is determined to be in the best interest of the beneficiary) was in the trustee’s “sole discretion.” Tannen v Tannen, supra, at 256. The trust should be crafted to disallow the beneficiary to control the trust.
Additionally, like in Tannen, it would bolster the protections for any beneficiary to include language which “clearly indicated that the creation of [the Trust] and any distributions made therefrom, were not intended to relieve [a spouse] from their legal obligation.” Tannen v Tannen, supra, at 257.
- Conclusion
In considering the differing treatment of trust interests across the country, strategic estate planning requires not only precise drafting but also foresight into the practical consequences of potential exposure during a dissolution event. Courts are increasingly dissecting the nature of a beneficiary’s interest for equitable distribution and support purposes and the trusts must be drafted to withstand these challenges and uphold the settler’s intent.
[1] Sheryl J. Seiden, Esq. is a founding partner at SeidenFreed, LLC, which has offices in Northern and Central New Jersey. She is admitted to practice law in both New Jersey and New York. She is a trustee of the NJSBA and the President of the American Academy of Matrimonial Law, New Jersey Chapter. She is a fellow of the International Academy of Family Lawyers. She is a former Chair of the Family Law Section of the NJSBA. Sheryl dedicates her practice to both litigation and serving as a mediator, arbitrator and parenting coordinator in family law matters. Kaitlyn McCracken is an associate at SeidenFreed, LLC. After graduating from Hofstra Law School, she served two clerkships for the Honorable Sairka Kapoor and the Honorable Deborah Venezia. Kaitlyn dedicates her practice to family law matters.
[2] Donnelly v. Donnelly, 405 N.J. Super. 117, 129 (App. Div. 2009)
[3] Stiffler v. Stiffler, 304 N.J. Super. 96, 102 (Super. Ct. 1997).
[4] See Aronson v. Aronson, 245 N.J. Super. 354, 356 (App. Div. 1991) (noting that even if the party chooses not to utilize the income from inheritance but reinvest it, it should be imputed to that party as “[t]he issue is not actual receipt of funds but access to them. So long as the spouse has the ability to tap the income source… whether he or she actually obtains the cash in hand is inconsequential.”
[5] Survey of How Courts Nationally Cite the American Law Institute’s Restatements: 50-State Survey (Primerus Oct. 30, 2019), https://www.primerus.com/legacy-files/files/Restatement%2050-State%20Survey%2010.30.19.pdf.