‘Spendthrift trust’ gets divided at divorce

divorce

Even though a wealthy family put assets in a trust for their children in order to protect them from creditors, a child’s interest in the trust could be divided in a divorce, says the Massachusetts Appeals Court.

While this result is unusual, it goes to show that even a solid spendthrift trust might not be perfect if a creditor – in this case, a spouse – is sympathetic enough.

Curt Pfannenstiehl was a beneficiary of a family trust worth some $25 million. He 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.

Again, this is an unusual result. Spendthrift trusts usually work well. But the case goes to show that even a good spendthrift trust might not be bulletproof in all cases, especially if the result could be perceived as unfair.

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