United States: New Law Changes Treatment Of Trust Interest In Divorce

Your divorce client advises you that her parents, who are well off, have likely provided for her in their trusts and she is concerned that her husband may share in her potential inheritance.  What do you advise her?

In New Hampshire, marital property includes "all tangible and intangible property and assets, real or personal, belonging to either or both parties, whether title to the property is held in the name of either or both parties."  RSA 458:16-a (emphasis added).

New Hampshire courts use a two-step analysis in making an award of property in a divorce.  The Trial Court first determines as a matter of law whether the property to be divided is marital property.  Second, the Court determines what division of that property would be equitable.  The New Hampshire Supreme Court, in the case of In re Chamberlin and Chamberlin, 155 N.H. 13, 16 (2007), held with regard to an interest in a third party trust that the court must (1) determine whether the trust interest is marital property under New Hampshire law, and, if so, (2) in its discretion, apply the various factors of RSA 458:16-a, II, in making an equitable distribution of the marital property between the spouses.

The New Hampshire Supreme Court, in the case of In re Goodlander, 161 N.H. 490 (2011) held that the interest of a beneficiary in a discretionary trust is a mere expectancy and pursuant to RSA 564-B:8-814(b) is not to be considered marital property.  The statute specifically provides: "[I]f a distribution to or for the benefit of a beneficiary is subject to the exercise of the trustee's discretion, . . .  then the beneficiary's interest is neither a property interest nor an enforceable right, but a mere expectancy."  The analysis does not change whether or not there is a discernible standard for the trustee to use in making distributions.  If the beneficiary possesses the right to compel distributions, the trust interest will likely be deemed marital property.

Within the past few months the New Hampshire Legislature has significantly revised the law to emphasize that a beneficiary's interest in a spendthrift trust is not marital property subject to division in divorce court.  On July 20, 2017, New Hampshire Senate Bill 225 was signed into law.  The bill made substantial revisions to the New Hampshire Trust Code, including a complete revision of RSA 564-B:5-502, now captioned "Creditor's Claim Against a Beneficiary of Trust Containing a Spendthrift Provision," which became effective as of September 16, 2017.  Subparagraph (e)(1) of section 5-502 provides that a beneficiary's interest in a third-party spendthrift trust "[i]s not property for purposes of RSA 458:16-a, I."  This change clearly extends protection of beneficial interests in trusts containing a spendthrift provision from asset division in a divorce proceeding in New Hampshire.

The law in Massachusetts is somewhat different.  The Massachusetts Supreme Judicial Court in Pfannenstiehl v. Pfannenstiehl, 475 Mass. 105, 106 (2016), held that an interest in a trust that is "so speculative as to constitute nothing more than [an] expectanc[y]," is "not assignable to the marital estate."  The Court further noted that even though an individual's expectancy of future acquisition of income from a trust is not a part of the marital estate it still may be considered as an "'opportunity of each [spouse] for future acquisition of capital assets and income' in the judge's determination of a revised equitable division of the marital property."  Id. Thus, even though a trust from which the spouse cannot compel distributions is not marital property to be divided in divorce proceedings in Massachusetts, a Massachusetts court in dividing marital property equitably may still consider the fact that one spouse potentially has access to a trust distribution.  This decision and an unpublished order by a single judge of the Massachusetts Supreme Judicial Court (Vaughan v. Vaughan, 91-485 (1991) (Greaney, J.)) has led to the common practice in Massachusetts of lawyers in divorce proceedings requesting the parents of litigants to provide so-called Vaughan affidavits disclosing their estate plans, their net worth, and provisions made in their wills and trusts for the benefit of the child involved in a divorce.  Obviously, such requests are a major invasion of the privacy of the parents of a divorcing child who may want their estate plan provisions and the extent of their assets kept confidential even from their children. 

The recent passage of Senate Bill 225 has gone a long way toward protecting a parent's privacy rights in New Hampshire.

This is an ever evolving and complex area of divorce law that estate planners and family lawyers are following with interest.

As for your client, she should relax if her parents have created discretionary trusts with spendthrift provisions as an interest in such trusts is not subject to division in a New Hampshire divorce.

Published in NH Bar News (11/15/2017)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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