A “spendthrift trust” is a trust that is set up to provide children or others with income while protecting them from potentially poor spending decisions. The donor who creates the trust gives a trustee – often a family member, lawyer or financial advisor – authority to decide how often to distribute the trust assets, usually with some guidelines from the donor as to acceptable uses of the money.
Spendthrift trusts protect the beneficiaries from impulsively wasting the assets. They can also protect beneficiaries by making it harder for creditors to collect the assets if a beneficiary has a business failure, lawsuit, or divorce.
But while a spendthrift trust can often protect assets in a divorce, it isn’t always foolproof, as a recent Massachusetts case shows.
In that case, a couple got divorced after a decade of marriage. The husband’s father had set up a trust for him and his two siblings. Over the course of the marriage, the couple relied on distributions from the trust to keep up an affluent lifestyle while caring for two children with special needs. In fact, when the husband filed for divorce in 2010, he and his siblings had received $800,000 apiece in distributions over just the past two years. But a month before he filed, the trustee stopped making any distributions at all to him – while continuing to make distributions to his siblings.
During the divorce, the husband claimed that his interest in the trust wasn’t an asset he had to share with his wife, because he had no legal right to distributions and any amount he might receive in the future was speculative.
But the Massachusetts Appeals Court disagreed, and said that even though the trust documents said the husband’s interest couldn’t be shared with anyone else, the actual pattern of distributions showed that the trust was being manipulated solely for the purpose of depriving the wife of her fair share.
Therefore, the value of the husband’s interest in the trust – which was valued at $2.2 million – had to be divided with his wife.