An “irrevocable spendthrift trust” is a popular vehicle for parents to pass along wealth to their kids while protecting the trust’s assets from their kids’ worst instincts.
Here’s how it works. The parent sets up a trust and names the child or children as beneficiaries. The trust document also includes language stating that if one of the beneficiaries owes someone money, that creditor can’t touch the assets in the trust before they’ve been distributed. And the person named as “trustee” is in charge of these distributions.
Once a beneficiary has received a distribution from the trust, creditors can go after that money, but only money in excess of what the beneficiary needs to support him or herself.
This raises an interesting question: If the beneficiary gets divorced, can his spouse touch his interest in a spendthrift trust?
A recent Massachusetts case indicates that the answer is “No.”
In that case, the husband’s wealthy father had set up a spendthrift trust for the husband, his children, his siblings and his siblings’ children. At the time of the case, there were 11 beneficiaries in all. It was completely up to the trustee to decide when and if any cash distributions would be made.
When the husband and his wife got divorced, the wife demanded that the court put a dollar figure on the value of the husband’s interest in this trust and divide it as marital property. The husband objected.
A trial judge and later the Massachusetts Appeals Court agreed with the wife. The court valued the husband’s interest at more than $2 million and awarded 60 percent of it to the wife, to be paid in 24 monthly installments of $48,000.
But the state’s highest court said, “Not so fast!”
As the court pointed out, while the husband was eligible to receive distributions under the trust, he had no control over when and if that would ever happen or how much he would receive. That was completely up to the trustee, making the husband’s interest too speculative an asset to be included in the marital estate.
It was also unclear how much of the trust belonged to the husband, because his 1/11th interest could shrink upon the birth of additional children or grandchildren.
The law, of course, may differ from state to state. But if you are getting divorced and either you or your spouse is the beneficiary of a spendthrift trust, talk to a family lawyer to discuss what rights you might have.