[WSBAPT] End of Asset Protection?

[Joshua McKarcher]

Nick,

You are a champ for sharing this. Very interesting read.

I would love to see the Supreme Judicial Court overturn this, and provide a different and narrowing analysis. But I’m not holding my breath on this one.

It’s not a terrible opinion, honestly; nowhere near as awful as Idaho Sup. Ct.’s utterly nutty Ferguson opinion in summer 2020 (holding, among other things, that a mother owed her son enforceable fiduciary duties during her lifetime after signing a will that exercised a (revocable-until-her-death) testamentary power of appointment in his favor). If you’re ever having too good a day, go read that gem.

A couple observations for we practitioners to learn from who do asset protection planning:

I would argue unfortunate and avoidable choices at both the design phase and at the litigation phase had a hand in the outcome. The devil is usually in the details.

The trust contains both a general (not limited) testamentary power of appointment (see footnote 13) and a mandatory outright distribution at the grantor’s death (see footnotes 7 and 8). In my view, these ultimately sunk the case.

These overshadowed entirely the discretionary distribution standard that applied during the grantor’s lifetime.

Sure, there is a postponement clause, which the court correctly (and generously) held applied to the mandatory distribution right after the grantor’s death. (See footnote 12.)

But even the postponement clause contained a judicially enforceable “compelling reason” standard for postponement. (It’s not a divestment clause, they point out.)

And “enforceable” means, to judges and others, vested and final.

In turn, “mandatory” + “vested” = “property right.” That’s how Massachusetts sees it, and maybe they are correct.

The postponement clause (as a “protective-seeming remedy” to “blunt mandatory distribution”) thus turns out to be a long paragraph that muddies the waters totally and defeats the asset protection it’s supposed to preserve, as this opinion demonstrates.

The trust could have instead simply retained the discretionary standard after grantor’s death. In the proper independent trustee’s hands, that can be used to achieve (1) accumulation when smart/needed, (2) full outright distribution when the time is right (even immediately), and (3) lots of options in between.

The wife could have had a limited power of appointment (and done lifetime estate tax planning separately if needed because of resulting includability).

Much of the opinion would be impossible to write if the above two paragraphs were the case.

Forcing full distribution outright is just not true asset protection, in my (probably controversial) view.

Why? Because clauses like the postponement clause combined with mandatory distribution ask FAR TOO MUCH NUANCED UNDERSTANDING of judges and lawyers who do NOT do this all day every day. (See footnote 19 and accompanying discussion.)

Why do I believe a simple discretionary standard with a truly independent but trustworthy and well-informed trustee still works?

Because even this court understood and correctly described the discretionary standard and accorded it the correct respect: see footnote 10 and accompanying discussion on pp 11-12.

What killed it? This sentence at the end of that discussion:

“[W]hile the trust clearly contains discretionary components, the wife largely ignores the mandatory distribution language and the limits on the trustee's discretion to postpone such a distribution.” Not just point, set, match; this is point, point, set, match. (The general testamentary POA later becomes point three.)

(Their later discussion about equity applying fiduciary standards to enforce (or “give judicial teeth to”) discretionary trusts is aimed at holding naughty trustees accountable when they won’t distribute without good reason, far more than it is aimed at justifying inclusion in a marital estate.)

And then this litigation error was killer:

There was no postponement in place (because technically there did not need to be “yet”), and, worse, wife did not establish that her trust assets would be required to be used to satisfy the 10-year promissory note award to the husband, although it seems implied the trust funds would be required. (Her trust was actually 100% allocated to her in the end. So other assets theoretically could be used to pay the husband.) See footnote 14:

“There has not been any postponement here on these or any other grounds. Nor was there any evidence that the wife ever requested, or would need to request, a distribution in order to make any of the payments to the husband required by the amended judgment of divorce.”

Lastly, to add to the oversights, wife’s record did not include any hard numbers – or even estimates– of the tax burden (entirely allocated to wife, see p. 21) of cashing out taxable assets to pay the husband over 10 years with interest. Wife’s lawyer simply asserted the concept without numbers or examples. (See pp. 28-29.)

(I experienced something similar in a Spokane case to which I was tangentially related the past three years. Divorce commissioner didn’t get it; superior court TEDRA judge barely got it; different superior court divorce judge definitely didn’t get it; opposing lawyers and financial expert obviously did all they could NOT to get it; and even a former Gonzaga professor was somehow persuaded to write all sorts of words that jumbled the relevant issues. All because, in that case, the beneficiary was also a co-trustee. So, sure, technically that doesn’t blow up asset protection or do other unhappy tax things – to IRS agents and trust lawyers. But optically and practically it sure appeared the beneficiary/co-trustee/spouse had a great big asset to include in the marital estate.)

So, I think ultimately the choice is either “true commitment to asset protection with an independent trustee you know and trust and maybe write a letter of instruction to or talk with” or “limited asset protection that might work and might not but is not really full asset protection.”

And now I realize I may be pummeled. 😉 I’m braced.

All the best, Josh

Joshua D. McKarcher
McKarcher Law PLLC
537 6th Street
Clarkston, WA 99403
(509) 758-3345
(509) 758-3314 (fax)
josh at mckarcherlaw.com<mailto:josh at mckarcherlaw.com>
www.mckarcherlaw.com<http://www.mckarcherlaw.com/>




From: wsbapt-bounces at lists.wsbarppt.com <wsbapt-bounces at lists.wsbarppt.com> On Behalf Of Nick Pleasants
Sent: Wednesday, September 20, 2023 2:05 PM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com>
Subject: [WSBAPT] End of Asset Protection?

Hi All,
In further evidence that Irrevocable Trusts may not be quite so irrevocable anymore, I wanted to share a Massachusetts Appellate decision that came out September 6, 2023. Jones v. Jones<https://www.mass.gov/files/documents/2023/09/06/q21P0655.pdf>, No. 21-P-655, 2023 WL 5729650 (link to the opinion). Divorce case, wife has an irrevocable trust she inherited from her mother. Trial court decided that it could include wife’s trust among the marital assets because, “The wife's mother played a significant role in shaping the marital lifestyle and financial expectations.” Trust has an independent trustee in Michigan, but that didn’t stop Massachusetts from asserting jurisdiction and issuing the alimony order. This wasn’t even her separate property, it was an asset-protected independent trusteed asset.
Shocking to see it upheld on appeal. Disappointing to see wife’s mother’s careful estate planning get ripped to shreds in her daughter's divorce. I hope this is not the new norm for divorce courts across the country.
Best,
Nick
Nicholas Pleasants | Shareholder

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