In making its ruling, the trial court applied the Restatement (Third) of Trusts to determine that the terms “support” and “maintenance” in the trust required the trustees to distribute “such sums as are necessary to maintain” Wendy’s lifestyle. The trust court determined it must consider trust benefits before computing alimony and imputed income to Wendy from the trust. In the final judgment of divorce, the trial court ordered the trustees to make a $4,000 monthly payment to Wendy and to continue making payments for shelter-related expenses that it historically had made. Based on that imputed income, the court calculated Mark’s permanent monthly alimony obligation at $4,500.
On appeal, the Appellate Division noted that the Restatement (Third) of Trusts had not been adopted by any reported decision in New Jersey and, if adopted, would operate to change the law in New Jersey. The panel recognized that pursuant to the Restatement (Third) of Trusts, Wendy would have an enforceable interest in the income of the trust. The panel determined, however, that as a court of intermediate appellate jurisdiction it would not presume to adopt the Third Restatement and suggested that such a decision would be more appropriately made by the Supreme Court. The Appellate Division held that by applying existing New Jersey law, which has incorporated various provisions of the Restatement (Second) of Trusts, Wendy’s beneficial interest in the trust was not an “asset held by” her for purposes of the New Jersey alimony statute and she could not compel discretionary distributions without the consent of her fellow co-trustees, i.e., her parents. Thus, the panel determined that no income from the trust should have been imputed to Wendy in determining Mark’s alimony obligation. The New Jersey Supreme Court affirmed the Appellate Division’s decision.
In determining whether trust income and assets are available to the creditors of a beneficiary, it must be determined whether the trust is classified as a discretionary trust versus a support trust. A discretionary trust is a trust that gives the trustee discretion over distributions to the beneficiaries. A support trust is a trust that includes a support standard for providing distributions to the beneficiary. The most widely used standard is for “health, education, maintenance and support.” This type of trust must rely on its spendthrift provision to protect its assets from the creditors of the beneficiaries. Certain classes of creditors are able to access the trust assets as “exception creditors,” either by state statute or by judicial rule. One such popular exception creditor is a divorcing spouse. A third type of trust is a “hybrid trust” which is a discretionary support trust. The trust in this case has both discretionary and support language and therefore is a hybrid trust. Despite the protections ultimately determined by the New Jersey Supreme Court, estate planning attorneys should be careful to avoid drafting support or hybrid trusts in situations where protection from creditors (including a divorcing spouse) is sought for the beneficiary. It is also important that the beneficiary not be designated as a trustee. The trial court in this case found that Wendy owed a fiduciary duty to Mark, despite the prohibition against her making a demand for distributions.
Our office focuses on estate planning strategies for clients of all wealth levels, including strategies designed to provide creditor and divorce protection for beneficiaries. As a member of the American Academy of Estate Planning Attorneys, our firm is kept up to date in the latest estate planning and asset protection strategies in drafting trusts for our clients. You can get more information about a complimentary review of your clients’ existing estate plans and our planning and administration services by calling or by visiting our website.
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