The Supreme Court of Connecticut (SCC) certified three trust-decanting questions of law to the Supreme Judicial Court of Massachusetts (SJC) incident to a divorce proceeding. On March 20, 2017, the SJC rendered its answers to the SCC. See Ferri v. Powell-Ferri, SJC-12070, which is available in this posting below.
Here is the situation in a nutshell: The Husband, the beneficiary of a Massachusetts trust established by his father (Trust #1), possessed a general inter vivos power of appointment over the entrusted property. Husband and wife are the parties to a Connecticut divorce proceeding. The trustees (one of whom was the husband’s brother) decanted the property into an irrevocable trust with a spendthrift clause for the husband's benefit (Trust #2). The sole purpose of the decanting was to remove the assets of Trust #1 from the reach of the wife. As a mechanical matter, were the trustees “empowered” by the terms of the trust to decant? Yes, answered Massachusetts. But, as the concurring opinion clarifies, unasked was whether the decanted assets in Trust #2 may nonetheless be reached by the wife in an equitable action to reach and apply incident to the divorce proceeding in light of the fact that the husband had possessed a general inter vivos power of appointment at the time of the decanting.
The Restatement (Third) of Property’s characterizes a general inter vivos power of appointment as an “ownership-equivalent” power. Certainly an equitable restitution order would have been available to the husband/powerholder had the trustee decanted without his express or implied informed consent. See Restatement (Third) of Property §17.4 cmt. f(1); §8.1.1 of Loring and Rounds: A Trustee's Handbook [page 861 of the 2017 Edition]. If there had been consent then it would seem that an equitable claw back of the decanted assets would be in order on public policy and/ or equitable grounds. Think fraudulent conveyance. Consent or no consent, the assets in Trust #2 should probably be returned to Trust #1 “to restore the status quo prior to decanting.”
Note also that if entrusted property is available to the creditors of a trust beneficiary, so also as a matter of public policy and/or equity should it be available to his or her spouse in the divorce context, though the spouse, qua spouse, is technically not a creditor. Under the model Uniform Trust Code (UTC), the husband’s creditors would have had access to the assets of the decanted trust, he having possessed--thanks to his father, not himself--a general inter vivos power of appointment. See model UTC § 505(b) (allowing for creditor access even though general inter vivos power had been granted to powerholder by a third party). The problem is that the Massachusetts UTC (MUTC) has no § 505(b), the legislature having deferred to pre-existing applicable “current Massachusetts law.” No attempt is made in the official comment accompanying § 505 of the MUTC to explain what that law is, which is currently murky at best. Cf. State St. Trust Co. v. Kissel, 302 Mass. 328, 19 N.E.2d 25 (1939). Would § 505(b) of the model UTC merely have codified pre-existing Massachusetts equity doctrine had it been enacted? I suspect the SJC would answer yes, if specifically asked. That answer alone should probably be enough to pave the way for an equitable claw back of the decanted assets.