In an opinion decided December 8, 2011, the New Jersey Supreme Court upheld an Appellate Division decision finding that a spouse’s beneficial interest in a discretionary support trust was not an “asset held by” that spouse for purposes determining the other spouse’s alimony obligation, which overruled the trial court’s determination regarding the trust.

The Tannens were married for nearly eighteen years. During the marriage, Wendy Tannen’s parents settled an irrevocable, discretionary support trust with Wendy as sole beneficiary and Wendy and her parents as co-trustees (“Wendy Tannen Trust.”).

The Trust provided that:

The Trustees . . . shall pay over to or apply for the benefit of the beneficiary’s health, support, maintenance, education and general welfare, all or any part of the net income therefrom and any or all of the principal thereof, as the Trustees shall determine to be in the beneficiary’s best interests, after taking into account the other financial resources available to the beneficiary for such purposes that are known to the Trustees. The term “best interests” shall include, without limitation and in the Trustees’ sole discretion as to need and amount, payments from the Trust to help meet educational expenses, medical expenses or other emergency needs of the beneficiary, to enable the beneficiary to purchase a home, and to enable the beneficiary to enter into a business or profession . . . . The time or times, amount or amounts, manner and form in which said distributions shall be made, or sums so expended, shall be left to the sole discretion of the Trustees and shall be made without court order and without regard to the duty of any person to support such beneficiary. . . .

. . . .

Notwithstanding any other provision in this Trust Agreement to the contrary, it is the express intention of the Grantors in creating this Trust that the beneficiary shall not be permitted, under any circumstances, to compel distributions of income and/or principal prior to the time of final distribution.

The trial court applied the Restatement (Third) of Trusts to determine that the terms “support” and “maintenance” in the Wendy Tannen Trust required the trustees to distribute “such sums as are necessary to maintain” Wendy’s lifestyle. The trial court determined it must consider trust benefits before computing the alimony required to be paid by Mark and imputed income to Wendy from the Wendy Tannen Trust.

The Appellate Division held that by applying existing law, which has incorporated various provisions of the Restatement (Second) of Trusts, Wendy’s beneficial interest in the Wendy Tannen Trust was not an “asset held by” her for purposes of N.J.S.A. 2A:34-23(b)(11) of the alimony statute. Thus, the panel determined that no income from the Wendy Tannen Trust should have been imputed to Wendy in determining Mark’s alimony obligation.

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 this State. The panel recognized that pursuant to the Restatement (Third) of Trusts, Wendy would have an enforceable interest in the income of the Wendy Tannen Trust. The panel determined, however, that as a court of intermediate appellate jurisdiction it would not presume to adopt that restatement and suggested that such a decision would be more appropriately made by the Supreme Court.

As an aside, I’m not sure the same result would be reached if the case involved the availability of trust assets for Medicaid purposes. In that instance I would be much more comfortable if the trust was drafted more along the lines of a third party special needs trust.

UPDATE (10/12/2017):

In January of 2016 the legislature passed the New Jersey Uniform Trust Code. The law became effective as of July 17, 2016 and provides a comprehensive set of guidelines for trusts. New Jersey adopted nine of the eleven Articles of the model Uniform Trust Code.

The New Jersey Uniform Trust Code reinforces the creditor protection articulated in the Tannen decision. The new section 3B:31-38 provides that “whether or not a trust contains a spendthrift provision, a creditor of a beneficiary may not compel a distribution that is subject to the trustee’s discretion, even if (1) the discretion is expressed in the form of a standard of distribution; or (2) The trustee has abused the discretion. Moreover, the provisions of this section apply even if the beneficiary is the sole trustee or a co-trustee of the trust.