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Trusts in Divorce: The Connecticut Supreme Court Speaks in Ferri

The Connecticut Supreme Court issued opinions in the two related cases known as Ferri, which lie squarely at the intersection of matrimonial law and estate planning. Although the Court focused on the narrow issue of trust "decanting," Ferri appears to present a surprising planning opportunity and may have considerably broader implications for matrimonial and estate planning attorneys alike.

Background. Husband was the beneficiary of a trust established by his father ("Trust 1") and, having reached age 35, Husband had the right to withdraw assets of Trust 1. Husband had never exercised that right, and upon initiation of the divorce action between Husband and Wife, and without notice to Husband, the trustees of Trust 1 "decanted" all assets to a new trust ("Trust 2"), which could be described as a "spendthrift" trust. After doing so, the trustees filed a declaratory judgment action to approve their decanting. That declaratory judgment action, along with the underlying divorce action, comprise the two parallel Ferri cases.

Importantly, Trust 1 was governed by Massachusetts law. Questions on the propriety of the decanting were certified to the Supreme Judicial Court of Massachusetts, which issued a ruling in March 2017 in favor of the trustees: decanting Trust 1 was a valid exercise of the trustee's discretion.

That March ruling in Massachusetts left open several questions in Connecticut. Would decanting result in a self-settled trust in Connecticut, subject to the rights of a beneficiary's creditors? If the decanting was valid, would this decision present a huge and surprising planning opportunity for beneficiaries of "withdrawal" trusts? Could the opinion be limited to decanting, or would it say more about matrimonial and trust law in Connecticut?

The New Rulings. In the declaratory judgment action, the Connecticut Supreme Court ruled in favor of the Trustees, approving the decanting. The Court acknowledged that the assets of Trust 1 had been fully reachable in the divorce prior to the decanting and now were off limits – the decanting had worked as planned. The Court rejected the argument that decanting had created a "self-settled" trust subject to the reach of creditors, pointing to a record showing that actions were taken without Husband's awareness or consent. The Court's conclusion was even stronger: "In light of the trial court's finding that [Husband] took no active role in planning, funding, or creating the 2011 trust, we can find no authority for the proposition that it should be considered self-settled." (Emphasis added.) The Court rejected various other arguments, including that Husband and trustees had dissipated assets and acted in contempt of court.

The divorce action reached a parallel result, though not without a few surprises.

A Twist. The Connecticut Supreme Court rarely has spoken on the protections afforded to trust interests in Connecticut divorce actions, making the new Ferri opinions a meaningful data point for practitioners. Most practitioners would agree that a true "spendthrift" trust – with fully discretionary distribution standards in the hands of an independent trustee – should not be subject to division in a divorce. And, indeed, per the Court, a trial court cannot "reach" or even "consider" such trust assets in dividing a marital estate. However, in a twist, the Court upheld the trial court's award of "substantially more of the marital assets" to Wife as well as an enhanced alimony award, writing: the trial court "could, and did, consider [Husband's] ability to earn additional income when creating its alimony orders" noting that the trust "had routinely supported his investments."

What appears to be the Wife's consolation prize raises fundamental questions: Does Ferri open a side door for trust assets to enter a divorce proceeding? Does the answer depend on how a trust has been administered in the past?

Possible Implications of FerriThere are many implications of Ferri, and it cannot easily be written off as a mere "decanting" case. The opinions appear to present a planning opportunity for trustees of "withdrawal" trusts (and possible other trusts with less than ideal terms vis-à-vis creditors), where the governing law of the trust arguably permits decanting. And the Court's discussion of equitable division and alimony awards, suggesting that trust assets – even with spendthrift trusts – could factor into a trial court's calculation, would seemingly have broad implications for trust administration, as well as for discovery and strategy in matrimonial actions.

To view the two opinions, please click here and here.

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About this Author

Matt Smith, Estate Planning, Trust Administration, Stamford, Wiggin and Dana Law Firm
Associate

Matthew E. Smith is an associate in the firm's Private Client Services Department. Matt advises clients on estate planning, estate and trust administration and probate litigation. His estate planning practice focuses on assisting individuals and families with practical estate, gift and tax planning, including the preparation of wills and trusts.

Prior to joining Wiggin and Dana, Matt was a litigation associate for Cravath, Swaine & Moore LLP.

Matt earned his J.D. from Columbia University Law School and he earned his undergraduate degree in applied mathematics, cum...

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Joseph Martini, Internal Investigations, Wiggin and Dana Law Firm, Washington DC, New York
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Joseph W. Martini, is a Partner and Chair of the firm's White Collar Defense, Investigations and Corporate Compliance Group. In 2014, 2015 and 2016, the White Collar Group was awarded the Litigation Department of the Year for Government Investigations and Corporate Compliance by the Connecticut Law Tribune. Mr. Martini, a member of the firm's Executive Committee, maintains offices in New York, Stamford, and Washington, D.C.

Mr. Martini is often retained by entities facing crisis situations to conduct internal investigations, and has regularly done so in the financial, health care, manufacturing, construction and defense industries. Mr. Martini also has experience representing clients in matters involving the United Nations, and before hospital boards of directors and hearing panels in connection with disciplinary matters and other administrative proceedings. He also advises educational institutions in connection with Title IX investigations.

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Michael Clear, Estate Planning, Attorney, Trust Administration, Greenwich, Wiggin and Dana Law Firm
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Michael T. Clear is a Partner in the firm's Private Client Services Department. Michael focuses his practice on estate planning, estate and trust administration, probate litigation and business succession planning. Michael was recently selected by the Connecticut Law Tribune as a New Leader in the Law for 2013.

His estate planning practice includes assisting individuals and families with tax-efficient and practical estate and gift planning, including the preparation of wills, revocable living trusts, insurance trusts, and qualified personal residence trusts. He also...

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