Victory for PLDW Client

Spendthrift Trust Asset Protection Alive and Well in Massachusetts

Proposed 2704 Regulations May Have Substantial Impact on Estate Planning

IRA Tip! Be Wary of Tax Laws Concerning IRAs

Pannone Lopes Devereaux and West attorneys Bernard A. Jackvony and Patrick J. McBurney recently argued, and a Rhode Island Superior Court justice agreed, that a cause of action alleging breach of fiduciary duty in a probate appeal may go forward in a battle between the three beneficiaries of an estate and the estate’s executors. The Court also determined that two of the estate beneficiaries—who had previously been dismissed from the suit for failing to follow the statutory formalities of perfecting their probate appeal—may intervene under the Superior Court Rules of Civil Procedure and participate in the third beneficiary’s probate appeal. See Mendes v. Factor, PP-2009-1820 (R.I. Super. Sept. 20, 2016).

Ambrose Mendes Sr. died on September 30, 1976. The executors filed a first accounting with the Providence Probate Court in 1979 but did not file a second accounting until September 2008. At the same time the executors filed a third and final accounting.  The three Mendes children objected to the accountings in the Providence Probate Court, and the parties stipulated to an appeal to the Rhode Island Superior Court.  The Mendes children also filed a separate verified complaint alleging negligence and breach of fiduciary duties.  However, ultimately the Supreme Court determined that the allegations contained in the verified complaint, which concerned the executor’s actions in the 1970’s and 1980’s, were barred by the statute of limitations.  The Supreme Court also determined that because only one of the Mendes children – Ambrose Jr. – had signed the notice of probate appeal, he was the only party that had perfected the appeal.  Thus, the Supreme Court dismissed the other two Mendes children – Victor and Madonna – from the probate appeal.  The matter was returned to the Superior Court.

Back in Superior Court, Ambrose Jr. amended his reasons for appeal, adding one count for breach of fiduciary duty and one count for negligence.  Defendants filed a motion for partial summary judgment on these two counts, alleging that res judicata applied due to the Supreme Court’s prior decision with respect to the verified complaint.  Thereafter, Victor and Madonna filed a motion to intervene in the action under the Superior Court Rules of Civil Procedure, alleging that they were interested parties in Ambrose Jr.’s probate appeal.  The Court heard these two motions consecutively, and issued a single written decision.

In denying defendants’ motion for partial summary judgment, the Court found that res judicata did not apply because the factual circumstances of the breach of fiduciary duty alleged in the amended reasons for appeal were separate and distinct from the breach of fiduciary duty allegations of the verified complaint. While the breaches complained of in the amended reasons for appeal related to the failure of the executors to render an accurate accounting in 2008, the verified complaint had complained of breaches that occurred between 1976 and 1987.  In so holding, the Court implicitly recognized a beneficiary may bring a breach of fiduciary duty claim when an executor renders an improper and incomplete accounting.

Turning to the motion to intervene by Victor and Madonna, the Court exercised its equitable power and determined that denial of the motion to intervene would result in injustice to Victor and Madonna.  Thus, since both Victor and Madonna were interested parties because of their one-third interest in the estate, and because their interests were not adequately represented, they were permitted to intervene in the probate appeal.

For more information, please contact our trust and estate attorneys, Bernard J. Jackvony, Gene M. Carlino and Rebecca M. Murphy at 401-824-5100 or email, and

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On August 27, 2015 the Massachusetts Appeals Court dealt a significant blow to asset protection strategies involving discretionary spendthrift trusts. In Pfannenstiehl v. Pfannenstiehl, 37 N.E. 15 (Mass. App. Ct. 2015), for the first time, the Appeals Court upheld a probate judge’s determination that a husband’s interest in a spendthrift trust created by his parents and administered by an independent trustee was part of the martial estate and thereby subject to division.

In reaching this conclusion, the Appeals Court emphasized that the trust made “substantial monthly payments” to all three beneficiaries—the husband and his siblings—in the years preceding the divorce. Specifically, the Appeals Court noted that after nearly two years of such payments, on the eve of the divorce, the payments to the husband ceased. However, his siblings continued to receive trust distributions.

The Appeals Court harshly condemned what it characterized as “subterfuge to mask the husband’s income stream and thwart the division of the marital estate in the divorce.” In refusing to apply the spendthrift provision, the Appeals Court relied on precedent in which courts allowed the inclusion of other intangible assets in the marital estate that were not within the total control of their possessors. Moreover, the Appeals Court cited language emphasizing that courts were not required to allow an “obligor . . . to enjoy an asset—such as a valuable home or the beneficial interest in a spendthrift trust — while he neglects to provide for those persons whom he is legally required to support.”

As surprising as this was, on August 4, 2016, in Pfannenstiehl v. Pfannenstiehl, 55 N.E.3d 933 (Mass. 2016) the Supreme Judicial Court unanimously reversed the Appeals Court and held that, under the circumstances, a spendthrift trust created by a parent for their children would not be part of the marital estate of one of those children. Its holding acknowledged the spendthrift provision, but observed the existence of a spendthrift provision alone could not bar equitable division of a trust.

Instead, the Supreme Judicial Court highlighted that the husband’s interest in the trust under the circumstances presented was too speculative to be anything more than a mere expectancy, and that therefore, his interest was not assignable to the marital estate. Notably, the Supreme Judicial Court pointed out that the expectancy that the husband could acquire capital assets and income through the trust would be a legitimate consideration in determining what disposition to make of the property that was properly subject to division. Overall, however, the Supreme Judicial Court rejected the idea that the an interest in a discretionary trusts could be more than an expectancy, concluding that such an interest would be too remote for inclusion in a marital estate.

This is very good news—asset protection strategies using discretionary spendthrift trusts remain alive and well in Massachusetts. At the same time, the Supreme Judicial Court’s final word on the matter suggests that a spendthrift provision alone does not constitute carte blanche to keep one’s assets out of the marital estate. Instead, it must operate in conjunction with a thoughtful, well-constructed trust instrument that leaves no ambiguity as to the nature of a beneficiary’s expectancy.

For more information, please contact our trust and estate attorneys, Bernard J. Jackvony, Gene M. Carlino and Rebecca M. Murphy at 401-824-5100 or email, and

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Proposed 2704 Regulations, as they are now drafted, would make vast and substantial changes to the valuation of interests in many family-controlled entities, such as a Family Limited Partnership (FLP) or Limited Liability Company (LLC), for purposes of estate, gift, and generation-skipping transfer taxes. 

Currently, due to the restrictions placed on a limited partner of a FLP or non-managing member of an LLC, interests that are gifted are valued less than the fair market value of the gifted share, as the donor owns a non-controlling interest and his or her interest is not readily marketable. Thus, discounts for lack of control and lack of marketability apply, reducing the value for estate tax purposes.

Additionally, a potential buyer will pay less for an interest that is subject to restrictive agreements, such as restrictions on transferability or formulas setting a withdrawal or repurchase price. Such restrictions are frequently used in buy-sell or stock restriction agreements between business owners. Similarly, a willing buyer will pay less for an interest that is subject to certain rights held by other interest owners, such as puts, calls, and liquidation rights.

The Regulations will change the discount-ability of non-controlling interests. Specifically, they disregard certain restrictions on liquidation in determining the fair market value of a transferred interest. This means that transferring an interest in a FLP or LLC may be found to have been a transfer of higher value, rather than a transfer of discounted value. The higher the value of the gift transferred, the higher the gift tax. Additionally, the Regulations treat the lapse of voting or liquidation rights as an additional transfer, thus, another taxable event.

As noted, the Regulations are in proposed form and certain aspects may become final as soon as December 1, 2016. If you are interested in forming a family limited partnership or limited liability company for the significant non-tax business advantages these types of entities provide, you should consider doing so before these Regulations become effective to also obtain the tax benefits noted above.

For more information, please contact our trust and estate attorneys, Bernard J. Jackvony, Gene M. Carlino and Rebecca M. Murphy at 401-824-5100 or email, and

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This past June, the IRS issued a Private Letter Ruling (201623001) which impacts surviving spouses in community property states. The decedent and the surviving spouse were married in 2004 and lived in a community property state. They had a son, whom the decedent named as the sole beneficiary of his three IRAs. Upon the decedent’s death, the surviving spouse filed a claim against his estate, seeking her one-half interest in the community property they owned together. The claim was settled and the settlement was approved by the court, which ordered that the IRA custodian assign a certain amount of the son’s inherited IRAs to the surviving spouse as a spousal rollover IRA.

Seeking to avoid paying a tax on the amounts paid to her from the IRAs, the surviving spouse requested four rulings: 1) that the settlement amount of the inherited IRAs be classified as the taxpayer’s community property interest; 2) that the taxpayer be treated as a payee of the inherited IRAs; 3) that the IRA custodian distribute the settlement amount to the taxpayer in the form of a surviving spouse rollover; and 4) that the distribution to the taxpayer of the settlement amount from the inherited IRA not be considered a taxable event. Applying IRA Section 408, the IRA rejected the taxpayer’s requests.

The IRS first stated that under Section 408(d)(3)(C) rollovers are not permitted from non-spousal inherited IRAs, and Section 408 must be applied without regard to any community property laws. Thus, rejecting the surviving spouse’s first request, the IRS stated that classifying the amount of the inherited IRA as the taxpayer’s community property is a matter of state property law, not federal tax law.

The IRS next rejected the taxpayer’s three remaining requests, noting that as the son was the named beneficiary of the decedent’s IRA, not the surviving spouse, the IRAs are “inherited.” Because Section 408 doesn’t consider community property laws, the IRS must follow Section 408(d)’s distribution rules and disregard the surviving spouse’s community property interest. Thus, the surviving spouse cannot be treated as a payee of the inherited IRA and cannot roll over any amounts from the inherited IRA. Moreover, because the son is the named beneficiary of the decedent’s IRA and the taxpayer’s community property interest is disregarded, any “assignment” of an interest in the inherited IRA to the taxpayer would be treated as a taxable distribution to the son. Accordingly, “the order of the state court cannot be accomplished under federal tax law.”

For more information, please contact our trust and estate attorneys, Bernard J. Jackvony, Gene M. Carlino and Rebecca M. Murphy at 401-824-5100 or email, and

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