A recent matrimonial case points out the difficulties of when one party to a divorce is the beneficiary of one or more trusts.
In Tannen v Tannen, a recent published case from the Appellate Division, the wife was the beneficiary of a trust established by her parents. She was the sole beneficiary and was also one of the trustees along with her parents. The standard for distributions, by the terms of the trust, was for the best interests of the wife’s “health, support, maintenance, education and general welfare.” The trust was of the “discretionary” type, that is, under the terms thereof, the trustees had “sole discretion” over distributions of both income and principal, and they should make their determinations after considerations of the wife’s other financial resources, but “without regard to the duty of any person to support” her. The trust also included a “spendthrift” provision which prohibited the wife, as beneficiary, from assigning, selling, encumbering, or in other ways “alienating” income or principal distribution without the written consent of the trustees. At the time of trial, the corpus of the trust included cash and securities, investment real estate, the home in which the parties and the children lived. The trust paid for the property taxes on the home, half of the cost of a housekeeper, and various capital improvements. The trust also paid for the children’s private school tuition, but on at least one occasion, the wife’s father refused her request for distribution for a vacation trip. Without there being delineation in the body of the opinion, it nonetheless appears that income generated by the trust may have significantly exceeded these disbursements on an annual basis.
At the trial judge’s direction, the trust was named as a party to the litigation and participated at trial.
The issues concerned a trial judge’s authority to make determinations involving the trust and to order it to make certain periodic payments. More specifically, the main issue appealed by the trust dealt with the determination by the trial judge that the trustee would be required to distribute periodic payments to the wife. (The case also involved matrimonial issue of whether and to what extent the judge could “impute” income to the wife in connection with its determination of alimony. This article, however, is limited to the trust issues. A companion article on Fox Rothschild’s New Jersey Family Law Blog by Eliana Baer has dealt with the matrimonial issues. Also, it should be noted that there were three other trust affecting the children which are also not encompassed herein).
It is to be noted at the outset, that the trial judge relied on recent revisions to the Restatement of Law as authority for his actions. The treatment of this reliance by the reviewing appellate court raises thought-provoking “institutional” questions which implicates the interplay between courts of different precedential levels. It is in the context of this interesting aspect which this article addresses.
First, let’s define the hierarchy of precedential authority by reciting the following principles:
A. There are essentially two types: precedent that is “mandatory,” that is, binding on a lower court within the jurisdiction of the upper court; and precedent that is “persuasive,” but not mandatory. The “persuasive” type of authorities are implicated in cases of “first impression,” that is, where there are no binding, mandatory decisions of higher courts in the jurisdiction.
B. Decisions of the New Jersey Supreme Court and published opinions of the Appellate Division of the Superior Court fall into the “mandatory” category relative to trial judges of the Superior Court of New Jersey. All decisions of the Supreme Court are published, but only some of the Appellate Division decisions are published.
C. The non-published decisions of the Appellate Division together with other sources, such as decisions of other trial courts (known as courts of parallel jurisdiction), and decisions of the highest courts of other jurisdictions, fall into the “persuasive” category, also known as “secondary” authority — not binding, but authoritative, but which seek to explain or apply law of the “primary” (mandatory) authority(ies).
D. Also of the secondary variety is learned treatises and articles — again, not binding but accorded some persuasive weight of authority. In this last category falls the Restatement of Law. The Restatement is a project of the American Law Institute. “The ALI’s aim is to distill the "black letter law" from cases, to indicate a trend in common law, and, occasionally, to recommend what a rule of law should be. In essence, they restate existing common law into a series of principles or rules.” (footnote omitted; quoted from Harvard Law School published online in Wikipedia).
Having set forth this structural background, now let’s return to the case. As indicated above, the trust issues in this case included the trial judge’s authority over the trust in terms of the court’s s power to override a decision of the trustees who had “sole” discretion to exercise their collective discretion. In ruling that he had the authority to do so, the trial judge relied on a statement of the law as set forth in the Restatement. The judge’s motivation was clear:
“[O]ur courts have determined that it would not be equitable for a beneficiary to maintain assets held in trust and not provide for his or her family . . . It is reasonable to conclude . . . that a court may require income available to a beneficiary to be paid to that beneficiary in the process of calculating alimony and child support. If such income is imputed to the beneficiary and the trustee refuses to act accordingly, the beneficiary would certainly be unjustly enriched if she were to first receive alimony, have a limited child support obligation and ultimately receive the entire trust income anyway.”
On these issues, the appellate court addressed the specific issue of whether the trust, being discretionary with the trustees and beyond the wife’s sole ability to compel distribution, could be considered as an asset of the wife (and, if so, thus allowing the court to impute income therefrom) — an issue of first impression in which persuasive authority came into play. In resolving the issue, the Appellate Division panel reviewed the terms of the trust itself in order to determine whether the trust was an asset of the wife, or whether she had the control to distribute its income. Based on the characterizations of the trust as first stated above, the court found that it was not an asset.
But that did not end the inquiry. The husband claimed that under evolving concepts of duties of trustees, the court could compel distributions to the wife. As support for his position, he relied on the Restatement’s recitation of the trend of the law which allows a court to override a trustee’s decision if the trustee acts arbitrarily. (Interestingly, this is akin to the standard which an appellate court reviews a trial court’s exercise of a discretionary function (such as whether to award alimony and the amount thereof) — that is, it will not second-guess the trial court’s determination, but will reverse if the decision constitutes an “abuse of discretion”).
In dealing with this, the reviewing court indicated that while the various other provisions of the Restatement has been followed by court in New Jersey, there is no published opinio
n (other than a tax court (a lower court) decision) in which a court of this state followed the specific provisions on which the husband relied. In such posture, —
“[a]s a court of intermediate appellate jurisdiction, we do not presume to adopt the Restatement . . . as the law of this state and apply its provisions to the facts of this case. Given the significance of its principles in the context of [the New Jersey statute dealing with the power of a court to impute income to a party in a divorce action), such determination would be more appropriately made by our Supreme Court.”
A cop-out? In discussions with other matrimonial attorneys, some feel so. Others, on the other hand, do not agree with that characterization. They feel, as the appellate court did, that the issue is more properly decided by the court of last resort in our state.
Now enter another curious institutional issue. The Supreme Court is required to hear cases on appeal only in limited circumstances, such as cases which come before it in which there was a dissent in the Appellate Division. But in Tannen, there was none. Therefore, while we have it on good authority that the wife will be applying to the Supreme Court for review, that court does not have to take the case. If the Supreme Court denies (what is called) certification, that essentially leaves the state of the law on this issue without resolution. Thus, it, perhaps, would have been more appropriate for the Appellate Division to dive into the fray and make a decision. At least, the law to the lower courts would be clear, subject only to revision by the Supreme Court if that court so chose to become involved if asked to do so.