Your client, who is required to file a Statement of Financial Interests (SFI Filer), has recently amended his 1986 Statement of Financial Interests (SFI) to include the reporting of two trusts. The first trust (ABC Trust) was created under the will of the SFI Filer's wife's grandmother. Under the provisions of that will, the trust income is to be distributed to the SFI Filer's father-in-law during his lifetime, and upon the death of the SFI Filer's father-in-law, the remainder will go to the SFI Filer's wife and children if they survive the SFI Filer's father-in-law. A second trust, the John Doe Trust (Doe Trust), was created on October 25, 1972. This trust is a revokable, grantor/ type trust in which Mr. Doe retains full power to terminate or amend the trust. He is entitled to all income and principal during his lifetime, and if he has not terminated or amended the trust, and if the SFI Filer's wife and children survive Mr. Doe, they will receive the principal upon his death.
The value of the assets in these trusts is estimated at $50,000 and $60,000, respectively. The SFI Filer will not be entitled to receive income or principal from these trusts, and the SFI Filer's wife and children are not now entitled to receive income or principal, although they may become so in the future as noted above. You have stated that it is uncertain whether the contingent future interests of the SFI Filer's family can be valued pursuant to ordinary accounting methodology to determine whether the minimum SFI reporting $1,000 threshold is met.
A. Introduction
A trust is, essentially, a separation of the legal title and the equitable ownership (or right of beneficial enjoyment) of property, whereby the equitable ownership is (or becomes) vested in one person, called the beneficiary, and the legal title is (or becomes) vested in another person, called the trustee. The trustee has no beneficial ownership interest in the property by virtue of his position as trustee. The trustee owes certain duties fixed by the trust instrument or by the law to the beneficiary, which duties are enforceable as a general rule in a court. 14A Simpson and Alperin, Summary of Basic Law, Trusts, §2021 (1974), (Simpson and Alperin).
A beneficiary's interest in a trust is variously described as a beneficial interest, equitable ownership, or equitable interest. These terms are used interchangeably. A beneficiary's interest may be either a present interest or a future interest; it may be either vested or contingent. A. W. Scott, The Law of Trusts, §129 (3rd edition 1967), (Scott).
The terms "present," "contingent", and "vested" have no precise meanings, thereby resulting in some confusion as to their application to specific trusts. The Office of Governmental Ethics, responsible for administering the Federal Financial Disclosure Law, has by regulation required the reporting of vested, but not non-vested, interests.1 Recognizing the difficulty of distinguishing non-vested from vested beneficial interests, the regulation specifically states:
Since the proper application of this section depends on all the facts and circumstances of a particular case, reporting individuals or their representatives should consult with the Office of Governmental Ethics staff to determine the proper treatment of any non-vested beneficial interest...
Although the term "vested" is not defined in Federal Regulations, certain parameters can be explained. A vested interest may be either a present and immediate interest, or it may be a future but uncontingent and therefore transmissible interest. A typical example of a vested future interest would be a remainder interest in a life estate of real property. In a sense, the remainder interest is subject to a contingency, the life tenant dying. A remainder interest contingent only upon the determination (termination by the terms of the trust) of a prior estate by death is typically characterized as "vested."2 Given the above guidelines, it may be that the SFI Filer’s wife has a "vested" future interest in the ABC Trust, but not in the Doe Trust.
Section 5(g)(2) of G. L. c. 268B, the financial disclosure law, requires the reporting of certain investments which are beneficially owned. Although the term "beneficially owned" is not ordinarily used in the law of trusts, it appears to be synonymous with terms such as equitable ownership, or beneficial interest. Operating on this assumption, the Commission has required public employees to identify trusts in the assets of which the employee and or family members have an aggregate interest with a fair market value greater than $1,000. This language has been contained in the instructions accompanying the SFI forms since 1979.
B. Family Trusts
The Commission has required the reporting of so-called family trusts if the reporting person's beneficial interest (or those of his immediate family) has a fair market value of greater than $1, 000. The Commission has not excluded family trusts from the reporting requirements because G. L. c. 268B does not specifically refer to or exclude such trusts, and because the phrase "family trust" has no special meaning which would indicate that it should be treated differently from other trusts. The term "family trust" has been defined in different ways depending on the presumed intent of the settlor (maker) of the trust. In some contexts the term "family" is limited to spouse and children, and others the term family includes "relations," "next of kin," or other meanings. Indeed, where a person leaves property in trust to the benefit of "family" the trust may fail because of the indefiniteness of the beneficiaries. See Scott, §120.1. In any event, we believe that any securities or other investments which are part of the trust must be treated the same as assets of a business or property related trust.3
C. Future Contingent Interests
Although a trust in which the filer has a present and immediate beneficial interest of a value of $1,000 or more must be disclosed, we question whether it is reasonable to require the disclosure of all trusts where the beneficial interest is future and contingent. Many contingent future interests are too remote for the purpose of a reporting requirement. Often, the present value of a future contingent interest is nominal when compared to its potential value when and if realized. This is particularly true in the case of a discretionary trust in which the trustee has the power to amend, terminate, or dissipate the assets of the trust during his lifetime. In the case of the Doe Trust, for example, it is doubtful that a court in the exercise of its equitable jurisdiction would allow creditors of the SFI Filer’s wife to attach her equitable ownership in the trust assets because the contingency is too remote. See Scott, §162; cf. Whiteside v. Merchants National Bank, 284 Mass. 165 (1933) in which a beneficial interest was reachable by creditors where the only contingency was the death of another beneficiary. Further, although the fact that a beneficiary has only a future contingent interest does not prevent him as a matter of law from assigning that interest to third parties, it is doubtful that anyone would exchange anything of substantial value for such an interest if the interest were speculative.
The beneficial interest of the SFI Filer's wife's interest in the ABC trust is more difficult to characterize. Under the terms of the ABC trust, it is possible that creditors of the wife could reach the future interests of the wife in that trust pursuant to the standards set out in Whiteside, and that the value of the wife's interest in the trust could be reduced to present value using certain assumptions and actuarial tables. Furthermore, the interest may be properly described as "vested".
In the absence of clarifying regulations or guidelines, however, we cannot make distinctions based on the ability of creditors to reach the potential interests of a future beneficial owner, based on the ability to reduce the beneficiary's future interests to present dollars according to ordinary accounting principles, or based on the fixation of a label "vested". There is a difference of opinion among states and the courts as to when future interests are reachable by creditors. Scott, §162. There is also a difference of opinion among experts as to the proper methodology or assumptions to be used in reducing future interests to present dollars (assuming the possibility of doing so in a particular case). An opinion which would require the reporting of the ABC Trust, but not require the reporting of the Doe Trust, would cause confusion and not provide the public with definitive guidelines as to which future contingent beneficial interests are reportable.
Until such time as we adopt definitive standards to distinguish those future contingent interests which are remote from those which are proximate, as a matter of fairness we will not require the reporting of future contingent interests in a trust. It is possible that a beneficiary of a future contingent interest, or a public employee whose immediate family member is a beneficiary of a future contingent interest in a trust, would not have knowledge of the exact nature of the trust or its value. That a beneficiary has only a future interest and that his interest is contingent does not preclude his compelling the trustee to account, Scott, §172. In the ordinary course of events, however, he would not necessarily receive such an accounting except upon specific requests. Even if the beneficiary did receive an accounting, the accounting would not necessarily reduce the potential value realized upon the contingency to present dollars. These facts dictate against our establishing an absolute rule of disclosure until such time as more definitive standards are promulgated.
The filing of SFIs provides a means of assuring the impartiality and honesty of SFI Filers. See, Opinion of the Justices, 375 Mass. 795 (1978). We do not believe that the holding of a contingent future interest in a trust by a filer or member of his immediate family lends itself to opportunities for the abuse of a public trust which the General Court envisioned in enacting Chapter 268B, when balanced against the potential hardship that such a reporting requirement would impose upon all potential filers. In the absence of clarifying guidelines, the case for such a requirement is not compelling.
DATES AUTHORIZED: October 26, 1987; September 17, 2026
