INTERESTS IN TRUSTS AS PROPERTY IN DISSOLUTION OF MARRIAGE: IDENTIFICATION AND VALUATION

Real Property, Probate and Trust Journal, Spring 2005 by Chorney, Marc A

Editors' Synopsis: When a trust is included as part of the divisible assets of a divorce, many complex issues associated with division and valuation of the trust arise. As the author discusses, such a division and valuation may be contrary to the settlor's intent and may require input from family members. This Article discusses the division of interests in trusts and the valuation of those interests, with the primary focus by way of example on the relevant Colorado law. Estate and gift tax valuation concepts also are discussed, and the author suggests that these concepts might be useful in valuing the interests of trusts at the dissolution of marriage. The Article concludes with a discussion of selected tax consequences of the division and valuation of a trust at the dissolution of marriage.

I. INTRODUCTION

A trust can be defined as a "legal device[ ] by which one person is enabled to deal with property for the benefit of another person."1 The simplicity of the definition belies the complexity to which trusts have evolved. The ability to create concurrent and successive equitable interests and powers in property is unique to trusts.2 Trusts have proliferated for this reason and also as a consequence of the increase in wealth in recent decades, the asset protection that a trust may provide,3 and the income, estate, gift, and generation-skipping transfer tax advantages of trusts.

The high rate of divorce in recent decades is indisputable,4 with the obvious consequence of courts making an increasing number of property divisions. Another indisputable trend is that the courts are including new types of property and interests in the pool of assets to be divided. Retirement benefits, intellectual ideas, employment perquisites, professional degrees and licenses, and a variety of other assets have been included in that pool and divided by the courts.5 "Twenty-plus years ago, many jurisdictions ignored pensions as mere contingencies and not deferred wages. Pensions were typically excluded from property settlements."6 Today, every state considers equitable division of pensions.7

A trust can constitute a complex package of present and future rights, powers, and interests, which are not necessarily fixed. If a trust is included in the pool of divisible assets on divorce, the trust instrument must be interpreted, its various interests quantified, and the value divided. Although the process and division may reflect the concept of marriage as a shared enterprise or partnership, this process and division likely will be counter to the intent of the trust's settlor and perhaps will require the participation of the family members of a beneficiary spouse in the proceedings. Those family members are likely to view the process as an unjustified appropriation of a family's wealth.

The body of law regarding division of trusts on dissolution of marriage is, in the author's opinion, too indistinct to say that the law of any one state represents a general rule or an emerging trend. However, Colorado law and, in particular, recent developments in Colorado law illustrate the struggle courts have with such divisions and the lack of a stable framework for dealing with such divisions. Divorce courts and family-law practitioners will require assistance in deciphering trust instruments and valuing temporal interests in property. Trust and estate practitioners therefore will be called upon to assist with these tasks.

This Article first discusses the division of interests in trusts on the dissolution of marriage under Colorado law. The Article then discusses the valuation of interests in trust on the dissolution of marriage, with primary emphasis on Colorado law. Next, the Article considers analogous estate and gift tax valuation concepts and how they might be useful in the valuation of such interests. Finally, the Article considers selected tax consequences that may be relevant in a division and valuation of interests in trusts on the dissolution of marriage.

II. INTERESTS IN TRUSTS AS PROPERTY: COLORADO LAW

The development of the law regarding the treatment of interests in trusts as divisible property on the dissolution of marriage has been diverse.8 Some decisions treat interests in trusts as divisible, regardless of whether the interest is vested, unvested, contingent, or remote.9 Yet some courts have held that an interest in trust is not considered property until the interest becomes possessory (the beneficiary has received or has a present right to withdraw the trust property).10 Colorado law falls between these two extremes.

A. The Enabling Statute

Colorado Revised Statutes Annotated ("C.R.S.A.") provides, in part:

In a proceeding for dissolution of marriage or . . . for legal separation . . . the court . . . shall set apart to each spouse his or her property and shall divide the marital property . . . in such proportions as the court deems just after considering all relevant factors including:

(a) The contribution of each spouse to the acquisition of the marital property, including the contribution of a spouse as homemaker;