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

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

As discussed infra Part IV.B, the dissenting opinion in Jones suggested that interests in trusts may be valued similarly to prospective pension payments. Courts in other states have made the same analogy.86

A. Net Present Value Method

Colorado recognizes three methods of distribution to divide a pension upon dissolution-the "net present value" method, the "deferred distribution" method, and the "reserve jurisdiction" method.87 The net present value method, also referred to as the "immediate offset" method, results in immediate distribution to the non-employee spouse. The Hunt court noted: "If using this method, the trial court, guided by actuarial data, values the future benefit, considers a number of different factors, including certain risks . . ., and accords a present value to the future benefit."88 The lump sum that represents the present value is offset by the value of other marital property.

Applying the net present value method to trusts presents special issues. A frequent uncertainty in the valuation of an interest in a trust arises as a consequence of a right of a current beneficiary (other than the beneficiary spouse) to receive discretionary distributions from the trust. Many trusts are drafted with, and the tax law encourages, the creation of discretionary interests in trusts for the benefit of an older generation because it allows flexible access to trust property without subjecting the trust property to estate tax at the older generation. A preceding invasionary right can produce a range of outcomes, depending on the circumstances. At one end of the spectrum, the invasionary right might be ignored, but at the other end, the invasionary right might render a divorcing spouse's interest in the trust too uncertain and speculative to be quantified.

Present value calculations involving pensions have been the source of significant litigation, which have required expert testimony, and the resulting calculations can vary significantly.89 The potential for experts to disagree will be even greater in valuing interests in trusts. The terms of trust instruments will vary more significantly than those of retirement plans. Trusts will involve more subjective valuation factors and perhaps multiple measuring lives. In addition, actuaries and accountants may be ill-equipped to decipher trust instruments and their estate, gift, and generation-skipping transfer tax consequences. Finally, as with pension assets, the offsetting assets may not be sufficient to equal the share awarded to the non-beneficiary spouse.

B. Deferred Distribution and Reserve Jurisdiction Methods

Under the deferred distribution and reserve jurisdiction methods, the latter of which also is referred to as the "wait and see" method, the nonemployee spouse does not receive any benefits until they actually are paid to the employee spouse or the employee spouse becomes eligible to receive benefits. The deferred distribution method requires the court to predetermine the non-employee spouse's percentage of the pension stream that the non-employee spouse will be eligible to receive, once the pension is both vested and matured. In Hunt the court observed: "If the court reserves jurisdiction, the non-employee spouse's percentage share is calculated later at the time when the pension has vested and matured."90