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

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

The issue in Balanson II was whether wife's remainder interest in the B trust constituted property under C.R.S.A. section 14-10-113. In reversing the Colorado Court of Appeals' holding in Balanson I that wife's interest was an expectancy that did not rise to the level of a property interest,23 the Colorado Supreme Court determined that wife had a "future, vested interest not within the discretion of the trustee to withhold"24 and held that wife's interest in the B trust constituted property, as opposed to a mere expectancy.25 The court reached this conclusion despite the father's income interest and right to invade the principal. According to the court, "[t]hese factors render the value of wife's remainder interest uncertain, but do not convert her interest into a mere expectancy."26 The remainder interest constituted wife's separate property, and the appreciation in the value of her separate property constituted marital property under the statute.27

C. Power of Appointment

The Colorado Supreme Court in Balanson II did not address whether wife held a property interest in the A trust. The parties apparently did not disagree in any of the appellate proceedings that wife's interest in the A trust did not constitute property for purposes of the division. The court of appeals, however, observed in Balanson I that wife's interest in the A trust was "merely an expectancy."28 The court of appeals found it significant that "wife's father was given a power of appointment to pass the entire remaining corpus of trust A through his last will, without any limitation as to the beneficiaries who could be designated in such will."29

1. General Power of Appointment

At least by way of dicta, Colorado authority suggests that a general power of appointment,30 which may defeat a spouse's interest in a trust, will render such interest a contingency. A general power of appointment marital trust, sometimes referred to as a "(b)(5) trust,"31 will grant a surviving spouse the type of general power held by wife's father over the A trust in Balanson, and it would seem that such trusts should not be included in the pool of divisible assets.

2. Special Power of Appointment

Whether a special power of appointment should cause the same result is less certain. For both practical and tax reasons, many settlors give trust beneficiaries special powers of appointment. If wife's father in Balanson had held a special power of appointment over the B trust, would the result have been the same?

If the test in Balanson II is that vested interests, even those subject to complete defeasance, constitute property interests, one can argue that the result would have been the same.32 If this position is correct, a trial court would be faced with the choice of completely ignoring the power of appointment in valuing the interest or determining a reduction in the value of the interest attributable to the power of appointment. Such a determination necessarily would require a trial court to weigh subjective criteria and calculate a risk factor as to whether and to what extent a power will be exercised.