§ 8.05 A Spouse's Interest in a Trust

JurisdictionUnited States
Publication year2021

§ 8.05 A Spouse's Interest in a Trust

[1]—Corpus of a Trust Created by a Third Party

[a]—Distributions During Marriage and Appreciation of the Trust Corpus During Marriage

[i]—Marital Property States

In marital property states,363 divorce courts normally cannot divide property acquired before marriage, or property acquired during marriage by gift or inheritance. Since a trust interest received from a third party is almost always received by gift or inheritance, a spouse's interest in a trust corpus normally is not divisible in marital property states, even if the corpus is distributed during marriage.364

Some cases involving trust interests have arisen in states that do not exclude property received during marriage by gift or inheritance from the marital estate. Because of these statutory variations, classification issues in these states can become more complicated. In both New Jersey365 and Delaware366 cases, the spouse at the time of marriage possessed a contingent interest in trust corpus. During marriage the interest vested and the spouse received payments of corpus. In both cases the corpus distributions were considered divisible by the divorce court.

The analysis by the Delaware court is more detailed than that of the court in New Jersey. In the Delaware case, the recipient argued that the corpus interest was separate property, because it was received in respect of the contingent trust interest acquired before marriage. The argument was not accepted, and the corpus payments were deemed "qualitatively different" from the future interest possessed at the time of the marriage. The spouse's interest in the corpus was deemed "acquired" for purposes of the divorce status when the payments were received.

The result reached by the Delaware court is totally inconsistent with marital partnership theory. No services were rendered by either spouse during marriage to establish the right to receive the money. The court was aware of this, and invited the legislature to amend the divorce statute to exclude gifts and inheritances from the definition of marital property. Until such an amendment was enacted, however, the court held that it was unable to reach another result.

The corpus of the trust normally increases in value over time. In most marital property states, natural enhancement of separate property during marriage remains separate property.367 Therefore, in marital property states, the increase in value of the trust corpus during marriage for passive reasons should be separate property if the corpus itself is considered separate property.368

The analysis can be more complicated in those states where all of the increase in value during marriage of separate property is marital property.369 Even if the corpus at the time of grant is deemed separate property of the recipient, it still must be decided whether the increase in value during marriage is marital property. A Colorado court has concluded that, when the amount received by the beneficiary is totally dependent upon the trustee's discretion, the increase in value of the trust during marriage is not marital property, because at that time the property was not owned by the spouse.370 In contrast, if the trust interest would be considered vested, in Colorado, any increase in value during marriage would be marital property.371 In a Colorado case, the wife's mother established a testamentary trust when she died. The beneficiary was her husband (the father of the wife in the divorce case), who was still alive when the daughter's divorce was litigated. Upon the death of her father, the wife and her brother were beneficiaries if they survived their father. The Colorado court held that the wife's interest was vested, although subject to divestment by her death before her father or exhaustion of the trust before her father's death. Because the interest was considered vested, the increase in value of the corpus was marital property.372

In a similar Colorado case, the court held that the wife's interest in a family trust was vested, so the increase in value of the corpus during marriage was marital property based on her percentage interest in the trust.373

Such cases could present complicated issues relating to discounting money to be received in the future374 and valuation of the stock in a closely held business.375

A similar issue was presented in a Pennsylvania case, where increases in value of separate property during marriage are marital property.376 During marriage, the wife was designated a beneficiary of a trust. Initially, she was only entitled to the income from the corpus. At age thirty-five, she was entitled to withdraw 50% of the principal; the remainder of the principal could be withdrawn by her after her fortieth birthday. The trust corpus had increased in value substantially during marriage. The court concluded that, because marital property only included the increase in value of separate property "acquired" during marriage, the marital estate could have no claim to any increase in value of the corpus until the wife had the absolute right to withdraw it. Here, the parties divorced when the wife was older than thirty-five but younger than forty. Therefore the marital estate included appreciation of 50% of the corpus (the portion the wife was entitled to withdraw) that occurred after her thirty-fifth birthday. The court emphasized that this holding was limited to capital appreciation of the corpus.377

[ii]—Kitchen Sink States

Any trust corpus distributed to a spouse during marriage would be divisible in a divorce in a kitchen sink state,378 since all property possessed by either spouse is divisible in divorces in such states.

Kitchen sink states have reached conflicting conclusions about whether undistributed trust corpus may be divided at divorce. A Connecticut court concluded that it was not divisible.379 Oregon courts have reached an opposite conclusion, in situations where it was established that the spouses' consumption decisions during marriage were significantly affected by the expectation of future trust distributions.380 The Massachusetts Supreme Judicial Court has also concluded that a divorce court may divide a spouse's interest in a trust.381 The New Hampshire Supreme Court has held that a spouse's remainder interest in a trust created by his parents could be included in the marital estate.382

In a Utah case, the court awarded the spouse who was not a beneficiary of the trust an equitable claim to 50% of the spouse's trust interest.383

[b]—Distributions After Divorce

A trickier question arises if a spouse acquires during marriage a possible right to receive distributions after divorce. Post- divorce acquisitions generally are not divisible, even in kitchen sink states.384 In this situation, should the trust interest be considered "acquired" at the time the future interest is inherited, or when the corpus is distributed? An analysis by the Delaware Supreme Court suggests that the time when the spouse has the right to possess the property is the moment of acquisition of divorce property division purposes.385 Only distributions made during marriage would be divisible under this view. Distributions after divorce would be deemed post-divorce acquisitions.386 Other courts have disagreed with this analysis, and have divided at divorce the beneficiary-spouse's right to receive future distributions.387 A possible compromise would be to consider this right as a factor that might affect the division of the marital estate.388

The North Dakota Supreme Court has answered this question by looking to whether the beneficiary spouse has a fixed, specified right to future distributions. In this case, the court concluded that future post-divorce distributions were completely at the trustee's discretion, so the future payments should not be considered divisible property at divorce.389

In contrast, the New Hampshire Supreme Court affirmed the inclusion of post-divorce trust payments in the marital estate because the beneficiary had not shown that the beneficiary's rights to future distributions were not "fixed and certain."390

A similar issue has been presented in kitchen sink states when a spouse acquires a remainder interest during marriage. Some courts have considered such a future interest divisible property at divorce, since the interest was acquired during marriage.391 Other courts have rejected this analysis.392 Those courts that consider remainder interests divisible at divorce393 probably would also consider a right to receive post-divorce trust corpus distributions divisible at divorce if the spouse possessed such a right at the time of divorce.

A Montana court did not include a spouse's contingent remainder interest in the marital estate.394 The court noted both that the trust interest was received before marriage and that the value of the trust interest was speculative, because the spouse would have to survive until the death of the life tenant to receive distributions from the trust.

In a marital property state,395 trust corpus distributions during marriage normally would be considered separate property. Still, the value of the spouses' respective separate estates can be considered when the divorce court is dividing the marital estate.396

[2]—Division of the Interest in the Trust Itself

[a]—In General

In most marital property states, no marital claim exists regarding the interest in the trust itself where the trust is established by a third party for a spouse through gift or inheritance. This results from the rule normally applied in marital property states that property received by gift or inheritance (and any passive appreciation of any such property) is not included in the marital estate. For an example, a Montana court held that it was reversible error to include in the marital estate the value of the husband's interest in a trust created during marriage as a gift from the husband's parents.397

In states that do not exclude gifts and...

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