Avoiding Appreciation in Trust Assets Being Treated as Marital Property

• Publication year: 1998
• Pages: 57
• Citation: Vol. 27 No. 3 Pg. 57

27 Colo.Law. 57 Colorado Lawyer 1998.

1998, March, Pg. 57. Avoiding Appreciation in Trust Assets Being Treated as Marital Property

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57

Vol. 27, No. 3, Pg. 57

The Colorado Lawyer
March 1998
Vol. 27, No. 3 [Page 57]

Specialty Law Columns
Estate and Trust Forum
Avoiding Appreciation in Trust Assets Being Treated as Marital Property
by David W. Kirch

In drafting trust documents, the attorney should be sensitive to the potential inadvertent treatment of interest in the trust as marital property. In advising a trust beneficiary who is contemplating marriage, an enforceable marital agreement can be used to address the operation of marital rights on the trust beneficiary's interest

Drafting Trusts to Avoid Marital Rights

The economic reality of possession of a power of appointment over trust assets is becoming more and more determinative in analyzing its legal consequences. Accordingly, Colorado case law reflects a trend toward the analysis of trusts, for purposes of their characterization as "property" in connection with the division of property in a dissolution of marriage proceeding, under the same type of analysis to which trusts are subjected in determining whether they are included in a decedent's taxable estate for federal estate tax purposes, as well as for other purposes

Under Internal Revenue Code ("Code") § 2041, if the decedent is found to possess a lifetime general power of appointment, the trust assets are included in the decedent's taxable estate. Similarly, under CRS § 15-11-201(2)(b)(I)(A), lifetime general powers of appointment are included in a decedent's augmented estate for purposes of calculating a spouse's elective share rights

A power of appointment can exist by virtue of either an express and unrestricted right to withdraw trust assets or the power to revoke and revise the trust. A "power of appointment" has been historically characterized as a right affecting ownership, and not technically as "property."

While the Colorado courts have not specifically addressed the issue of treatment of a trust as property of a spouse who has a lifetime general power of appointment over the trust assets, they have operated under the unmistakable assumption that placing property in a trust will not necessarily place it beyond the reach of a spouse in a dissolution action.

Colorado Cases Dealing With Trusts

In Kaladic v. Kaladic,1 the Colorado Court of Appeals held that a trust created by a spouse was illusory and a sham, fraudulently intending to avoid rights with respect to a spouse. In contrast, the court, in In re Marriage of Rosenblum,2 held that the increase of value of assets in a discretionary trust created by a third party was not marital property in a situation where the spouse-beneficiary was acting as co-trustee, because the spouse's powers as trustee were limited by an ascertainable standard of "health, education, support and maintenance." This is consistent with the tax treatment of such trusts. More recently, in the case of In re Marriage of Jones,3 another discretionary trust created by a third party was reviewed by the Colorado Supreme Court. If the spouse had served as trustee, the court held, the spouse's powers as trustee were limited by an ascertainable standard.

The trusts were not treated as separate property under either Rosenblum or Jones; thus, the appreciation in trust assets during marriage was not marital property. However, in neither case did the spouse have a general power of appointment. In Jones, the court did comment on the impact on the treatment of trusts of the seminal cases of In re Marriage of Gallo4 and In re Marriage of Grubb.5 The Gallo and Grubb decisions signaled a generally more expansive, and less technical, view of "property" in the dissolution context, specifically in treating retirement rights as property for division of property purposes.

The court in Jones indicated that it would not address whether vested rights in a trust subject to divestment (such as a lifetime general power of appointment) would be either marital or separate property. The court noted a split of authority in the various jurisdictions on this issue and cited the Massachusetts case of Davidson v. Davidson.6 Significantly, since Davidson was decided, the Vermont Supreme Court in Lynch v. Lynch,7 citing Davidson, held that a right to revoke a trust caused the trust to be "property" for purposes of an equitable division of property on dissolution of marriage.

While neither Rosenblum nor Jones deemed the trusts involved to be "property," the trusts were treated as an "economic circumstance" to be taken into consideration in the property division. Such treatment may have yielded a result not much different from the trust being considered "property" for division of property or maintenance purposes, although the spouse did not have a lifetime general power of...