The Continuing Evolution of Balanson: Trusts as Property in Divorce - Family Law Newsletter
| Publication year | 2005 |
| Pages | 89 |
2005, June, Pg. 89. The Continuing Evolution of Balanson: Trusts as Property in Divorce - Family Law Newsletter
June 2005
Vol. 34, No. 6 [Page 89]
Family Law Newsletter
The Continuing Evolution of Balanson: Trusts as Property in Divorce
by Marc A. Chorney
This column is sponsored by the CBA Family Law Section to provide information to family law practitioners. Articles are intended to focus on practice tips and discussions of current issues within the realm of family law. New column authors are welcomed.
Column Editors:
Gretchen Aultman, Denver, of Burns, Wall, Smith & Mueller, P.C. - (303) 830-7000, gaultman@bwsm.com; Marie Avery Moses, Greenwood Village, of Cook, Cooper & Moses, LLC - (303) 623-1130, marmoses@msn.comAbout The Author:
This month's article was written by Marc A. Chorney, Englewood, an attorney with Chorney and Associates, LLC, specializing in trusts, estates, taxation, and planning for closely held businesses - (303) 792-5048, mchorney@chorneyassoc.com.
This article discusses interests in trusts as property in a property division in dissolutions of marriage. The article also considers a statutory revision affecting treatment of interests in trusts, effective July 1, 2002.The development of the law in the United States regarding treatment of interests in trusts as property for purposes of property division in dissolutions of marriage has been diverse.1 Some decisions treat interests in trusts as divisible, regardless of whether the interest is vested, unvested, contin gent, or remote.2 Other courts have held that an interest in trust is not considered property until the interest becomes possessory - meaning that the beneficiary has received or has a present right to withdraw the trust property.3 Colorado law falls within these two extremes.4
This article provides an overview of Colorado's enabling statute, which establishes how property is divided in a dissolution or legal separation of marriage. It also discusses case law regarding interests in trusts as property in a property division in dissolutions of marriage. Finally, the article considers a statutory revision affecting treatment of interests in trusts, effective July 1, 2002.
Overview of Colorado's Enabling Statute
CRS § 14-10-113 determines how property is divided in a dissolution or legal separation of marriage. CRS § 14-10-113(1) provides, in part, that in such a proceeding, the court is to "set apart" each spouse's separate property and divide the marital property "in such proportions as the court deems just." To do so, the court is to consider 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;
(b) The value of the property set apart to each spouse;
(c) The economic circumstances of each spouse at the time the division of property is to become effective . . . ; and
(d) Any increases or decreases in the value of the separate property of the spouse during the marriage or the depletion of the separate property for marital purposes.5
CRS § 14-10-113(2) defines marital property as "all property acquired by either spouse subsequent to the marriage" with several exceptions. Excluded from the definition of marital property is property that was: (1) acquired by gift, bequest, devise, or descent; (2) acquired "in exchange for property acquired prior to the marriage or in exchange for property acquired by gift, devise, or descent"; (3) acquired by a spouse after a decree of legal separation; or (4) excluded by valid agreement of the parties.6 CRS § 14-10-113 also provides:
"[P]roperty" and "an asset of a spouse" shall not include any interest a party may have as an heir at law of a living person or any interest under any donative third party instrument which is amendable or revocable, including but not limited to third-party wills, revocable trusts, life insurance, and retirement benefit instruments, nor shall any such interests be considered as an economic circumstance or other factor.7
In making a property division, a court must first determine whether an interest constitutes property; if it does, the court must determine if the property is separate or marital.8 Increases in the value of separate property and income from separate property constitute marital property.9 The statute creates a rebuttal presumption that all property acquired subsequent to the marriage, regardless of titling, is marital property.10 Nonetheless, the presumption in favor of marital property can be overcome even if an asset is titled jointly.11
After determining whether an interest constitutes property and setting aside the separate property of the parties to the respective owners, the enabling statute requires the court to divide the marital property in a manner the court determines to be just. Such division need not necessarily be mathematically equal.12 As subsequent discussion will demonstrate, an emerging body of law has developed in Colorado as to when a beneficiary's interest in a trust constitutes property for purposes of the enabling statute.
Determination of "Property"
In re Marriage of Balanson,13 which is referred to as "Balanson II," concerned the determination of whether a beneficiary's remainder interest in a trust constituted "property" for purposes of property division in a dissolution of marriage. The wife's parents created a joint revocable trust, which, at the death of the wife's mother, had been divided into two irrevocable trusts.14
The "A" trust apparently was intended to be a combined trust consisting of the surviving father's assets and the assets of the deceased mother that would have qualified for the federal estate tax marital deduction at the mother's death.15 The "B" trust apparently was intended to be a "credit shelter trust" with the intent that it would not be subject to estate tax at the surviving father's death.16
Both trusts provided the wife's father with a mandatory income interest and the power, as the trustee, to distribute principal to himself for his support, care, and maintenance. At the father's death, the "A" trust would be distributed in accordance with his general power of appointment exercisable by will or, if not exercised, in accordance with the "B" trust. The "B" trust was to be divided at the father's death into equal shares between the wife and her brother. The father was the trustee of both trusts and the wife's brother was designated as the successor trustee at the death of the wife's father. The father was still living.
At issue in Balanson II was whether the wife's remainder interest in the "B" trust (which was subject to her father's income interest and power of invasion for his support, care, and maintenance) constituted property under CRS § 14-10-113 or was merely an expectancy. The Colorado Court of Appeals held, in Balanson I,17 that the wife's interest was an expectancy that did not rise to the level of a property interest.18
In Balanson II, in reversing the Court of Appeals, the Colorado Supreme Court determined that wife had a "future, vested interest not within the discretion of the trustee to withhold."19 The Court held that the wife's interest in the "B" trust constituted property, as opposed to a mere expectancy.20 The Court reached this conclusion despite the father's income interest and invasionary rights to the principal. The Court stated, "[T]hese factors render the value of wife's remainder interest uncertain, but do not convert her interest into a mere expectancy."21 The remainder interest, according to the Court, constituted the wife's separate property, and the appreciation of her separate property thereby constituted marital property under the statute.22
Power of Appointment
Not addressed by the Supreme Court in Balanson II was whether the wife held a property interest in the "A" trust. The parties apparently did not disagree in any of the appellate proceedings that the "A" trust did not constitute property for purposes of the division. However, in Balanson I, the Court of Appeals observed that the wife's interest in the "A" trust was "merely an expectancy."23 The Balanson I court observed that "significantly," the wife's father was given a power of appointment to pass the corpus through his will "without any limitation as to the beneficiaries who could be designated in such will."24
At least by way of dicta in Balanson I,25 authority exists in Colorado that a general power of appointment,26 which may defeat a spouse's interest, will render the interest in trust a contingency. A general power of appointment marital trust27 will grant a surviving spouse the type of general power held by the wife's father over the "A" trust in Balanson. Thus, it would seem that such trusts should not be included in the pool of divisible assets.
There is less certainty as to whether a special power of appointment should cause the same result. For both practical and tax reasons, many trusts create special powers of appointment in favor of a current trust beneficiary. If the wife's father in Balanson held a special power of appointment over the "B" trust, it is unclear whether the result would have been the same.
If the test established in Balanson II is that vested interests, even those subject to complete defeasance, constitute property interests, it can be argued that the result would have been the same.28 If this position is correct, a trial court would be faced with the...
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