'Til Death Do Us Part, 0717 COBJ, Vol. 46, No. 7 Pg. 43

• Author: REBECCA KLOCK SCHROER AND IAN SHEA, J.

'Til Death Do Us Part

Vol. 46, No. 7 [Page 34]

The Colorado Lawyer

July, 2017

Where Probate Law Meets Family Law

REBECCA KLOCK SCHROER AND IAN SHEA, J.

This article highlights intersections between probate and family law, featuring spouse's property interests in trusts, the automatic temporary injunction, the revocation of spouse's interests under the Colorado Probate Code, and representation of fiduciaries in divorce proceedings.

Family law intersects with probate law in many areas. While some practitioners have expertise in all of these areas, others do not. This article aims to assist practitioners by highlighting common situations where family and probate issues coexist, including:

■ how spouse's interests in trusts are considered in divorce;

■ the impact of the automatic temporary injunction on estate planning;

■ provisions in the Colorado Probate Code addressing divorce, including a discussion of when bifurcation in a dissolution proceeding may be appropriate; and

■ the unauthorized practice of law by fiduciaries in divorce cases.

Spouse's Property Interests in Trusts

When a divorce involves a spouse who is the beneficiary of a trust, his beneficial interest must be evaluated in the divorce proceeding to determine whether it is (1) a "mere expectancy" that does not "rise to the level of property";¹ (2) property, which is evaluated as income, separate property, or marital property; or (3) an economic circumstance. Separate property is property acquired before the marriage, including property acquired through exchange of such property or acquired by gift or bequest to one spouse, and property excluded from marital property by a valid marital agreement.² In a divorce proceeding, the court "shall" set aside to each party that party's separate property³

Marital property is property acquired during the marriage that is not set aside as separate property, including any appreciation in value of separate property during the marriage.^[4] Marital property is divisible by the court in any manner the court deems equitable (which does not necessarily mean equal).⁵

Income from any source is considered for the purposes of maintenance and child support⁶ and includes gifts that are regularly received from a dependable source.⁷

Economic circumstances is a broad term used to cover the circumstances a court may consider in reaching equitable orders in a dissolution case.⁸ These circumstances can include concrete, tangible things like a spouse's income, a spouse's separate property, or the total marital property⁹ Economic circumstances can also include intangible elements such as a spouse's reasonable needs for purposes o f maintenance, a spouse's potential earnings if the spouse is unemployed or under-employed, mental and physical health, non-monetary (or non-monetized) contributions to the marriage, and marital waste. Economic circumstances encompass virtually everything, with the exception of "mere expectancies" and no n-financial marital misconduct. Economic circumstances as a whole are used in the court's equitable division of property¹⁰ For example, they are used to determine maintenance,¹¹ to justify deviations from the child support guidelines,¹² and are the basis for fee sharing awards in family law cases.¹³

Colorado Case Law Regarding Trusts

A spouse's interest as a beneficiary in a revocable trust or will before a decedent's death is considered a "mere expectancy" and does not factor into the division of property in a divorce matter.^[14] When a spouse is a beneficiary of an irrevocable trust, however, that interest maybe considered property.

Colorado case law addressing how interests in irrevocable trusts are considered in a dissolution action is nuanced and fact specific, so it is difficult to deduce rules that apply in all circumstances. Estate planners should consider the various cases when a client's goal is to protect a beneficiary from the potential impacts of a divorce. A complete survey of existing case law in this area is beyond the scope of this article, but the cases highlighted below analyze discretionary trusts, remainder interests, and income interests.

A discretionary trust (one where the trustee has complete discretion to decide whether to make a distribution of income or principal to the trust beneficiaries) is unlikely to be considered property of the beneficiary involved in a divorce, particularly if the beneficiary does not have a future vested remainder interest. Colorado courts have held that a spouse's beneficial interest in a trust is not considered property in a divorce action if the trustee has complete discretion and the trust has a spendthrift clause.¹⁵ A spendthrift clause generallyprovides that a beneficiary cannot assign her interest in the trust.¹⁶

In In re Marriage of Jones, the Colorado Supreme Court stated that a discretionary trust differs from a trust that grants the beneficiary some future vested benefit that the trustee cannot withhold.¹⁷ There was no such future vested benefit in Jones.¹⁸ Similarly, the husband in In re Marriage of Rosenblum was the beneficiary of a totally discretionary trust, and upon his death, the assets passed to the next generation.¹⁹ While the spouse's interest in a discretionary trust was not considered property, in both/ones and Rosenblum the trust was considered an economic circumstance.^[20] To the extent that an interest in a trust is deemed to be property, any marital component of that property will be divided directly by the court.²¹ If the interest is deemed not to be property, but only an economic circumstance, it will not be divided and may only be weighed in equity by the court against all of the other economic circumstances.²²

A spouse's remainder interest in a trust may be considered property, even if it is subject to the lifetime interest of another person. The Colorado Supreme Court, in In re Marriage of Balanson, held that the wife's remainder interest in a trust, which was subject to her father's income interest and power of invasion for support, care, and maintenance, was considered the wife's property in a divorce action.²³ While the corpus of the trust was considered separate property, the appreciation in value on the corpus during the marriage was considered marital property.²⁴

The Colorado Court of Appeals' earlier decision a Balanson suggested in dicta that there may be a distinction between a general and limited power of appointment. The trust over which the wife's father held a general power of appointment, which allows the power holder to appoint the property to himself, his creditors, his estate, or the creditors of his estate, was not considered to be property.²⁵ A limited power of appointment is, as its name suggests, more limited—the permissible appointees do not include the power holder, his creditors, his estate, or the creditors of his estate.^[26]

In perhaps an unexpected result, a mandatory income interest in a trust was not considered property by the Colorado Court of Appeals in In re Marriage of Guinn.^[27] The Court's rationale was that the husband had no control over how the principal was invested and thus had no control over the amount of income produced.²⁸ In addition, the trustee had discretion to allocate receipts between income and principal.

Similar to Jones and Rosenblum, the fact that the husband was not a remainder beneficiary of the trust also factored into the Court's decision in GuinnP The trust at issue in Guinn was a generation skipping transfer tax (GST) trust. Due to the typical structure and tax goals of a GST trust, the settlor's children are not the remainder beneficiaries; instead, the remainder beneficiaries are grandchildren or more remote generations. Accordingly, if a spouse is a beneficiary of a GST trust as a child of the settlor, such interest is probably an income interest or entirely discretionary interest, and therefore, unlikely to be considered property.

Because the case law is fact driven, domestic relations practitioners should review it in light of the specific circumstances of a case when a spouse is a beneficiary of an irrevocable trust. Conversely, this case law is also important for estate planners to consider when they are drafting irrevocable trusts.

The Automatic Temporary Injunction

Upon filing a petition for dissolution of marriage, the petitioner is bound by an automatic temporary injunction.^[30] The in junctionis binding on the respondent as soon as the respondent is served with the petition.³¹ The automatic temporary injunction has two primary financial effects of which estate planners should be aware. First, the automatic temporary injunction prevents a party from "transferring, encumbering, concealing, or in anyway disposing of, without the consent of the other party or an order of the court, any marital property, except in the usual course of business. . . ."³² The injunction also prevents a party, without consent of the other party, from "canceling, modifying, terminating, or allowing to lapse for nonpayment of premiums, any policy of... life insurance that names either of the parties or the minor children as a beneficiary"³³ Domestic relations practitioners often seek sanctions for contempt for violation of the automatic temporary injunction, and also often use such violations in support of their positions with respect to property division in permanent orders.

As a companion to the concept of the automatic temporary injunction, the doctrine of marital waste also protects marital property during any period in which the parties are "in contemplation of" divorce.³⁴ Marital waste may occur where a party transfers marital property to a third party or third-party entity.³⁵ The transfer could take a variety of forms...