Chapter 2 - § 2.6 • INCOME INTERESTS

• Jurisdiction: Colorado

§ 2.6 • INCOME INTERESTS

§ 2.6.1—Income Interests Not Considered Property

Courts have held that a beneficiary's mandatory income interest in a trust should not be included as property subject to the court's dispositional power. In the Colorado case of In re Marriage of Guinn,¹⁹⁰ the husband's parents created an irrevocable generation-skipping trust. The husband was entitled to the net income from the trust, which was to be distributed at least annually. Discretionary distributions of trust principal to the husband were permitted if such payments were reasonably necessary for the husband's health, maintenance, support, and education. Upon the husband's death, the principal was to remain in trust for the benefit of the husband's descendants. The husband had no power of appointment or other right to direct the disposition of the trust. The husband's parents were the trustees of the trust. Specifically, the trust instrument allowed the trustee to determine, in the trustee's reasonable discretion, what was principal and what was income of the trust. The trust instrument allowed the trustee to allocate capital gains to income. Testimony established that capital gains had been allocated to the principal, and interest and dividend income had been allocated to the income interest during the entire term of the trust.¹⁹¹

The wife contended that the husband's income interest in the trust constituted property under the Colorado property division statute.¹⁹² The Colorado Court of Appeals decided otherwise and held that the husband's income interest in the trust was not property under the statute.¹⁹³ The court stated that "when the beneficiary has no interest in the corpus, and no right to control how the corpus is invested, . . . the income is a mere gratuity deriving from the beneficence of the settlors."¹⁹⁴

Reaching the same result with respect to a mandatory income interest, but utilizing a different rationale, the Delaware Supreme Court in Sayer v. Sayer¹⁹⁵ reasoned that the income interest was not subject to a property division because it could not be reduced to actual or constructive possession.¹⁹⁶

In re Marriage of Harris¹⁹⁷ involved a trust of which the husband's living mother was apparently the sole current beneficiary. Upon the mother's death, the husband and his two brothers "will each receive one-third of the annual interest income from the Trust."¹⁹⁸ The court described the trust as a "generation-skipping trust," and further stated that the husband will not be entitled to any of the trust principal, "except if needed for health care purposes."¹⁹⁹ The trial court found that "the couple had made no retirement plans, based in large part on the assumption that [the husband's] ultimate inheritance would allow them to continue their lifestyle into retirement."²⁰⁰ The trial court valued the husband's "one-third life interest income" in the trust at $3 million and placed it on the husband's side of the ledger, apparently offsetting that value with other divisible property in the wife's favor.²⁰¹ The Montana Supreme Court reversed the trial court and held that the trust should not have been included in the marital estate, but that the husband's trust interest could be considered when distributing the existing marital estate.²⁰²

It would seem that the logic for excluding an income interest from the pool of divisible assets might also apply to annuity and unitrust interests. At least one decision can be cited for that proposition.²⁰³

§ 2.6.2—Income Interests Considered Property

Contrary to the decisions discussed above, North Dakota law permits an income interest to be considered as property for purposes of its property division statute.

In Fox v. Fox,²⁰⁴ the North Dakota Supreme Court held that an income interest in a "self-sustaining" irrevocable life insurance trust created by the husband, of which the wife was the trustee, should be included in the marital estate.²⁰⁵ The trust held policies on the husband's life with death benefits of $814,969 and cash values of $290,000.²⁰⁶ The wife was given the income from the trust for her life and held the right to withdraw the greater of $5,000 or 5 percent of the principal of the trust each calendar year.²⁰⁷ Even though the trust had produced no income in the past and the wife stated at trial that she had no intent (as trustee) of surrendering the policies, the court required the value of the wife's income interest and the withdrawal right to be included in the marital estate.

The value of a beneficiary's lifetime income interest in a trust is also subject to the court's dispositional power in Oregon. In Becker v. Becker,²⁰⁸ the Oregon Court of Appeals determined that the wife's income interests, in addition to her beneficial interests in other trusts, were subject to the trial court's authority to divide property. The court awarded the non-beneficiary spouse his share of the trust interests by means of a judgment payable in installments, with a balloon payment due when the property of one trust became distributable at the death of an elderly aunt.²⁰⁹

The New Hampshire Supreme Court held that the right to receive "interest" from an unusual "charitable trust" constituted "marital property subject to distribution" in a property division in Chamberlin v. Chamberlin.²¹⁰

In Wilburn v. Wilburn,²¹¹ the parties created a charitable remainder unitrust.²¹² The husband received annual unitrust payments during his life, and, upon his death, the wife...