Chapter 2 - § 2.3 • REMAINDER INTERESTS FULLY DISTRIBUTABLE

• Jurisdiction: Colorado

§ 2.3 • REMAINDER INTERESTS FULLY DISTRIBUTABLE

Courts of several states have ruled that a remainder interest that will be fully distributable to a spouse at some point in time is subject to the trial court's dispositional power even though the remainder interest may be subject to a survivorship provision or may be reduced or eliminated by a preceding beneficial interest in the trust. Some courts have included such remainder interests in the pool of divisible assets without relying upon a property law rationale, while other courts, in an apparent search for a guiding principle, have applied the concept of "vesting" in a property law sense to the analysis.

§ 2.3.1—Vesting Not Determinative

In the early case of Trowbridge v. Trowbridge,⁵⁵ a remainder interest in trust was included in the pool of divisible assets and divided between the spouses.

The husband's father created a testamentary trust, the terms of which required the income of the trust to be distributed to the husband's mother during her life. The mother was also entitled to withdraw up to $5,000 in any year, and the bank co-trustee was authorized to distribute principal to the mother for other unstated purposes. If the husband survived his mother, the trust would be distributed to him at his mother's death. If the husband did not survive his mother, the trust would be distributed to the husband's issue.

The Supreme Court of Wisconsin affirmed a property division that awarded the wife 30 percent "of whatever interest in said trust accrues to the benefit of the [husband]."⁵⁶ The court's rationale was simply that the "future interest of the type given to [the husband] is part of his 'estate . . . for the purpose of [the property division statute].'"⁵⁷

In Davidson v. Davidson,⁵⁸ the husband's remainder interest in a testamentary trust created by his father's will was subject to a property division where the husband was required to survive his mother and "the trustees were empowered 'in their uncontrolled discretion' to invade principal for the benefit of . . . [the] mother."⁵⁹

Acknowledging that the remainder interest "may have been at the outer limits"⁶⁰ as to what constitutes a sufficient property interest, the Massachusetts Appellate Court in Davidson reasoned that the "remainder was fixed at the time of divorce" and "uncertainty of value or inalienability of the interest [, as a result of a spendthrift provision, does not] preclude consideration of the interest as subject to division."⁶¹

It is important to note that the Davidson court specifically rejected the idea that "technical rules of the law of property" should determine the result.⁶² Similarly, although not explicitly stated, the Trowbridge court also avoided applying the concept of vesting in a property law sense in arriving at its decision.

§ 2.3.2—Concept Of Vesting Applied Or Arguably Applied

Because a spouse's interest was "vested" and since he was "an ascertained remainderman," a remainder interest in trust was subject to the court's dipositional power in the New Hampshire case of Flaherty v. Flaherty.⁶³

The irrevocable trust created by the beneficiary's parents in Flaherty provided that the parents were to be paid up to $1,000 of the trust income monthly and that upon the death of the last surviving parent, the trust would be distributed among their six children. If a child died prior to surviving the last living parent, the trust interest designated for a child would pass to the estate of the child.⁶⁴

In the North Dakota case of Van Oosting v. Van Oosting,⁶⁵ because the husband had a "vested interest in the trust . . . [a]lthough contingent in nature,"⁶⁶ the remainder in a credit shelter trust created upon the death of the husband's father was a property interest subject to division even though the trust could be invaded for the benefit of the husband's living mother.⁶⁷

Similarly, in Chilkott v. Chilkott,⁶⁸ a Vermont case, a beneficiary's unrestricted power to invade an apparent credit shelter trust at the death of his 87-year-old mother was subject to equitable division where the spouse was required to survive his mother and the trustee had the power to distribute principal for the mother's health, maintenance, and welfare, but had not invaded the trust for such purposes.⁶⁹ The Vermont Supreme Court reasoned that the interest was "fixed and no longer inchoate,"⁷⁰ even though subject to a condition of survivorship.

In Buxbaum v. Buxbaum,⁷¹ the husband's remainder interest in a testamentary trust was included in the marital estate. The trial court held that the husband's mother was entitled to the trust's income and upon her death the trust was to be distributed to the husband and his sisters. The Montana Supreme Court upheld the trial court's determination, noting that both parties agreed that the husband's interest in the trust was a "vested future interest subject to defeasance."⁷²

§ 2.3.3—In Re Marriage Of Balanson

The Colorado case of In re Marriage of Balanson⁷³ (referred to as "Balanson II") concerned the determination of whether a wife'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, divided into two irrevocable trusts.⁷⁴ The settlors apparently intended the "A" trust to be a combined trust consisting of the surviving father's assets and the deceased mother's assets, which would have qualified the trust for the federal estate tax marital deduction at the mother's death.⁷⁵ The settlors apparently intended the "B" trust to be a credit shelter trust that would not be subject to estate tax at the surviving father's death.⁷⁶ 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 the father's general power of appointment exercisable by will and, if not exercised, then in accordance with the B trust. The B trust was to be divided at the father's death into as many equal shares as there were living children of the mother and the father. The wife and her brother were the only living children of the wife's parents. The wife's father was the trustee of both trusts, and the trust instrument designated the wife's brother as the successor trustee at the death of the wife's father.

The issue in Balanson II was whether the wife's remainder interest in the B trust constituted property under Colorado's equitable division statute. In reversing the Colorado Court of Appeals' holding in Balanson I that the wife's interest was an expectancy that did not rise to the level of a property interest,⁷⁷ the Colorado Supreme Court stated that the wife had a "future, vested interest not within the discretion of the trustee to withhold"⁷⁸ and held that the wife's interest in the B trust constituted property, as opposed to a mere expectancy.⁷⁹ The court reached this conclusion despite the father's income interest and right to invade the principal. According to the court, "[t]hese factors render the value of Wife's remainder interest uncertain, but do not convert her interest into a mere expectancy."⁸⁰ The remainder interest constituted the wife's separate property, and the appreciation in the value of her separate property constituted marital property under the Colorado property division statute.⁸¹

The Colorado Supreme Court in Balanson II did not address 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 wife's interest in the A trust did not constitute property for purposes of the division. The Colorado Court of Appeals observed in Balanson I that the wife's interest in the A trust was "merely an expectancy."⁸² The court of appeals found it significant that "Wife's father was given a power of appointment to pass the entire remaining corpus of Trust A through his last will, without any limitation as to the beneficiaries who could be designated in such will."⁸³

General Power of Appointment

At least by way of dicta, there is Colorado authority that a testamentary general power of appointment, which may defeat a spouse's remainder interest in a trust, will cause the trust to be excluded as "property." A general power of appointment marital trust, sometimes referred to as a "§ 2056(b)(5) trust,"⁸⁴ will grant a surviving spouse the type of general power held by the wife's father over the A trust in Balanson, and it would seem that such trusts should not be included in the pool of divisible assets.

In S.L. v. R.L.,⁸⁵ the Massachusetts Appeals Court considered whether five trusts would be included in the marital estate for property division purposes.⁸⁶ One of the trusts was a marital trust over which the wife's mother held a general power of appointment exercisable by will.

The court in S.L. held that the trust should not have been included in the marital estate because the wife's remainder interest was "susceptible of complete divestment upon the wife's mother's exercise of the power."⁸⁷ Under this rationale, whether the power was general or special and whether the trust was a "marital trust" would seem to be irrelevant.

The court reached an opposite conclusion as to the wife's interests in the other trusts, one of which was very similar in design to the Balanson B trust. The distinction drawn by the court was that the wife's interest in the non-marital trusts "[was] subject only to her surviving her [then living] mother, a condition [that Massachusetts precedent] considered not to bar inclusion within the marital estate."⁸⁸

Special Power of Appointment

Whether a special power of appointment should cause the same result is less certain. For both practical and tax reasons, many settlors grant trust beneficiaries or other persons special powers of appointment. If...