Chapter 2 - § 2.8 • SELF-SETTLED TRUSTS

• Jurisdiction: Colorado

§ 2.8 • SELF-SETTLED TRUSTS

In the Colorado case of In re Marriage of Pooley,²⁵⁷ proceeds from a personal injury settlement received by the wife were transferred to an irrevocable trust with the wife as beneficiary and the wife's parents as trustees. Distributions of income and principal by the trustees to the wife were within the "sole and absolute discretion" of the trustees.²⁵⁸ The husband argued that the trust was funded with marital property.

Although the trial court and the Colorado Court of Appeals acknowledged that the assets from a personal injury settlement are generally marital property subject to equitable division, both courts disagreed with the husband's contention that the trust property was marital property subject to division.²⁵⁹ The court of appeals stated that it did not read the holding in Jones as "in any way dependent on the fact that the trust at issue [in Jones] was created with funds that would otherwise have been the beneficiary's separate property."²⁶⁰ The court further stated:

[U]nder Jones, it is the extent of the beneficiary's right to or interest in the trust rather than the source of funding for the trust that determines whether the trust and the income from it are property. While the trust at issue here was funded with settlement proceeds that would otherwise have been marital property, wife's interest in these funds after they were placed in a discretionary trust was no different from the interest of the wife/beneficiary in Jones.²⁶¹

The wife in Kaladic v. Kaladic²⁶² transferred property to an "irrevocable, discretionary spendthrift trust"²⁶³ of which the wife was the beneficiary and her lawyer the trustee. The wife transferred the property in trust without the husband's knowledge because of what the wife viewed as the husband's excessive drinking and financial irresponsibility. The transfer in trust was made by the wife 11 months before filing the dissolution of marriage action.

The trial court awarded the husband approximately 26 percent of the trust and ordered the trustee to make such payment to the husband. The Colorado Court of Appeals affirmed and held that the wife's conveyance of the marital assets into trust was "illusory and fraudulent" against the husband.²⁶⁴

If it is possible to reconcile Pooley and Kaladic, perhaps the distinction turns on whether the spouse who conveyed the property in trust acted fraudulently as to the other spouse. Assuming this distinction is valid, it is at least arguable that a self-settled discretionary trust with a third-party trustee...