Chapter 32 - § 32.18 • NATURE OF ESTATE GIVEN — TRUST INTERESTS IN DIVORCE CASES

• Jurisdiction: Colorado

§ 32.18 • NATURE OF ESTATE GIVEN — TRUST INTERESTS IN DIVORCE CASES

An increasing number of cases are dealing with the issue of whether a beneficial interest in a trust will be characterized as "property" for the purposes of creditor rights or division in dissolution of marriage. In Marriage of Rosenblum, 602 P.2d 892 (Colo. App. 1979), the husband's interest in discretionary trust property was properly taken into account as an economic circumstance in dividing marital property in a dissolution of marriage proceeding. See also Haskins v. Garrett, 820 P.2d 350 (Colo. App. 1991).

In Marriage of Grubb, 745 P.2d 661 (Colo. 1987), in determining the interest of a spouse during marriage in the pension rights of the other spouse, the court described the interest as a property right (not a mere expectancy) that was "vested" but "unmatured." This was so even though the interest was contingent in the sense that receipt of the benefits was contingent upon the working spouse living until the time of retirement. The decision was followed in Marriage of Gallo, 752 P.2d 47 (Colo. 1988).

In Marriage of Jones, 791 P.2d 1173 (Colo. App. 1989), aff'd in part, rev'd in part, 812 P.2d 1152 (Colo. 1991), it was held that a beneficiary's interest in a discretionary trust established under the will of a parent was not property of any kind, let alone marital property in a dissolution case. But trust income from a trust that is the beneficiary's separate property, once distributed and invested in new property, is marital property. Marriage of Fottit, 903 P.2d 1209 (Colo. App. 1995). In University National Bank v. Rhoadarmer, 827 P.2d 561 (Colo. App. 1991), it was held that a trust beneficiary's annual 5x5 withdrawal power was not a property right subject to garnishment.

There are several cases, including Marriage of Gorman, 36 P.3d 211 (Colo. App. 2001), discussed below, whose holdings may be questionable. In Marriage of Pooley, 996 P.2d 230 (Colo. App. 1999), the wife suffered a personal injury during the marriage. The suit was settled and the proceeds were placed in an irrevocable trust with the wife as the discretionary beneficiary and her parents as trustees. Under dissolution of marriage law, personal injury proceeds are generally classified as marital property when the injury occurs during the marriage. In this case, however, the court, following Marriage of Jones, 791 P.2d 1173, found that since the proceeds were in a wholly discretionary trust, the trust assets were not property at all, only an economic circumstance. Pooley, 996 P.2d at 232. This case seems wrongly decided since an injured plaintiff is often deemed to be the settlor of a self-settled trust as to injury proceeds, in which case the spendthrift protection otherwise available to third parties is not applicable.¹¹

Marriage of Balanson, 996 P.2d 213 (Colo. App. 1999), aff'd in part, rev'd in part, 25 P.3d 28 (Colo. 2001), dealt with a question left open in Marriage of Jones — that is, whether a trust remainder interest owned by one of the spouses is property and, if so, marital or separate property. In Balanson, the wife had a remainder interest in the trust established by her mother as to which her father was trustee and beneficiary. There was an "A" trust where the father was the sole income beneficiary and had the discretion as trustee to invade the corpus for his support, care, and maintenance. The father had a testamentary power of appointment. In default of appointment, the assets went to Trust "B." As to Trust "A," the court held that the father had sufficient powers that the daughter's interest was best characterized as an expectancy.

As to Trust "B" (the Family Trust), the father was again entitled to all income. Corpus could be invaded for his care and maintenance only if the income from Trusts "A" and "B" was insufficient, and no corpus payments could be made from Trust "B" until the corpus from Trust "A" was exhausted. Trust "B" terminated at the father's death into equal shares for each child and the wife. The court, apparently improperly under the facts, applied the same analysis to Trust "B" as Trust "A" and held that the wife's vested remainder interest in Trust "B" was so remote that it should not be considered in property division. It appears that a better...