Chapter 36 - § 36.3 • DRAFTING CONSIDERATIONS FOR DIVORCE
| Jurisdiction | Colorado |
§ 36.3.1—Spouse's or Civil Union Partner's Property Rights Without a Marital Agreement
Under Colorado law, without a valid marital agreement, the court determines the marital property and separate property to be divided between the parties in a divorce or legal separation. Any items determined by the court to be separate property will be awarded to the party whose separate property it is. The court will make an "equitable" division of the marital property, which is typically, but not necessarily, an equal division.
The Colorado Civil Union Act, SB 13-011, signed into law on March 21, 2013, and effective May 1, 2013, states in part:
The rights, benefits, protections, duties, obligations, responsibilities, and other incidents under law that are granted or imposed under the law to spouses apply in like manner to parties to a civil union, including the following:
Responsibility for financial support of a party to a civil union; [and]
Rights and abilities concerning transfer of real or personal property to a party in a civil union. . . .
The same processes that are provided in law for dissolution, legal separation, and declaration of invalidity of a marriage apply to dissolution, legal separation, and declaration of invalidity of a civil union.31
Therefore, all Colorado laws applying to marital agreements apply equally to civil union agreements. See C.R.S. §§ 14-15-107 and -108.
On June 26, 2015, the U.S. Supreme Court struck down Colorado's constitutional amendment that marriage be between one man and one woman and required Colorado to recognize all valid marriages from any jurisdiction and to issue marriage licenses to any couple desiring one. See Obergefell, 135 S. Ct. 2584. This decision required all states to recognize all valid marriages from any jurisdiction.
Therefore, same-sex and heterosexual couples may now be spouses or civil union partners in Colorado. While civil unions have the same legal applications as marriage, care must be taken to use the correct terminology in an agreement for enforceability. Unless the language of a cohabitation or civil union agreement provides for conversion, a new agreement will be required for the new legal status if a cohabitating couple enters into a civil union or gets married, or civil union partners marry.
Separate and Marital Property
Under Colorado law, separate property includes all assets owned individually prior to the marriage or civil union, and all inheritances and gifts to one spouse after the marriage or civil union partner after the date of the civil union. Separate property must be held in only one spouse's or partner's name or as tenants-in-common during the marriage or civil union so the funds are traceable directly to separate property.
Marital property includes all assets acquired during the marriage or civil union, regardless of titling, excluding mere exchanges of separate property. Appreciation on separate property during the marriage or civil union is also marital property for purposes of equitable division upon dissolution.
Separate property can be converted to marital property by spouses commingling their separate property during the marriage, and the separate property character can be forever lost. This can be done by moving the separate property funds through a joint account, adding marital property to separate property, or buying an asset titled jointly with separate property.32
Because the identification of assets as separate or marital is a source of much litigation in dissolution actions, it is important that a marital agreement clearly define what assets and income will and will not be separate and marital property of each party. Conversion provisions or prohibitions must be added for application as the couple's assets change during the relationship. Specificity and forethought are needed to avoid later ambiguity and confusion. Couples may choose to have different separate and marital property definitions or allocations for dissolution than for the death of one spouse/partner while they remain in their legal relationship, and the marital agreement can so provide.
Inheritances in Trust
State law provides that all gifts and inheritances or bequests received during a marriage or civil union by one spouse or partner are the separate property of that recipient party. This includes gifts and inheritances placed in a trust by third parties to benefit a spouse or partner. Any appreciation on or income from such separate property during the marriage or civil union may be characterized as marital property under Colorado law, depending upon the terms and history of the trust. C.R.S. § 14-10-113(4). (See the discussion below.)
Trust Income and Assets
Under a line of cases that follow In re Marriage of Balanson, 25 P.3d 28 (Colo. 2001) ("Balanson II"), any vested beneficial interest (not subject to the trustee's complete discretion) in an irrevocable trust created by a third party constitutes "property" of the beneficiary spouse or partner under Colorado law, even when it is subject to divestiture. Further, when a trust becomes irrevocable during the marriage, such vested interest is the separate property of the beneficiary spouse or partner because it is a gift and excepted from the definition of marital property under C.R.S. § 14-10-113(2), but the increase in the value of that separate property may be considered marital.
Income and appreciation on third-party settled trusts for the benefit of a spouse or partner in a civil union may be characterized as marital property or the separate property of the trust beneficiary. Under the line of Colorado cases beginning with Balanson, state case law and statutory law has defined the appreciation and income on any vested interest in a trust during the term of the marriage or civil union, whether such interest is subject to divestiture or not, as marital property. Therefore, the terms of the trust become determinative.33
If the trust is irrevocable at the date of the dissolution, any present or future mandatory distribution of principal of the trust to the beneficiary party will likely create a vested interest in the trust, and the potential for income and appreciation to be characterized as marital property.34 However, the value of an interest in a trust may be discounted to take into account delay in receiving the interest, the possibility of forfeiture, and other contingencies. In re Mohrlang, 85 P.3d 561 (Colo. App. 2003).
If a third party has a power to appoint trust assets to other persons before any interest vests in a beneficiary party, the trust interest will not be considered vested, but may still be considered an "economic circumstance" in the court's division of marital property.35
If the trust remains revocable by the settlor on the date of a dissolution, the beneficiary's interest in the trust is not vested, and thus creates no property interest in the trust assets, nor a marital property interest in the income or appreciation on the trust assets during the marriage or civil union. C.R.S. § 14-10-113(7). A trust where the beneficiary party receives income and/or principal distributions from the trustee in the trustee's sole discretion is not a vested interest. However, if that purely discretionary interest also has a fixed distribution outright to the beneficiary at any future date (maybe the death of the settlor), the beneficiary's interest is now vested and it does not matter that he or she has to survive another party to get the distribution (the vested interest is subject to divestiture).
While Colorado reported cases have not yet required invasion of a trust to distribute the marital property appreciation to the non-beneficiary spouse, they have included the trust appreciation in the total marital property value in order to determine the share of marital property assets that spouse receives. In at least one unreported case, a court ordered self-settled trust assets to be distributed to the non-beneficiary divorcing spouse. Thus, a marital or civil union agreement may want to address self-settled asset protection trust assets.
Mandatory trust income distributions are beneficiary income for determining court awards of alimony and creditor attachment but are not property for property division in a dissolution of marriage. However, the courts can attach trust assets for spousal and child support payments as "super creditors," when necessary. Green v. Green, 113 P.2d 427 (Colo. 1941) (but see C.R.S. § 14-10-113(7), which prohibits such trusts being considered as an "economic circumstance or other factor"). The least likely distribution to be considered by the court as income or attached by a creditor is a purely discretionary trust that has no pattern of regular distributions prior to the divorce where the beneficiary party to a dissolution action is not the sole trustee and sole beneficiary. There is some concern of losing even this discretionary trust protection in states that have adopted the Uniform Trust Code if discretionary distributions are permissible for the beneficiary's support. The Colorado Uniform Trust Code (CUTC), enacted in 2018 with an effective date of January 1, 2019, does not adopt this provision. C.R.S. §§ 15-5-101, et seq.
In determining the future income of parties legally terminating their relationship, the court will consider distributions from a trust in addition to current employment, future earning potential, and income earned on the separate and marital assets to be available to each party after the divorce. All mandatory distributions from a trust will be included in the party's income for this determination. In determining support obligations, the availability of trust distributions is the same as for a creditor trying to reach the trust assets, because the ex-spouse or partner is a creditor of the trust beneficiary if support obligations are imposed on such beneficiary. If the beneficiary has a right to demand...
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