DIVISION OF TRUSTS IN DIVORCE CASES
© 2003 National Legal Research Group, Inc.
Most decedents choose to distribute their estates by means of outright bequests to the objects of their bounty. For a variety of reasons, however, many decedents choose to place all or part of their estate into some form of trust. If the beneficiary is divorced before the trust terminates, the court must determine the extent to which the various income and remainder interests in the trust constitute divisible property.
The immediate objection is often made that the status of trusts need not be considered in detail, because they are acquired by gift or inheritance, and are therefore separate property. This objection has only limited force. First, roughly one-third of all American jurisdictions follow the all-property model of property division, which permits the division of inherited or gifted property. Brett R. Turner, Equitable Distribution of Property § 2.07 (2d ed. 1994 & Supp. 2002). Second, those states which do recognize separate property generally hold that active appreciation during the marriage, or in a few instances even all appreciation during the marriage, is marital property. For these reasons, a considerable amount of divisible value can sometimes be found in an inherited or gifted trust.
This article is a complete update of an earlier article addressing the same subject. Wendy J. Simpson, Equitable Distribution of Income and Remainder Interests in Inter Vivos and Testamentary Trusts, 5 Divorce Litigation 1 (1993).
II. TERMINOLOGY: TRUST LAW FOR DIVORCE LAWYERS
Trusts can generally be divided into two categories: revocable and irrevocable. A revocable trust can be terminated at any time the creator wishes. Upon termination, all undistributed principal and accumulated income revert back to the creator. An irrevocable trust is one which cannot be revoked by the creator.
While trusts can be classified as entities, it is broadly inaccurate to speak of a trust as a single asset for purposes of property division. In most situations, what is being divided is not the trust itself, but rather a series of different interests in the trust. It is therefore important to define certain types of interests at the outset. Trusts generally consist of the actual body of the trust, known as the principal or corpus, and the income generated by that body. Income can be either distributed, in which case it leaves the trust altogether, or undistributed. Undistributed income remains with the trustee and is normally invested with the corpus, but it is sometimes subject to different rules of distribution.
An income interest is the right to receive periodic distributions of income from the trust. An income interest can be mandatory, one which requires the trustee to distribute income, or discretionary, one which merely permits the trustee to distribute income. An income interest can also be absolute, requiring or permitting the distribution of income under all conditions, or conditional, requiring or permitting the distribution of income only in certain circumstances (for example, as necessary for the beneficiary's health or education).
The counterpart of the income interest is the remainder interest: the right to receive the corpus of the trust at some point in the future. A remainder interest in the creator of the trust (the settlor) is known as a reversion. Remainders can be classified as vested or contingent. The distinction nominally depends upon whether the right to receive the corpus is certain or uncertain. In practice, the distinction depends upon years of rulings under the law of trusts, most decided for purposes far removed from the division of property upon divorce, and the distinctions are often illogical. For example, a remainder is considered vested if the only condition is that the beneficiary must survive until the year of distribution—even if the beneficiary is currently 80 years old and the date of distribution is 20 years in the future. Likewise, a remainder is considered contingent if the beneficiary must survive someone else in order to receive benefits. Thus, a remainder interest in the survivor of two persons is generally contingent before the actual death of either, even if one person is 80 years old and the other a mere infant. Some vested remainders are relatively speculative; some contingent remainders are relatively certain.
Most remainders are given to a specific person or set of persons. But sometimes a trust will allow another person (most often an income beneficiary) to decide who will ultimately receive the trust corpus. The power to name the beneficiary of the remainder interest is called a power of appointment. A general power of appointment is one which the holder can use to benefit anyone, including his or her own estate. A limited power of appointment is one which the holder cannot use for his or her own benefit.
Corpus is most commonly distributed by means of remainders, which are payable when the trust terminates. But some trusts permit the trustee to distribute principal as well as income during the trust's lifetime. These early distributions can be classified much like income interests; they can be mandatory or discretionary, and absolute or conditional. If the right to an early distribution is broad enough, there may be a risk that early distributions will consume the principal of the trust altogether, making the remainders appear even more speculative.
II. TRUST INTERESTS AS PROPERTY
When classifying an interest in a trust for purposes of divorce, the first question is whether the interest constitutes property to begin with. Some interests owned by a spouse do not constitute property, and so cannot be divided upon divorce. The most common examples are professional degrees and the expectancy of a future gift or inheritance. Turner, supra, §§ 6.20, 6.27.
The strong general rule is that a revocable trust does not constitute property. Interests under a revocable trust exist only at the sufferance of the settlor. At any time, for any reason, the settlor may revoke the trust. A revocable trust is like a will executed by a person who remains alive: it offers no presently enforceable right to receive anything, but rather only the right to receive benefits in the future, if the will or trust remains in force. Another way to phrase the same point is to note that the power to revoke the trust at will is tantamount to ownership of the trust assets. If the settlor owns the trust's assets, then those assets obviously cannot be owned by the beneficiary.
This rule has been followed in divorce cases involving both settlors and beneficiaries. In the settlor's divorce case, since the trust is not property, it is not an independent entity in the same manner as a corporation or irrevocable trust. For all practical purposes, the settlor actually owns the trust assets. Those assets are therefore subject to direct classification and division. See In re Marriage of Seewald, 22 P.3d 580 (Colo. Ct. App. 2001) (classifying individual assets of revocable trust); In re Malquist, 227 Mont. 413, 739 P.2d 482 (1987); Galachiuk v. Galachiuk, 262 A.D.2d 1026, 691 N.Y.S.2d 828 (1999) (where husband failed to prove that trust was irrevocable, proper to divide trust assets between the parties); Dorn v. Heritage Trust Co., 24 P.3d 886 (Okla. Civ. App. 2001) (assets of revocable trust were marital property); In re Estate of Knickerbocker, 912 P.2d 969 (Utah 1996) (for purposes of equitable distribution, assets of a revocable trust are owned by the settlor); Lynch v. Lynch, 147 Vt. 574, 522 A.2d 234 (1987); Kelln v. Kelln, 30 Va. App. 113, 515 S.E.2d 789 (1999) (dicta) (marital assets transferred into revocable trust did not become separate property, as transferor had not given up complete control over them; stating in dicta that court can treat revocable trust's assets as if owned by the settlor (on the facts, the trusts were revoked before the divorce)).
In the beneficiary's divorce case, because a revocable trust is not property, the beneficiary really owns nothing at all. The beneficiary has no more legal right than he would if he were the beneficiary of the settlor's will, but the settlor remained alive. Since the beneficiary's rights are only a speculative expectancy, interests under a revocable trust cannot constitute divisible property. See Rubin v. Rubin, 204 Conn. 224, 527 A.2d 1184 (1987).
Irrevocable trusts do create enforceable legal rights in the beneficiaries. Thus, they constitute property for purposes of a divorce case.
In the settlor's divorce, because the trust is irrevocable, it is an independent third-party entity, similar to a corporation or partnership. Assets held by the trust are not property owned by either spouse, but rather property owned by a third party, the trust itself. The court is free to classify and divide any interest in the trust retained by the settlor, but the trust assets themselves cannot be divided. See McGinn v. McGinn, 273 Ga. 292, 540 S.E.2d 604 (2001); Findlen v. Findlen, 695 A.2d 1216 (Me. 1997); In re Marriage of Jones, 159 Or. App. 377, 981 P.2d 338 (1999); Endrody v. Endrody, 914 P.2d 1166 (Utah Ct. App. 1996). But see Riechers v. Riechers, 178 Misc. 2d 170, 679 N.Y.S.2d 233 (Sup. Ct. 1998) (awarding wife half of funds conveyed by husband into irrevocable trust; drawing no distinction between the assets of the trust and the trust itself).
In the beneficiary's divorce, because the trust is legally enforceable, the beneficiary's rights do constitute property. Those rights can therefore be classified and divided under the rules set forth in the remainder of this article.
Fraudulent Conveyances. There is one important exception to the general rule that the court cannot divide the assets of an irrevocable trust. The rule assumes the validity of the conveyance which transferred the assets into the trust. While the court cannot directly treat the assets of an irrevocable trust as property owned by the parties, it can hold that the conveyance which placed the assets into the trust was invalid. If the conveyance is set aside, and if one or both parties were the conveyors, then the court would be able to divide the trust assets.
Conveyance of property into trusts can be set aside under the normal defenses applicable to any written instrument: duress, undue influence, fraud, or mistake. In addition, if the conveyance was made pursuant to some form of marital agreement, the agreement can be attacked as unconscionable.
The most common ground for attacking a conveyance into a trust made by a spouse, however, is the relevant state fraudulent conveyance statute. Fraudulent conveyance statutes vary somewhat, but they generally provide that any transfer made with the actual intent to defraud creditors is invalid. Fraudulent intent is sometimes presumed when the transfer renders the conveyor insolvent. A spouse with a potential property or support claim is always a creditor for purposes of the statutes. See generally Turner, supra, § 6.30.
Most fraudulent conveyance cases involve transfers to a paramour or close family member. But several cases have set aside a transfer to an irrevocable trust. E.g., Jensen v. Jensen, 256 A.D.2d 1162, 682 N.Y.S.2d 774 (1998); Leathem v. Leathem, 94 Ohio App. 3d 470, 640 N.E.2d 1210 (1994). These are necessary holdings, for a spouse could otherwise steal marital property simply by placing it into a sufficiently discretionary irrevocable trust for his or her future benefit.
One decision points in a different direction. In In re Marriage of Pooley, 996 P.2d 230 (Colo. Ct. App. 1999), the court held that a discretionary trust was not property, even though it was established with marital funds. The court further held that the initial conveyance into the trust was not fraudulent, because it was not made for an improper purpose. Pooley is troubling, for it allows a spouse to steal marital property by conveying it into a spendthrift trust, so long as the spouse is careful enough to leave no direct evidence of fraudulent intent. Fraudulent intent is harder to prove than the Pooley court believed, and the practical result of the case is to encourage clever schemes to dissipate property. The court would have done better to hold that any conveyance of marital property into a form which the court cannot divide, for absolutely no consideration, is dissipation of marital property or at least a major negative contribution to the marriage.
III. INCOME INTERESTS
A mandatory unconditional income interest in an irrevocable trust clearly constitutes property. E.g., Sayer v. Sayer, 492 A.2d 238 (Del. 1985); In re Becker, 122 Or. App. 567, 858 P.2d 480 (1993).
Discretionary income interests generally do not constitute property. In In re Marriage of Jones, 812 P.2d 1152 (Colo. 1991), the wife was a beneficiary of a testamentary trust created by the will of her mother. The trustees had uncontrolled discretion to distribute the income and principal from the trust to the wife and other beneficiaries for any expense deemed necessary for their health, welfare, comfort, support, maintenance, and education. The court held that the income interest was not property:
While the wife may have some equitable beneficial interest in the subject matter of the trust, whether she receives money from the trust depends not on a future contingency, but on the sole discretion of the trustees. Thus, unlike a vested retirement plan, the beneficiary of a discretionary trust has no contractual or enforceable right to income or principal from the trust, and cannot force any action by the trustee unless the trustee performs dishonestly or does not act at all. The interest of the beneficiary in a discretionary trust is not assignable and cannot be reached by his or her creditors. G. Bogert, Trusts § 41 (6th ed. 1987). The beneficiary, then, has no vested property right to receive payment from the trust. Until the trustee elects to make a payment[,] the beneficiary has a mere expectancy. G. Bogert, Trusts & Trustees, § 228, at 512-13 (2d ed. 1979). . . .
A discretionary trust differs from those trusts that grant the beneficiary some future, vested benefit not within the discretion of the trustee to withhold, but whose value may be uncertain at the time of the dissolution of marriage. . . . Here, on the other hand, the wife had no right at any time to either the trust corpus or income. It was the wife's descendants, if any, who would receive any undistributed income or principal from the trust upon her and her father's death. We therefore agree with, and affirm, the court of appeals' conclusion that a discretionary trust corpus cannot be considered the separate property of a beneficiary for purposes of division of property[.]
Id. at 1157 (citations omitted); accord In re Marriage of Rosenblum, 43 Colo. App. 144, 602 P.2d 892 (1979).
In Hawkins v. Hawkins, 11 Conn. App. 195, 526 A.2d 872 (1987), the wife was a beneficiary under a trust set up by her grandmother. The trust gave the trustees complete discretion as to whether to make periodic distributions to the wife's mother and her issue. Even though the wife received $30,000 per year from the trust, as well as a $40,000 distribution from the principal, the court held that her interest was not property:
In its memorandum of decision, the court expressly made note of the trust, described the [wife's] interest therein and the amount of the income and principal that had been paid to her over the years. While the [husband] disputes the trial court's characterization of the [wife's] interest in the trust as a mere expectancy, it is undisputed that the [wife] was guaranteed no fixed sums, or any funds at all, under the trust. We cannot find from the record before us that the trial court erred in refusing to consider the [wife's] interest in her grandfather's trust.
526 A.2d at 874 (footnotes omitted).
To similar effect is In re Eddy, 210 Ill. App. 3d 450, 569 N.E.2d 174 (1991). There, "[t]he [trust] document state[d] that the trustee may decide to pay such beneficiary and his or her descendants proportions which the trustee determines, considering the best interests and welfare of such beneficiary and his or her descendants in that order and as a group." 569 N.E.2d at 180 (emphasis by the court). The court held that the wife, who was among the stated beneficiaries, had a discretionary income interest which did not constitute property:
A reading of the trust document makes it clear that Judith does not have a present interest of $1.9 million in the trusts. Judith's present interest is an eligibility to receive a portion of the trust if her father so directs or if he dies intestate. Contrary to Michael's assertions that Judith, as a descendant of James Cook, has a present half interest subject to disfeasance, she actually has a right to receive a limited amount of funds per year and is eligible, with five other persons, to receive an interest in the trusts. . . .
Although the circuit court could consider her present interest in the trust, it could not consider her eligibility to receive a portion of the trust because that is an expectancy and not a realization. [Citations omitted.] Potential inheritances, just as expected degrees or licenses, are not property which can be valued and awarded to a spouse, although they can be given some consideration in determining property distribution.
Id. at 180-81.
Undistributed Income. Undistributed trust income is not income acquired by a party, because it has not yet been distributed. It remains the property of a third-party entity, the trust, and as such it is not directly marital property. See Lemke v. Lemke, 929 S.W.2d 662 (Tex. App. 1996); In re Marriage of Burns, 573 S.W.2d 555 (Tex. Civ. App. 1978). It could represent appreciation in the trust corpus (assuming that the value of other trust assets has not declined), and might therefore constitute divisible appreciation of the remainder interest. See Part IV, infra.
Early Distribution. The right to an early distribution of the principal is generally classified like an income interest. If such a right were to be mandatory, it might well constitute property.
Most rights to early distribution are discretionary with the trustee. Like a discretionary income interest, a discretionary right to an early distribution of the principal is not property. See In re Marriage of Jones, 812 P.2d 1152 (Colo. 1991); Hawkins v. Hawkins, 11 Conn. App. 195, 526 A.2d 872 (1987).
Marital Property. In those jurisdictions which permit only the division of marital property, an income interest is separate property if acquired by gift or inheritance. E.g., Odle v. Eastman, 192 W. Va. 415, 453 S.E.2d 598 (1994) (income from premarital trust was separate property).
In states where all income from separate property is marital, the argument is sometimes made that this rule includes income from separate property trusts. The trend is to reject this argument. If the income interest is itself not property—that is, if it is discretionary—the income cannot be income from separate property. In re Marriage of Jones, 812 P.2d 1152 (Colo. 1991). Moreover, Wisconsin has held that trust income is not income from an asset owned by the parties, but rather income from a third-party entity, the trust itself. As such, it is not marital property. Friebel v. Friebel, 181 Wis. 2d 285, 510 N.W.2d 767 (Ct. App. 1993).
It should be noted that income interests are not always acquired by gift or inheritance. When the parties themselves placed marital property into an irrevocable trust, any income interest was acquired in exchange for the transfer of marital property into the trust, and thus is marital property. There are no reported cases, but it is likewise possible in theory that an income interest could be given as compensation for services rendered. If so, the interest might be marital property. See Turner, supra, § 5.16 (transfer in compensation for services rendered during the marriage is marital property, even if it takes the form of a gift).
Where an income interest is divisible property, the marital estate includes only the income actually received during the marriage, and not the income due after the marriage. Sayer v. Sayer, 492 A.2d 238 (Del. 1985); Magrauth v. Magrauth, 136 N.H. 757, 622 A.2d 837 (1993).
IV. REMAINDER INTERESTS
Courts uniformly hold that a vested remainder constitutes property. A leading Massachusetts decision stated:
[I]mplicit in our appellate decisions is the rejection of the notion that the content of the estates of divorcing parties ought to be determined by the wooden application of technical rules of the law of property. We think an expansive approach, within the limits of the marital partnership concept, is appropriate. The purpose of § 34 is to empower the courts to deal broadly with property and its equitable division incident to a divorce proceeding. Such broad discretion is necessary in order that the courts can handle the myriad of different fact situations which surround divorces and arrive at a fair financial settlement in each case. (Citations omitted.) Rice v. Rice, 372 Mass. at 401, 361 N.E.2d 1305.
We conclude that Henry's remainder interest under his father's testamentary trust, while it may have been at the outer limits, constituted a sufficient property interest to make it a part of his estate for consideration in connection with a property division under § 34. Henry's right to the remainder was fixed at the time of the divorce in 1976 (Henry's father died about 1968. The record does not show when his will was admitted to probate.), subject only to the conditions of survivorship. We do not think that either the uncertainty of value or the inalienability of the interest, in themselves, are sufficient to preclude consideration of the interest as subject to division.
Davidson v. Davidson, 19 Mass. App. Ct. 364, 474 N.E.2d 1137, 1144 (1985).
For additional cases holding that a vested remainder is property, see In re Marriage of Gorman, 36 P.3d 211 (Colo. Ct. App. 2001) (fact that remainder is subject to divestment on future conditions does not change the result); In re Foottit, 903 P.2d 1209 (Colo. Ct. App. 1995); Dietter v. Dietter, 54 Conn. App. 481, 737 A.2d 926 (1999); In re Tatham, 173 Ill. App. 3d 1072, 527 N.E.2d 1351 (1988); Moyars v. Moyars, 717 N.E.2d 976 (Ind. Ct. App. 1999); Findlen v. Findlen, 695 A.2d 1216 (Me. 1997) (dicta); Lauricella v. Lauricella, 409 Mass. 211, 565 N.E.2d 436 (1991); S.L. v. R.L., 55 Mass. App. Ct. 880, 774 N.E.2d 1179 (2002) (where only condition on wife's remainder was that she survive her mother, remainder was divisible property); In re Marriage of Foreman, 294 Mont. 181, 979 P.2d 193 (1999) (even though remainder was subject to divestment if husband died at an early age); Buxbaum v. Buxbaum, 214 Mont. 1, 692 P.2d 411 (1984); Flaherty v. Flaherty, 138 N.H. 337, 638 A.2d 1254 (1994) (despite anti-assignment clause); Lawrence v. Lawrence, 100 N.C. App. 1, 394 S.E.2d 267 (1990); Loeb v. Loeb, 72 N.C. App. 205, 324 S.E.2d 33 (1985); Zuger v. Zuger, 563 N.W.2d 804 (N.D. 1997); Van Oosting v. Van Oosting, 521 N.W.2d 93 (N.D. 1994); In re Taylor, 121 Or. App. 635, 856 P.2d 325 (1993); In re Becker, 122 Or. App. 567, 858 P.2d 480 (1993); In re Bentson, 61 Or. App. 282, 656 P.2d 395 (1983); Chilkott v. Chilkott, 158 Vt. 193, 607 A.2d 883 (1992); and Trowbridge v. Trowbridge, 16 Wis. 2d 176, 114 N.W.2d 129 (1962).
A vested remainder is marital property even if the beneficiary has a right to early distribution of the principal. In In re Balanson, 25 P.3d 28 (Colo. 2001), the issue was the classification of the wife's interest in two related irrevocable trusts. The income beneficiary of the first trust, the wife's father, had a power of appointment over the remainder; if he did not use the power, the remainder would flow into the second trust. The wife was the absolute owner of a half remainder interest in the second trust, but the father had a discretionary right to consume the principal if the income was insufficient to meet his needs. He was required to consume the principal of the first trust before invading the second.
The court of appeals had held that neither trust was property because the father had the theoretical legal right to consume the corpus. The supreme court disagreed, and held that both trusts were property. The court held that a vested right, subject to divestment on consumption of the principal, generally does constitute property. See also In re Marriage of Gorman, 36 P.3d 211 (Colo. Ct. App. 2001) (relying on Balanson); Davidson; Zuger.
This holding is sound with regard to the principal of the second trust. The court of appeals appeared to believe that the father had a broad right to consume the principal of both trusts, but in fact his right to consume the principal of the second trust was very qualified; he had to consume the income first, and the amount of both the principal and the income was substantial. There was no evidence suggesting any real likelihood that the father's actual expenses were greater than his income plus the income of the trust. There was therefore no actual (as opposed to theoretical) possibility that the principal of the second trust would be depleted.
The supreme court did not expressly discuss the father's power to devise the corpus of the first trust by will. It could be argued, by analogy to case law on future inheritances, see Turner, supra, § 6.27, that the wife possessed only an expectancy to be named as the direct or indirect beneficiary of the first trust. But there was no suggestion that the daughter would not be named, and the court seemed influenced by the fact that if the father took no action at all, the corpus of the first trust would flow into the second. Thus, there may be very important legal differences between an expected inheritance of $100 and the vested right to receive $100 from a trust unless the settlor affirmatively elects to give the $100 to someone else. The former right is clearly not property; the latter right may well be.
A vested remainder might not be property where a third party's right to consume the principal is so broad, and used with such regularity, and the principal of the trust is so limited, that complete depletion of the corpus is a realistic possibility. But no reported decision has yet presented this situation.
Reversions. A reversion, like a vested remainder, constitutes property. See Skokos v. Skokos, 344 Ark. 420, 40 S.W.3d 768 (2001).
There is a split of authority on the divisibility of a contingent or unvested remainder. A majority of the cases hold that such a remainder is not property. In In re Marriage of Hoffman, 493 N.W.2d 84 (Iowa Ct. App. 1992), the husband was entitled to a portion of a trust if he survived his father. The trial court refused to treat the husband's interest as divisible property. The wife appealed, citing the Massachusetts decision in Lauricella, which divided a vested remainder. The appellate court distinguished Lauricella and affirmed the trial court:
We do not find Lauricella v. Lauricella, 409 Mass. 211, 565 N.E.2d 436 (1991), to be controlling. Lauricella involves the interpretation of a Massachusetts statute which gives the court the authorization to assign to one spouse all or any part of the estate of another. See Mass. Gen. L. ch. 208, § 34 (1988). In Lauricella, the court assigned a trust interest to a spouse where the other spouse possessed a present and enforceable right in the trust property. 409 Mass. at 216, 565 N.E.2d 436. We do not find Dennis's interest in either the life insurance policies or the trust to be present and enforceable.
The district court did not err in declining to distribute Dennis's interest in the trust and the life insurance policies.
Id. at 90.
Several years later, Massachusetts agreed that Lauricella does not apply to contingent remainders:
The husband's contingent remainder interests in the two trusts were not clearly fixed and enforceable property rights. See Hanify v. Hanify, 403 Mass. 184, 193, 526 N.E.2d 1056 (1988) (Liacos, J., concurring in part and dissenting in part) ("A final and equitable property division under § 34 should not be based on speculative assets"). These interests were mere expectancies, comparable to a future inheritance, which are not sufficient property interests to be considered a part of the marital estate. See Davidson v. Davidson, supra at 374, 474 N.E.2d 1137. Practical difficulties, although perhaps not unsurmountable, presented by a division of property that the husband does not have, weigh heavily in our decision. Neither the present assignment of a percentage of a contingent interest's value, nor a future award on an "if and when" basis, avoids administrative hardships inherent in the valuation of expectant interests or in the requirement of continued court supervision. See Dewan v. Dewan, supra at 757, 506 N.E.2d 879. The judge correctly considered these expectancies under the § 34 criterion of "opportunity of each for future acquisition of capital assets and income" in determining what disposition to make of the property that was subject to division.
Williams v. Massa, 431 Mass. 619, 728 N.E.2d 932, 940-41 (2000).
A similar result was reached in Storm v. Storm, 470 P.2d 367 (Wyo. 1970). Storm involved a ranch which was owned by a trust. The husband's interest was contingent upon his survival:
The disputed ranch property had been left by defendant's father in a testamentary trust, with income from the ranch to be paid to appellant and his sister for a period of ten years from the date of their father's death. At the end of ten years, which was July 26, 1969, the ranch was to be set over to appellant and his sister "or the survivor of them" in equal undivided interests—or one-half to each. It is to be noted that defendant's share was not to come into being unless defendant was living on July 26, 1969.
Id. at 368. The Wyoming Supreme Court held that the trust interest was not subject to division:
With respect to future property, we think the rule must be that, when a court divides property incidental to the granting of a divorce, the court is limited by the amount of property in its hands for division and a mere expectancy is not subject to division. Hill v. Hill, 82 Cal. App. 2d 682, 187 P.2d 28, 36.
Inasmuch as the divorce in this case was sought several months before defendant's expectancy matured; and inasmuch as trial was had and the decision of the court announced before defendant inherited a half interest in his father's ranch, the inheritance must, in equity, be considered the same as future property regardless of the exact date of the entry of the final decree. It would not be "just and equitable" to consider such property a part of the marital estate and in the hands of the court for disposition.
Id. at 370. Interestingly, the court reached this result even though it knew by the time of the appellate decision (1970) that the husband had actually survived until July 26, 1969.
Citing Storm, the Indiana Supreme Court reached a similar result in Loeb v. Loeb, 261 Ind. 193, 301 N.E.2d 349 (1973). In Loeb, the husband's mother received during her lifetime the income from a trust. Upon her death, the principal would be distributed to the husband and his two siblings in equal shares. If any of the remainder beneficiaries did not survive the mother, his or her share was to be paid to the surviving issue of that beneficiary per stirpes. If no such issue existed, that beneficiary's share would go to the other beneficiaries in equal shares. These terms are essentially the same as those present here. The court affirmed a lower court decision finding no divisible property:
Under the terms of the trust agreement, it should be noted that the defendant has no present interest of possessory value. If he should predecease his mother, he takes nothing under the trust. Further, the trustees have no authority to invade the corpus during the settlor's lifetime. The beneficiaries reap no income while their mother is living. Likewise, the defendant husband is not presently possessed of any pecuniary value which could have been before the trial court for disposition. The trial court correctly refused to include the remote interest in the property settlement award.
301 N.E.2d at 353.
In In re Marriage of Beadle, 291 Mont. 1, 968 P.2d 698 (1998), the court noted that under prior Montana case law, vested remainders were subject to division. But the facts of the case involved a contingent remainder:
In this case, however, Andy's interest in the John G. Beadle Revocable Trust was not a vested interest. Bernadene had a life interest in the John G. Beadle Revocable Trust and the power to appoint by will the remainder of the trust among the couple's descendants. Only in the event that Bernadene did not choose to exercise her power of appointment would the trust corpus be distributed among John and Bernadene's children, including Andy.
968 P.2d at 705. The trial court held that the husband's remainder was not divisible. The Montana Supreme Court affirmed:
In Marriage of Hill, Buxbaum, and Marriage of Meeks, the interest considered was a vested interest; that is, (1) the interest was limited to an ascertained person in being; and (2) that person's right to the estate was fixed and certain and did not depend on the happening of any future event. In Marriage of Hill and Buxbaum, the only event that could divest the spouse of his interest was if he predeceased the owner of the life interest. Likewise, in Marriage of Meeks, the spouse was sure to receive his interest in the trust corpus so long as he did not predecease his mother. However, this Court held that the spendthrift provision evidenced the intention of the settlor of the trust that the spouse's interest not vest until the trust proceeds were distributed. These cases all stand for the general proposition that only a vested remainder may be considered in evaluating the opportunity for future acquisition of assets or income under § 40-4-202, MCA, and that even where the interest is vested, the intent of the testator can render it contingent.
The District Court initially characterized Andy's interest as a vested interest, subject to divesture. However, prior to trial, Bernadene executed a codicil to her will, exercising her power of appointment to disinherit Andy. The District Court held that "by reason of the divesture taking place, Andy no longer has any vested remainder interest in the John G. Beadle Revocable Trust. Unless the remainder interest is vested, it cannot be included in the marital estate." We determine that the District Court was correct in holding that a remainder interest can only be considered if it is vested, but that it incorrectly based its classification of Andy's interest on the status of Bernadene's will. The provisions of Bernadene's will only became significant at her death, when the power of appointment was exercised. Andy's interest remained contingent through trial and up until Bernadene's death in April 1998.
Id. at 703-04.
A respectable minority of the cases hold that an unvested remainder is property. A good example is Van Oosting v. Van Oosting, 521 N.W.2d 93 (N.D. 1994). The trial court in that case held that a trust cannot be divided, but the North Dakota Supreme Court reversed:
At the time of divorce Bruce had a vested interest in the trust. Although contingent in nature, his interest is certain to reach him upon the death of his mother. Further, Bruce is currently entitled to receive, at the trustee's discretion, income and principal distributions. We are in agreement with numerous other courts that the trust is a property interest subject to division.
Id. at 97. The court recognized that the trust had spendthrift provisions which prevented the beneficiaries from transferring their interests, but expressly held that these provisions did not bind the divorce court. "Bruce's interest in the trust," the court concluded, "should be treated just as any inherited property should be treated." Id.
For additional minority cases holding that contingent remainders are not property, see In re Bentson, 61 Or. App. 282, 656 P.2d 395, 396 (1983) ("Whether vested or contingent, husband's interest in the trust is a marital asset to be considered in the division of marital property"), and Chilkott v. Chilkott, 158 Vt. 193, 607 A.2d 883, 884 (1992) ("Although the trust represents to the parties a future, contingent interest, the trust is a form of property subject to ownership").
Policy Concerns. The majority rule is correct in holding that some trust interests are too speculative to be divided. It is hard to draw any real distinction between future benefits under a revocable trust and future benefits under the will of a person who remains alive, and there is universal agreement that an expected inheritance is not property. An unvested remainder is different in one key sense, since the beneficiary of such a remainder does have legally enforceable rights. But the rights are subject to a set of conditions. If the occurrence of the conditions is entirely speculative on the facts, there is a reasonable basis for refusing to hold that any present property exists. This is particularly true when the property at issue results from gift or inheritance, with no material marital contribution.
The important fact, however, is the degree to which the legally enforceable right is subject to actual, real conditions. The problem with the majority rule cases is that they tend to look not to the actual amount of uncertainty, but rather to the technical question of whether the remainder is vested or unvested. As noted in Part II, supra, the rules of law which govern the vesting of trusts were established long ago, for purposes far removed from the division of property at divorce. For historical reasons, some benefits which are actually highly uncertain are classified as vested; some benefits which are actually highly certain are classified as unvested.
There is no reason why the law of property division should be burdened with the accumulated baggage of years of case law under the law of future interests. Property division upon divorce is a uniquely equitable setting, and it places little importance upon rules of law (most significantly legal title) which are controlling in other contexts. The time at which a remainder technically vests is a highly technical rule of real property law, heavily related to legal title, and established for reasons not relevant to divorce cases. As the New Jersey Supreme Court observed in another context, "[t]he concept of vesting should probably find no significant place in the developing law of equitable distribution." Stern v. Stern, 66 N.J. 340, 331 A.2d 257, 262 (1975).
But this does not mean that the majority cases reached the wrong result, or that the minority cases reached the correct one. Interests which are speculative beyond a certain point are mere expectancies and not divisible property. It is wrong to hold that the "certain point" is the point at which the remainder technically vests because vesting often has little to do with whether the underlying interest is actually speculative. A remainder in the survivor of two persons, one of whom is 80 years old and in failing health, is technically unvested, but the other person's interest nevertheless has a fairly high degree of certainty. It is the actual level of certainty or speculativeness, and not the technical question of whether the interest is vested, which should determine the result. In future cases where an unvested benefit is reasonably certain, it should be treated as property. In future cases where a vested benefit is highly speculative, it should not be treated as property.
It should be noted that the important question is not whether the benefit is uncertain to any degree, but whether it is highly speculative—that is, whether it is speculative in the same manner and to the same extent that a expected inheritance or gift is speculative. The mountain of case law dividing unvested retirement benefits, see Turner, supra, § 6.09, establishes that mere uncertainty does not prevent an asset from constituting property. But interests in trusts are closer to future gifts or inheritances than to retirement benefits, particularly since they are not in most cases products of the marital partnership. Where the overall speculativeness of a remainder interest is similar to that of a future gift or inheritance, the remainder should not be treated as property.
Powers of Appointment
A general power of appointment, one which can be used for the holder's own benefit, almost certainly is property.
The only case to consider the issue held that a limited power of appointment, one which cannot be used to benefit the holder or the holder's creditors, is not property. Cooley v. Cooley, 32 Conn. App. 152, 628 P.2d 608 (1993). The court reasoned that because the owner could not use the power for his own benefit, he possessed nothing of real economic value.
In Ruml v. Ruml, 50 Mass. App. Ct. 500, 738 N.E.2d 1131 (2000), review denied, 433 Mass. 1102, 742 N.E.2d 82 (2001), the husband conveyed divisible assets into an irrevocable trust, reserving to himself a power to appoint income and remainder beneficiaries. The appointment could not be used to benefit creditors. The court held in essence that the power to appoint the wife as the beneficiary was tantamount to ownership, and therefore treated the trust assets as marital property. The holding is not objectionable on the specific facts presented, but it certainly plays fast and loose with the requirement that the power could not be used to benefit a creditor of the husband, a class which probably included the wife. A better option, not discussed by the court, would have been to rescind the transfer into the trust under the law of fraudulent conveyances.
In those jurisdictions which permit only the division of marital property, a remainder interest which constitutes property is still separate property, if it was acquired by gift or inheritance. E.g., Mason v. Mason, 319 Ark. 722, 895 S.W.2d 513 (1995) (inherited trust); Pittman v. Pittman, 791 So. 2d 857 (Miss. Ct. App. 2001) (gifted trust); McGinley v. McGinley, 388 Pa. Super. 500, 565 A.2d 1220 (1989); cf. In re Marriage of Meeks, 276 Mont. 237, 915 P.2d 831 (1996) (under all-property system, trial court did not err by choosing not to divide contingent remainder acquired by inheritance); In re Smith, 270 Mont. 263, 891 P.2d 522 (1995) (proper to award husband no share of wife's premarital trust interests; husband had made no contribution to them).
It should be noted that remainders are not always acquired by gift or inheritance. When the parties themselves placed marital property into an irrevocable trust, any remainder interest was acquired in exchange for the transfer of marital property into the trust, and thus is marital property. E.g., Heinrich v. Heinrich, 609 So. 2d 94 (Fla. Dist. Ct. App. 1992); Findlen v. Findlen, 695 A.2d 1216 (Me. 1997); Caccamise v. Caccamise, 130 Md. App. 505, 747 A.2d 221 (2000); Fox v. Fox, 1999 ND 68, 592 N.W.2d 541 (N.D. 1999). Of course, any remainder interest acquired in exchange for separate funds would be separate. E.g., Schmanski v. Schmanski, 115 Nev. 247, 984 P.2d 752 (1999) (trust acquired with separate funds was separate property).
There are no reported cases, but it is likewise possible in theory that a remainder could be given as compensation for services rendered. If so, the interest might be marital property. See Turner, supra, § 5.16 (transfer in compensation for services rendered during the marriage is marital property, even if it takes the form of a gift).
If a remainder interest is separate property, it is still subject to normal rules of law for classifying appreciation in separate property. In most states, such appreciation is marital if it is active appreciation caused by marital funds or efforts. In these states, active appreciation in a remainder is marital property. See In re Marriage of Tatham, 173 Ill. App. 3d 1072, 527 N.E.2d 1351 (1988) (where the husband's personal efforts on farm, the trust property, were significant and resulted in substantial appreciation of the trust, that appreciation was treated as marital property even though the farm itself was separate property); In re Schatz, 768 S.W.2d 607 (Mo. Ct. App. 1989) (involving a remainder in real estate). For additional cases holding that the doctrine applies, but finding the appreciation passive on the facts, see Lawrence v. Lawrence, 100 N.C. App. 1, 394 S.E.2d 267 (1990), and Doerr v. Doerr, 189 Wis. 2d 112, 525 N.W.2d 745 (1994).
In Colorado and Pennsylvania, where all appreciation in separate property is marital, all appreciation in a remainder is likewise marital. In re Marriage of Gorman, 36 P.3d 211 (Colo. Ct. App. 2001); In re Foottit, 903 P.2d 1209 (Colo. Ct. App. 1995). Pennsylvania tempers this rule by holding that a remainder interest is not acquired until the owner has a present right to withdraw the principal. Solomon v. Solomon, 531 Pa. 113, 611 A.2d 686 (1992); Powell v. Powell, 395 Pa. Super. 345, 577 A.2d 576 (1990); McGinley v. McGinley, 388 Pa. Super. 500, 565 A.2d 1220 (1989).
Active appreciation principles apply only to appreciation in separate property. Thus, if a remainder interest is not property at all, its appreciation cannot be a marital asset.
Time of Acquisition
In a few jurisdictions which treat gifts and inheritances as marital property, but property acquired before the marriage as separate property, the time at which an interest in the trust principal is acquired can be an important point. Two older cases hold that a distribution of principal from a trust is acquired when received, even if the owner previously held a remainder. Frank G.W. v. Carol M.W., 457 A.2d 715 (Del. 1982); Mey v. Mey, 79 N.J. 121, 398 A.2d 88 (1978). This distinction will be irrelevant in most dual-classification states, as regardless of when the principal was acquired, the manner of its acquisition (gift or inheritance) will make it separate property.
Distribution of Principal
Unlike the right to the early distribution of the principal, which is often discretionary, the right to the distribution of the principal when the trust terminates is by definition mandatory. But the remainder beneficiary obviously loses his or her remainder when the trust terminates. Distributions upon termination of the trust (e.g., distributions when a remainder becomes possessory) are therefore treated as property acquired in exchange for the beneficiary's remainder interest. See In re Marriott, 264 Ill. App. 3d 23, 636 N.E.2d 1141 (1994) (husband acquired land upon termination of premarital land trust; land was separate property).
V. VALUATION AND DIVISION
Valuation. The value of an interest in a trust is the total value of the payments to be received, discounted by the likelihood of forfeiture, reduced to present value. See Fox v. Fox, 2001 ND 88, 626 N.W.2d 660 (N.D. 2001); Chilkott v. Chilkott, 158 Vt. 193, 607 A.2d 883 (1992); cf. Turner, supra, § 6.12 (discussing similar process for determining value of defined benefit pension plans). See generally Laura W. Morgan, Valuation of a Remainder Interest in a Trust, 13 Divorce Litigation 247 (2001).
When valuing an interest in a trust, the court may consider methods used by the IRS for tax purposes, but it is not bound by them. Skokos v. Skokos, 344 Ark. 420, 40 S.W.3d 768 (2001).
Method of Division. Where the total amount which the owning spouse is likely to receive from a trust interest is uncertain, the trial court may divide the interest by deferred distribution. S.L. v. R.L., 55 Mass. App. Ct. 880, 774 N.E.2d 1179 (2002); Zuger v. Zuger, 563 N.W.2d 804 (N.D. 1997).
One decision holds that the trial court lacked the power to reserve jurisdiction to divide a trust in the future. Smith v. Smith, 249 Conn. 265, 752 A.2d 1023 (1999). The owning spouse in Smith had only an expectancy of receiving a trust, an expectancy which was clearly not property to begin with. The court appeared to suggest, however, that the trial court lacked the power to reserve jurisdiction over any equitable distribution issue.
When determining the manner of division, the court is bound by any restrictions on alienability contained within the trust. See Fox v. Fox, 626 N.W.2d 660 (N.D. 2001) (where trust prevented transfer of interest, court must determine present value of trust and compensate nonowning spouse with other property). As noted above, this sort of restriction does not prevent the court from treating a trust interest as marital property and compensating the nonowning spouse with some method of division other than a direct transfer.
As a general rule, it is accurate to state that certain and definite interests in trusts are property. They can therefore be divisible or marital property when the other requirements of that status are met—most importantly, the requirement that they result in some manner from the efforts of the marital partnership. Interests which are somewhat uncertain are generally still divisible, as complete certainty has never been viewed as a necessary attribute of property.
Interests which are so uncertain as to be speculative, however, have traditionally not been treated as property. The standard example is a discretionary income interest. The courts are also holding with some regularity that unvested remainders are not property. Most of the cases reach reasonable results on the facts, but it is dangerous to define speculativeness in terms of the common-law concept of vesting, a concept which was created for reasons not generally relevant to the division of property upon divorce. Better results will be reached if future cases look at the overall speculativeness of the remainder at issue, including, but not limited to, the question of whether the remainder has vested under the law of future interests.
Go to: Trusts Category
Go to: Cases of Interest by Category
Go to: Previous Page
About Us | Monthly Newsletter | Terms & Conditions | Privacy Statement | Contact Us | Advertising
The information contained on this page is not to be considered legal advice. A lawyer should always be consulted in regards to any legal matters. Divorce Source, Inc. is also not a referral service and does not endorse or recommend any third party individuals, companies, and/or services. Divorce Source, Inc. has made no judgment as to the qualifications, expertise or credentials of any participating professionals. Read our Terms & Conditions. © 1996 - 2012 Divorce Source, Inc. All Rights Reserved.