Opinion ID: 2587569
Heading Depth: 3
Heading Rank: 3

Heading: Family Trust

Text: The record indicates that the trust that Wife's parents had established during her marriage to Husband reserved to her parents the power to alter, amend, or revoke the trust until one of them died. Thus, when Wife's mother died, the trust became irrevocable and non-modifiable. At that time, the trust was to be divided into two trusts, A and B. Under the trust instrument, Wife's father, as trustee, must pay the entire net income from both trusts to himself during his lifetime and has the discretion to invade the corpus for his own support, care, and maintenance. When Wife's father dies, the corpus of Trust A will be distributed as designated in his will, and any undesignated portion will go into Trust B. Wife's brother will become the trustee, and is required under the trust instrument to divide Trust B into as many equal shares as there are living children of the trustors. At this time, Wife and her brother are the only living children of their parents. The parties dispute whether Wife's interest in the family trust constitutes marital property under section 14-10-113, or merely an expectancy. Although the trial court had concluded that Wife's interest in the trust constituted property because it was a vested remainder subject to divestment only if she predeceases her father, the court of appeals reversed this determination, holding instead that because Wife's father had unfettered discretion to distribute to himself as much of the income and principal as he saw fit to distribute, the trust did not constitute a property interest, but merely an expectancy. Accordingly, the court of appeals held that the trial court erred in determining that Wife held a property interest in the trust. The court also held, however, that the trial court's error was harmless because the trial court properly considered Wife's interest in the trust as an economic circumstance in dividing the marital property. We disagree with the court of appeals' determination that Wife did not hold a property interest in the family trust. We have previously held that a trust interest similar to that of Wife's in this case constitutes a vested interest. In re Question Submitted by the United States Court of Appeals for the Tenth Circuit, 191 Colo. 406, 411, 553 P.2d 382, 386 (1976). In that case, the beneficiary had a remainder interest in a trust created by the father from which the mother was to receive income for life and so much of the principal deemed to be necessary by the trustee for the mother's care, support and maintenance. Id. at 407, 553 P.2d at 383. Upon the mother's death, a portion of the trust's remaining principal and any accrued income was to form a new trust from which the son was to receive $1,000 per month for his life or until the fund was exhausted. Id. We concluded that a present fixed right to future enjoyment gives rise to a vested interest in property, even if that interest is subject to complete divestment or defeasance. Id. at 409, 553 P.2d at 385. By way of comparison, we held in Jones, 812 P.2d at 1158, that a beneficiary's interest in a discretionary trust was not property, but merely an expectancy. The issue there was whether the wife's interest in a testamentary trust created by the will of the wife's mother constituted marital property. Id. at 1153. In that case, the trustees had uncontrolled discretion to distribute income and principal from the trust to the wife's father, the wife, or her descendants, for expenses deemed necessary for their health, welfare, comfort, support, maintenance and education. Id. Upon the father's death, the trust proceeds were to be distributed to the wife's descendants, if any, or otherwise to the mother's heirs. Id. After reviewing the relevant case law in Colorado discussing the issue as to whether an interest constitutes property, we concluded that one's enforceable contractual right gives rise to a property interest, while an unenforceable interest constitutes a mere expectancy. See id. at 1154-57. Because we found that the trust in that case was completely discretionary, we determined that the wife had no contractual or enforceable right to income or principal from the trust. Id. at 1156. Therefore, we concluded that the wife's interest in the discretionary trust was not property, and that the income received by the wife from the trust was more properly characterized as a gift under the Act. Id. at 1158. In the present case, Wife has a future, vested interest not within the discretion of the trustee to withhold. See id. at 1157. Such interests are distinguishable from interests in discretionary trusts because although the value of such interests may be uncertain at the time of the dissolution of marriage, they nonetheless constitute property because they are certain, fixed interests subject only to the condition of survivorship. See id. Indeed, when describing future vested interests in Jones, we cited several cases involving trusts similar to those at issue in the present case. Id.; Davidson v. Davidson, 19 Mass. App.Ct. 364, 474 N.E.2d 1137, 1143-44 (1985) (holding that a beneficiary's remainder interest in a trust in which the trustees were empowered in their uncontrolled discretion to invade principal for the benefit of [the beneficiary's] mother constituted a property interest); Trowbridge v. Trowbridge, 16 Wis.2d 176, 114 N.W.2d 129, 134 (1962) (holding that a beneficiary's remainder interest in a trust from which the beneficiary's mother is entitled to (1) the net income for as long as she lives, and (2) to withdraw up to $5,000 from principal in any year plus any additional amounts deemed by the trustee to be necessary or advisable for certain purposes, constituted both a real and personal property interest). Thus, we conclude that in the present case, Wife's interest in the family trust constitutes property, as opposed to a mere expectancy. We reach this conclusion despite the fact that Wife's father must pay the entire net income from both trusts to himself during his lifetime and has the discretion to invade the corpus for his own support, care, and maintenance. These factors render the value of Wife's remainder interest uncertain, but do not convert her interest into a mere expectancy. Having determined that Wife's interest in the family trust constitutes property, we now turn to the issue of whether such property qualifies as marital property under the Act. As discussed above, the Act creates a presumption that all property acquired during the marriage constitutes marital property unless such property falls within one of the listed exceptions. § 14-10-113(3). One of the listed exceptions, however, is [p]roperty acquired by gift, bequest, devise, or descent. § 14-10-113(2). Because the trust was created during the marriage, we conclude that Wife's interest constitutes a gift, which is excepted from the definition of marital property under the Act. Thus, we hold that the trial court properly concluded that Wife's interest in the trust does not constitute marital property, but Wife's separate property. The trial court also properly concluded, however, that the appreciation on Wife's interest in the trust during the course of the marriage does constitute marital property under the Act. § 14-10-113(4). Such appreciation is to be calculated by determining the extent to which the property's present value at the time of the decree exceeds its value at the time of acquisition. Id. The trial court determined that the value of the trust at the time of its final orders was $1.3 million, but the record reveals no evidence as to the value of the trust at the time of its creation. The trial court therefore awarded Wife her entire interest in the trust, which was one half of the value of its corpus, [5] describing that property as the marital portion of the Trust. We conclude that this award was made in error. Because Wife's interest in the trust constitutes separate property, the trial court's characterization of that interest as marital property suggests that the court had found that the entire value of the trust constituted appreciation. There is no evidence in the record to support such a finding. Therefore, we conclude that the trial court erred in awarding Wife's entire interest in the family trust to her. We further hold that such error was not harmless. As discussed above, a trial court's abuse of discretion in making a particular determination as to property division amounts to reversible error where the substantial rights of the parties are affected by the trial court's error when viewed in relation to its overall property division. See supra p. 36. A review of the record indicates that the trial court's determination that the entire value of Wife's interest in the trust was appreciation and therefore marital property affected substantial rights of the parties, and thus constitutes reversible error. We reach this conclusion notwithstanding the trial court's determination that its property division would not be any different even if Wife's interest in the Trust is not considered to be marital property since it was considered as an economic circumstance in making the overall property division equitable. As discussed above, a summary determination that the same result occurs when viewing an interest as either marital property or separate property constituting an economic circumstance, fails to comport with the requirements under the Act that a trial court determine first whether property is marital or separate before making an equitable division that considers the economic circumstances of the parties. See supra, p. 38. The value of Wife's interest in the trust was $650,000, or approximately twenty percent of the total marital estate. Treatment of such a significant property interest may not result in an identical property distribution regardless of its characterization as marital or separate property. We believe that the trial court should have an opportunity to reconsider the distribution of property in light of this opinion. Thus, the substantial amount of the marital estate impacted by this error, particularly in light of the trial court's error with regard to Husband's interspousal gifts, warrants reversal of this issue. See supra p. 38. Accordingly, we reverse the court of appeals' ruling that the trial court's error was harmless, and remand this issue to the trial court to calculate the trust's appreciation, by determining the extent to which the trust's present value at the time of the decree exceeded its value at the time it was created. [6]