A trust is an agreement that is held by one person (trustee – person who manages the trust) at the request of another (settlor – a person who creates and usually provides the funding for the trust) for the benefit of a third party (beneficiary – the person that receives the income or principal from the trust). Estate planning is accomplished in two ways: a (1) revocable trust; or an (2) irrevocable trust. A person can establish value of trust assets either way.
When a settlor creates a revocable trust, this person has an option to modify this trust at some time in the future. Furthermore, this person can exercise his/her option to remove property and terminate the trust. On the other hand, when a settlor creates an irrevocable trust, the settlor cannot retrieve the property. The rationale being that the property belongs to the trust and not the settlor.
In order to determine whether the beneficiary’s interest in the trust is marital property depends on the jurisdiction and the terms of the trust. When a trust is at issue in litigation as to whether it is marital or separate/non-marital property, the following questions are generally considered:
1. Is the trust revocable or irrevocable?
2. Who (if anyone) is vested the power of appointment?
3. Who are the beneficiaries of the trust?
4. How and to whom does the trust provide for distributions?
5. Is the trust a discretionary trust?
6. Is the trust a support trust?
7. Is the trust a non-discretionary trust?
8. Does the trust provide for both non-discretionary and discretionary distributions?
In terms of jurisdictional differences, some states have a broad view on whether a beneficiary’s interests constitutes property no matter whether such an interest is possessory, vested or contingent. Other states require that a spouse have a present right to receive the trust assets for a spouse’s interests to be considered acquired property. Meanwhile, other states have adopted a more flexible approach based upon an examination of the type of interest held by the beneficiary spouse in the trust.
b. Income Trusts and Remainder of Interests
An income interest in a trust is a provision which grants the beneficiary the right to receive periodic payments during the lifetime of the trust. Income earned from trusts are generally not considered property because these income earned via trusts cannot be assigned (one to whom property rights are transferred by another) or conveyed to another person.
(1) Property acquired by gift, bequest, devise, or descent;
(2) Property acquired in exchange for property acquired prior to the marriage or in exchange for property acquired by gift, bequest, devise, or descent;
(3) Property acquired by a spouse after a decree of legal separation;
(4) Property excluded by valid written agreement of the parties; and
(5) The increase in value of property acquired prior to the marriage or pursuant to subdivisions (1) to (4) of this subdivision, unless marital assets including labor, have contributed to such increases and then only to the extent of such contributions. (Emphasis added).
[C]onsider client whose revocable trust provides that upon client’s death all assets will be distributed outright to client’s children in equal shares. If each child receives $100,000, then that $100,000 is non-marital property as property acquired by bequest. If child invests the $100,000 in stock that pays a $1,000 dividend, the $1,000 is marital property. If child purchases a home with $100,000 and child’s spouse spends weekends fixing it up to be resold, then the appreciation in the value of the home may be marital property as marital labor contributed to the increase.
There are many cases out there in various jurisdictions that are helpful on this topic. For example, in Holte v. Holte , during the marriage, husband’s parents established an irrevocable trust and assigned to it mineral rights with a one quarter interest to him. After filing for divorce, the trial court eventually granted his wife a one-half future interest in his trust income. Husband appealed and the North Dakota Supreme Court ultimately upheld the trial court’s decision, agreeing that a present valuation of the trust income was too speculative to value. Generally, marital property is valued as of the date of trial, rather than the date of distribution. However, in certain circumstances, a property’s value at trial may be too speculative to determine. Although at trial the husband had a fixed one-fourth interest in “all royalties and other income” from the trust, the value of his interest, which is based on mineral production levels, mineral values, and other factors, will fluctuate.
In another example, Byrd v. Byrd, the wife appealed the trial court’s decision in classifying her husband’s one-third interest in the trust as his separate property. The Mississippi Supreme Court affirmed, concluding that the husband’s one-third interest is his separate property. The court defined “marital assets” as assets accumulated or acquired during marriage, excluding assets attributable to one party’s separate estate prior to or outside marriage. Although proceeds from the trust might have been used to purchase assets, which became marital property, at no time did any assets, proceeds, or money go into the trust from the marriage.
In regards to a revocable trust, if a child takes $10,000, which was received from client’s revocable trust and puts it in a brokerage account containing money earned during marriage, then the inheritance has “commingled with marital property.” In order to avoid such problems, a lawyer should be cautious when drafting mandatory or discretionary interests in a trust.
There are also many other notable decisions relative to this topic from various
jurisdictions. For example, in Solomon v. Solomon, the Pennsylvania Supreme Court held that only an increase in value in property actually acquired can be deemed marital property. In these instances, appreciation is to be calculated only to the degree to which the property exceeded its value the time of acquisition. However, if a beneficiary’s interest does not rise to the level of a property interest in the first place, there can be no argument that the asset is subject to division in a divorce or that the appreciation is martial property.
Likewise, other states also seem to focus on whether a beneficiary spouse has a present and absolute right to receive the trust assets. For example, in Mey v. Mey, the New Jersey Supreme Court held that a beneficiary spouse’s interest in a trust does not constitute property that is legally and beneficially acquired, unless the beneficiary has acquired “unimpaired control and totally free use and enjoyment” of the trust assets.
In Friebel v. Friebel, the Wisconsin Court of Appeals on a similar note held that a beneficiary spouse does not acquire an interest in a trust during the marriage, unless she has a right to receive the corpus of the trust. Similarly, in Lipsey v. Lipsey, the Texas Court of Appeals held that a beneficiary spouse does not acquire an asset unless she has a right to compel distributions.
A beneficiary’s interest in a trust that is subject to the trustee’s discretion does not constitute an interest in property even if the discretion is expressed in the form of a standard of distribution or the beneficiary is then serving as a trustee or co-trustee. A creditor or other claimant may not attach present or future distributions from such an interest or right, obtain an order from a court forcing the judicial sale of the interest or compelling the trustee to make distributions, or reach the interest or right by any other means even if the trustee has abused the trustee’s discretion.
Furthermore, this statute provides that if the interest in a trust does not constitute a mandatory distribution, then “a beneficiary’s interest in a trust is subject to the trustee’s discretion.” Given this definition, an income earned via beneficiary’s discretionary interest is not property because this earned income is “acquired by gift or bequest.” In sum, “if all distributions are subject to the trustee’s discretion, then neither accumulated nor distributed income will be marital property.” However, any future income earned on the beneficiary’s assets will be marital. For example:
Consider the client whose revocable trust provides that upon client’s death all assets are left in trust for client’s child, and the trust is funded with $100,000. The terms of the trust provide that the trustee may distribute the income and principal to child for health, maintenance and education, for child’s entire lifetime. If the trustee invests the $100,000 in stock that pays a $1,000 dividend, the $1,000 is non-marital property, notwithstanding whether the $1,000 is retained in the trust or distributed outright to child. “Health, maintenance, and education” is a discretionary standard, so the beneficiary has no property interest for divorce purposes. If the trustee distributes the $1,000 to the children outright, then the $1,000 is non-marital property, as property acquired by gift or bequest. However, if child invests the $1,000 in a bank account that earns $50 of interest, then the $50 will be marital property.
a distribution of income or principal which the trustee is required to make to a beneficiary under the terms of the trust, including a distribution upon termination of the trust. The term does not include a distribution subject to the exercise of the trustee’s discretion even if (1) the discretion is expressed in the form of a standard of distribution, or (2) the terms of the trust authorizing a distribution couple language of discretion with language of direction.
Unlike a trustee’s discretionary distribution, in Missouri, mandatory distributions are not treated in a similar fashion. There are two cases that concern with the mandatory distribution trusts: (1) Charles Moore v. Melanie Moore; and (2) Linda Moore v. Jaclyn Moore. In Charles Moore, the issue presented to the Missouri Court of Appeals was whether the income not distributed by the trust categorized as marital property. The Court held that this undistributed income was martial property. The Court said:
[H]usband had the right to terminate his trust when he attained age 35. This court holds husband constructively received the trust assets at that time. The trial court erred in not classifying the income the trust generated from that date until the date of the dissolution of the parties’ marriage as marital property.
Furthermore, the Court concluded that any income received from non-marital property, after marriage, is considered marital property in Missouri. This analysis was adopted by other jurisdictions (Pennsylvania and Texas) and persuaded the Missouri Court of Appeals to utilize similar rationale when deciding whether property is marital or non-marital.
In Linda Moore, the Western District of the Missouri Court of Appeals held that “trust income which wife received as a result of corporation paying excess distributions to trusts was marital property.” The Court treated this income as income earned on non-marital property. Furthermore, the Court said:
Trust income which wife received as a result of corporation paying excess distributions to trusts was marital property; wife, as sole trustee and sole beneficiary of each trust, held both equitable and legal title, excess distributions paid to each trust were in turn paid by wife, as trustee, to herself as beneficiary, wife reported the income on her tax returns, wife’s receipt of the excess distributions payable from the trust was actual rather than constructive, and trust agreements established that her right to the income from the distributions was vested, absolute, and irrevocable.
Other states seem to focus as well whether a trust is discretionary or non-discretionary. For example, in In Re Marriage of Balanson, the beneficiary was to receive the remainder interest subject only to her survival. In other words, she would receive the trust assets provided she did not die before her father. In this case, the Colorado Supreme Court held that the beneficiary’s spouse’s interest in a trust does not need to be subject to her present enjoyment to constitute marital property provided that the beneficiary had an enforceable contractual right to receive the trust assets in the future. The Court concluded that remainder interests are distinguishable from discretionary trusts in that “the value of such interests may be uncertain at the time of dissolution of marriage, they nonetheless constitute property because they are certain, fixed interests subject only to the condition of survivorship.”
In the Massachusetts Supreme Court, a similar decision was reached in the case of Lauricella v. Lauricella. In Lauricella, the beneficiary’s spouse had an interest in a trust subject to divestment only if husband did not survive until the trust terminated according to its terms. Given husband’s young age, the court concluded that the “likelihood is he will survive to receive his share…” Thus, the Massachusetts Supreme Court concluded that the fact that the valuation might be difficult, husband’s interest was a divisible asset. However, in a later case, D.L. v. G.L., the Massachusetts Supreme Court engaged in further analysis on this topic indicating that trust documents should be examined closely in cases to determine “whether a party’s interest is too remote or speculative to be so included.”
RSMo §456.5-508. Creditor cannot reach trust property or beneficial interests of beneficiary or other person holding special power of appointment or testamentary general power of appointment -definitions. 2014