As part of any Colorado divorce, parties will need to identify and value any marital property so it can be fairly divided. A spouse’s interest in a trust can be a form of property. Depending on the nature of the trust, when it was created, and to what extent the trust benefits you, your spouse could have a claim to the trust during the divorce.
The law surrounding trusts is complex. Depending on the size and value of your trust, it may be a good idea to consider consulting not only a family law attorney but also an attorney who specializes in trusts and estates. You should always seek legal advice from an attorney regarding your specific circumstances prior to making any decisions or entering any agreements related to your divorce.
Is a Trust Marital or Separate Property?
When analyzing a trust in divorce, an essential question to be answered is whether the trust is marital or separate property.
Part of your trust may be marital property. Marital property is subject to equitable distribution or division in a divorce. This means that your spouse could be entitled to part of the trust’s value. In contrast, all, or part, of your trust may be separate property. Separate property is not subject to division in a divorce.
Many assets though, including trusts, have both marital and separate components. By way of example, you may have owned an asset in your name alone prior to your marriage. This asset was clearly your separate property when you entered the marriage. However, if you still own this asset today, any appreciation in value that occurred during your marriage is likely marital. As part of your divorce, you will want to determine the separate property value of your asset to ensure that it is set aside to you alone and not divided with your spouse. This concept applies not only to trusts but all property in a divorce.
Trust Basics
There are many different types of trusts. Even trusts of the same type can include very different provisions. As such, you and your attorney will need to carefully review the trust, also known as the trust instrument. The trust instrument will describe, among other things, the assets held by the trust and when and how those assets will be distributed.
There are different parties or “players” in a trust. For example, a trustee is the person designated to manage the trust. The trustee may or may not receive any compensation for administering the trust. The beneficiary is the person who benefits from the trust. If you (or your spouse) are named to benefit from the trust, you will need to understand when, and under what circumstances, this benefit will be received. You will also need to know whether you (or your spouse) are entitled to receive assets held by the trust, or, if you are entitled to receive only the income earned from those assets.
The type of trust may, by definition, determine whether your spouse has a property interest in the trust. For example, Colorado law currently holds that a revocable trust established by a third party for your benefit is not a property interest in divorce. This is because the beneficiary’s right to receive his or her interest in the trust is a “mere expectancy.” The trust could be revoked or changed at any time and this would be out of the beneficiary’s control.
Provisions within the trust document should also clarify whether you have a mandatory or discretionary interest in the trust. These specific terms may not be used in the trust instrument and you will need to read the trust in its entirety to determine this. If your interest in the trust is discretionary, this usually means that you have no enforceable right to the trust. Your right to benefit from the trust could be contingent upon the acts and decisions of a third party. In contrast, if the trust provides that you have a mandatory right to receive trust distributions, this is likely a property interest that will be subject to valuation and division in your divorce.
Considerations
Even if your trust—or your spouse’s trust—is not a marital property interest, the existence of the trust could still be considered as an economic circumstance when determining how to divide the marital estate. This means that a court can look at each party’s financial circumstances when dividing the rest of the property at issue. The Court could potentially give one spouse more (or less) property in light of the trust. Again, due to the complexity of trusts, it is important that you and your attorney read the trust instrument and understand how you or your spouse benefit from the trust before entering any final agreements in your case.
Valuation
If it is determined that the trust is a property interest in your divorce, you may need to have the trust valued. As with other aspects of your divorce, it may be necessary to employ an expert to conduct this valuation to ensure that an accurate value is obtained and that you are protected.
If you have questions related to your trust and divorce, please contact our firm to schedule a consultation with one of our qualified attorneys.