"'When I use a word,' Humpty Dumpty said, in rather a scornful tone, 'it means just what I choose it to mean — neither more nor less.' 'The question is,' said Alice, 'whether you can make words mean so many different things.' 'The question is,' said Humpty Dumpty, 'which is to be master — that's all.' " Lewis Carroll - Through the Looking Glass
Matrimonial lawyers in common law states are not strangers to the concept of "equitable division" but they may find themselves perplexed when like Alice, they find the words used to mean so many different things and this may particularly be the case when they find the words applied to a party's interest in a trust. "Equitable division" may mean dividing marital property, whatever that may be, in something other than a 50/50 split. It may also mean going beyond marital property and awarding some part of separate property of one party to the other party. It may also mean going beyond outright ownership of property and into the beneficial interest that a party may have in a trust set up by others, or the appreciation that occurs in such trust. It may also mean that if the interest of the trust beneficiary cannot be invaded for the other party that its value will be extracted from other assets of the beneficiary party. Classic trust law concepts frame the rights and interests of beneficiaries of trusts and the powers and duties of trustees. However, divorce courts tend to look upon trust law concepts as fusty leftovers from the past that are to be cast aside when the Court looks to doing substantial justice between the parties. There are 40 states that have common law based rules. By some account, roughly 20 have some form of expanded marital property rules which would encompass not only traditional jointly held property but also property acquired during marriage as well as other property. For purposes of this discussion, we will deal with the laws of Colorado, Michigan, and Massachusetts as being fairly representative of the variations and approaches.
The Colorado Rules. Under the Colorado equitable division of property rule found at CRS §14-10-113 the relevant factors include: (a) The contribution of each spouse to the acquisition of the marital property, including the contribution of a spouse as homemaker;(b) The value of the property set apart to each spouse;(c) The economic circumstances of each spouse at the time the division of property is to become effective, and (d) Any increases or decreases in the value of the separate property of the spouse during the marriage or the depletion of the separate property for marital purposes. “Marital property” means all property acquired by either spouse subsequent to the marriage except property acquired by gift, bequest, devise, or descent; and property acquired in exchange for property acquired prior to the marriage or in exchange for property acquired by gift, bequest, devise, or descent. However an asset of a spouse acquired prior to the marriage shall be considered as marital property to the extent that its present value exceeds its value at the time of the marriage or at the time of acquisition if acquired after the marriage. Marital property does not include any interest a party may have as an heir at law of a living person or any interest under any donative third party instrument which is amendable or revocable, including wills, revocable trusts, life insurance, and retirement benefit instruments, nor shall any such interests be considered as an economic circumstance or other factor.
In the decision of the Colorado Supreme Court In re the Marriage of Balanson, 25 P3rd 28 (Colo. 2001), the Trial Court found that the wife's parents had established, during her marriage, a revocable trust which became irrevocable upon the death of her mother. During the father's lifetime, the father, as trustee, was to pay all income to himself and in his discretion he could invade corpus for his support, care, and maintenance. On the father's death, the wife and her brother are to share equally in one of the sub-trusts. The parties disputed whether the wife's share of this sub-trust constituted marital property or merely an expectancy. The Trial Court concluded that the wife's interest in the sub-trust was "property" because it was a vested remainder subject to divestment only if she fails to survive her father. The Trial Court was not concerned that the father could exhaust the trust for his own benefit but the Appellate Court ruled that the wife's interest was a mere expectancy and not a property interest. However, the Appellate Court concluded further that the Trial Court's error was harmless because the Trial Court considered the trust also as "an economic circumstance" of the wife in dividing the marital property and therefore counted it as part of her share. The Colorado Supreme Court disagreed with the Appellate Court and held that the wife's interest in the trust was by law a property interest.
The Colorado Supreme Court compared the wife's interest with two earlier decisions: In re Question Submitted by the United States Court of Appeals for the Tenth Circuit, 553 P2nd 382 (Colo. 1976) and In Re: Marriage of Jones, 812 P2nd 1152 (Colo. 1991). In In re Question Submitted, a federal tax lien question turned on whether or not the taxpayer had a property interest in a trust susceptible of being liened. In that case, the taxpayer beneficiary had a remainder interest in a trust created by his father. His mother was to receive income for life and discretionary payments of principal for her care, support, and maintenance. On the mother's death, the trust principal and accrued income was to be held for the son and he was to receive $1,000 per month for life or until the fund was exhausted. The Colorado Supreme Court found that the "fixed right to future enjoyment gives rise to a vested interest in property, even if that interest is subject to complete divestment or defeasance." In Jones the wife was the beneficiary of a Testamentary Trust created in the Will of her mother. The Trustees had uncontrolled discretion to distribute income and principal to the wife's father, the wife, or her descendants for health, welfare, comfort, support, maintenance, and education. On the death of the survivor of the father and the wife, the remaining trust estate was to be distributed to the wife's descendants, if any, otherwise to the mother's heirs. The Court concluded that since the interest of the wife was completely discretionary during her lifetime, she had no contractual or enforceable right to income or principal from the Trust and to the extent that she did receive income from the trust, it was more akin to being a "gift" and therefore not "marital property."
Perhaps the real difference between the facts of In re Question case and the Jones case is that the beneficiary in the Question case gets an annuity interest in the remainder of whatever is left after the father dies and loses only if he fails to survive his father and the father uses it up during his lifetime. In Jones, the wife's interest in taking principal was only as one of a number of potential distributees and the Court emphasized that the Trustee's had uncontrolled discretion. She never had the right to a mandatory distribution or even priority payment of principal or income.
In Balanson the beneficiary wife's interest was a 1/2 remainder interest in a Trust over which the wife's father was the Trustee and the beneficiary of mandatory interest payments and discretionary principal payments during his lifetime. The Colorado Supreme Court found that her interest in the Trust was vested, although subject to divestment by her death before her father or exhaustion of the Trust before his death. As such, her interest in the Trust was deemed to be "property." Under Colorado law all property acquired during the marriage is presumed to be marital property with several exceptions. One of which exception is "property acquired by gift, bequest, devise, or descent." Thus, the wife's interest in the Trust was determined to be her separate property however, the appreciation on it during the course of the marriage does constitute marital property, subject to division.
Thus, in Colorado, the key issue may not be whether or not the interest in the Trust is marital or separate property, but whether or not it is even property and if so, it may likely be characterized as a gift and therefore separate property and therefore only the appreciation on it during the course of the marriage constitutes marital property subject to the allocation of marital property between the parties. If the interest of the beneficiary in the Trust is one in which the beneficiary's only right is to be considered for the exercise of unfettered discretion by the Trustee and the beneficiary is one among several possible recipients, then the beneficiary's interest may be nothing more than an expectancy and when the beneficiary does receive it, it is likely to be considered as a gift, as in Jones and there is no underlying interest whose appreciation during marriage can be converted to marital property.
The Michigan Rules. In Michigan the statutory authority for the Court making property division is located in three statutory Sections: MCL §552.19 which provides that the Court may “restore” to either party the whole or parts of property of either party as it shall deem is just and reasonable. MCL §552.23, which provides that the Court may award to the party needing it for spousal or child support property of the opposing party “after considering the ability of either party to pay and the character and situation of the parties and all other circumstances of the case”. MCL §552.401 which provides that the Court may award to a party all or a portion of property owned by his or her spouse, that appears to the court to be equitable under all the circumstances of the case, if it appears that the party contributed to the acquisition, improvement, or accumulation of the property.
The Michigan Supreme Court dealt with inheritances in Dart v Dart, 460 MI 573, 595 NW2nd 82, 1999 Mich Lexis 1898, which involved substantial wealth [$500,000,000 ] acquired by the husband from his father's estate in England, some of which was in trust. The Court was required to deal with the question of whether or not to give comity to the English divorce Court Judgment dividing the property between the parties. The Michigan Court found that factors to be used in reaching a division of the marital property in England under its statute are very similar to those in Michigan as set forth in the Michigan case of Sparks v Sparks, 490 MI 141, 159-160, 485 NW2nd 893 (1992), to-wit:"(1) duration of the marriage, (2) contributions of the parties to the marital estate, (3) age of the parties, (4) health of the parties, (5) life status of the parties, (6) necessities and circumstances of the parties, (7) earning abilities of the parties, (8) past relations and conduct of the parties, and (9) general principals of equity."
While English Courts observe what is called the "Preston Ceiling" to place a cap on cases involving large assets that are marital assets, here the English Court found that the inheritance was not marital property subject to a division with or without a cap but the husband's separate property and not attributable to her efforts or his, for that matter. His separate property was invaded to meet her needs (that is, $14,500,000 worth of needs). The wife claimed that the English Court was unduly influenced by the Preston Ceiling even though it didn't apply it. The Michigan Supreme Court did not buy that argument citing the decision of the English Trial Court as follows: " If Mr. and Mrs. Dart had started with nothing and in a back street somewhere in Detroit they had started making plastic objects and over the period of 20 or 30 years they had ended up with an empire worth £1,000 million, I would see every reason for Mrs. Dart having half of it. Personally, I do not have any difficulty with that. Whether the English law permits it or not is another matter, but that is not this case."
Since the wife was a party to the English case and participated with counsel, the Michigan Supreme Court held that comity required enforcing the English Judgment and res judicata prevented her from relitigating the question in Michigan.
The real thrust of this case is that in Michigan, except to the extent of need, the non-inheriting spouse will not be treated as having a marital property interest in the other spouse's inherited property where the inheriting party's interest in the inheritance exists independently of his or her workplace activities or the marriage partnership. This rule is followed in Powers v Powers, 2012 Mich App Lexis 1067 (2012), an unpublished opinion in which the Court held that assets earned by a spouse during the marriage does not include "passive" appreciation in value during the course of the marriage of what was initially a separate asset, and the owner did nothing to bring about such appreciation except letting time pass. However, a court may award one spouse some of the other's separate property if the spouse needs it for suitable support and maintenance, or if one spouse has significantly assisted the other in the acquisition or growth of the other's separate asset.
Two other 2009 Michigan decisions (both unpublished) illustrate the degree of the Court's willingness to invade gifts/inheritances where the circumstances indicate that a party that is the non-beneficiary deserves an award. In Bowser v Bowser, 2009 Mich App Lexis 136 (2009) the parties were farmers. The farm was owned by a Family Limited Partnership owned by the husband's revocable Trust. 78% of the Family Limited Partnership had been acquired by the husband's Trust as a gift from his parents. The husband and wife worked on the farm doing what one expects from a farm family. The Trial Court treated the entire farm property as a marital asset despite the husband's claims that 78% was his separate property as being in his Trust. The Court of Appeals gave that argument short shrift citing the holding in Dart v Dart. Here, it is clear that both parties actively managed the farm, which was a fully operational business, first as a cow-milking operation and then for selling cash crops. The farm asset was actively managed and the proceeds were partly used for marital purposes. Tim Bowser focused on the trust and the farm funds, asserting that they remained separate property and were not co-mingled with marital property. However, it is clear from the record that the farm account, which was funded with proceeds from the farm's milking operation, cash crops, and rental income, was used not only to pay farm and property-related expenses, but also to pay propane, electricity, and car insurance bills for the family. Thus, the trial court did not err in concluding that the farm was not separate property. Notice that in Bowser, the Court did not merely add to the marital property the appreciation that 78% of the farm property experienced over the marriage from the gift to the Trust but the entire 78% of the farm property was treated as marital property subject to division. The other 22% was marital property as a result of other transactions.
In Haines v Haines, 2009 Mich Lexis 2568, Plaintiff husband's father was the owner of two grocery stores. Both parties started out in low level jobs in one store and then were transferred to another store where the defendant performed office duties and the plaintiff became the manager. The father sold the first store and converted the proceeds into an LLC which then held a variety of stocks. Plaintiff had a 27% interest in the LLC which the father controlled. The father also created an irrevocable Trust that he gifted to the husband. It was funded with a minority interest in the store in which the plaintiff and the defendant worked. The interest would be transferred to the plaintiff when he reached 55 "and in the meantime plaintiff had absolutely no rights or privileges therein." Plaintiff's father testified that the Trust was for "estate planning and too much too soon destroys the work ethic…I just didn't want to give him that kind of money." While the present value of the plaintiff's interest in the Trust and the LLC could be ascertained, the evidence showed that it was not possible to predict what, if anything, the Trust would be worth by the time the Plaintiff reached age 55. The Trial Court found neither the Trust nor the LLC were marital property but it decided…apparently sua sponte…to exercise its equitable power to invade the LLC in the amount of $250,000.00 based on the Defendant wife's needs. The wife argued that the LLC should have been considered a martial asset because either the plaintiff's interest was intended to belong to both parties or because of her efforts contributed to asset appreciation. The Court concluded that it was the father's management of the investments that accounted for the appreciation of the LLC assets and when she had worked at the first store, she was merely one of 100 employees. Defendant also argued that the Trust should be considered marital property. In ruling that it was not marital property, the Court of Appeals agreed with the Trial Court that it was not, even though the rights of the plaintiff were no doubt vested, in that he would receive the trust estate at age 55. The Court of Appeals affirmed the Trial Court's exclusion of the Trust from marital property on the grounds that the husband "would only theoretically receive any control or benefit in the Trust in 12 years, by which time the Trust might not be worth anything. The undisputed evidence was indeed that it was not even possible to predict what, if anything, the Trust would be worth when plaintiff finally received any functional rights thereto."
Recall that the sole asset of the Trust was a minority interest in a grocery store in a small Michigan town. The Court of Appeals noted that future assets can be included in the marital estate and distributed even if they will not be received until sometime after the divorce is finalized but the party seeking to include an asset in the marital estate bears the burden of proving a "reasonably ascertainable value." It appears that the Defendant should have presented a better set of proofs. It is not too far a stretch to suppose that an actuary or a forensic accountant with an appraiser could come up with some reasonable projection of what the business would be worth in 12 years, and what it was worth at the time of the creation could have been determined from the records of the LLC. At the very least, the wife should have had a shot at including the expected appreciation on the 27% of the store value in the marital property since her husband worked there as a manager and at least a part of its value would be attributable to his efforts. Thus, in Michigan, the rule as to "Equitable Division" appears to be that marital property is property which may be viewed as the product of the marital partnership to the extent that it can be quantified. Separate property is property which is acquired before the marriage by any means or after the marriage by gift or inheritance to the extent that it is kept separate. Separate property may generate marital property in the form of appreciation to the extent that the efforts of either or both spouses contribute to such appreciation or converted into marital property if it is actively managed and the proceeds used for marital purposes. Appreciation attributable to mere market forces where the assets are not actively managed by a spouse probably continues to be separate property.
The Massachusetts Kitchen Sink Approach. In Massachusetts under General Law Chapter 208, Section 34 essentially all property of the parties is assumed to be marital property subject to equitable division:"[T]he court may assign to either husband or wife all or any part of the estate of the other, including but not limited to, all vested and nonvested benefits, rights and funds accrued during the marriage and which shall include, but not be limited to, retirement benefits, military retirement benefits if qualified under and to the extent provided by federal law, pension, profit-sharing, annuity, deferred compensation and insurance. … The court may also consider the contribution of each of the parties in the acquisition, preservation or appreciation in value of their respective estates and the contribution of each of the parties as a homemaker to the family unit."
The words "estate of the other, including but not limited to, all vested, nonvested benefits, rights and funds accrued during the marriage” were held In Moriarity v Stone, 41 Mass App Ct 151, 1996, 668 NE2nd 1338, 1996 Mass App Lexis 777, to include the parties' retirement related benefits that accrued prior to marriage. In Massachusetts the leading case regarding trust interest inclusion in marital property and thus being susceptible of equitable division is Lauricella v Lauricella, 408 Mass 211, 565 NE2nd 436, 1991 Mass Lexis 46 (1991). Herein the Defendant husband was the beneficiary of a Trust created by his father. The principal asset was a duplex. The Defendant's sister was also a beneficiary. The Trust was to last for 21 years after the death of the father in 1986. During that time, the beneficiaries according to the Court, "have equitable interests," however the property is not subject to partition or distribution, and there is a spendthrift clause. The Trust could be amended by the unanimous action of the Trustees and the beneficiaries. The Trust could be terminated by the Trustee by the sale of the property and distribution of the net proceeds to the beneficiaries in equal shares. The Trial Court held that the defendant husband did not have a beneficial interest in the property sufficient to be considered marital property. The Trial Court further ruled that the Trust had nothing, per se, to do with the marriage, that the husband was neither Settlor nor Trustee, that the Trust could be amended and the husband could be eliminated as a beneficiary (albeit it would have taken his approval, but this was not noted in the decision). The Appellate Court concluded that the interest of the defendant husband was more than a mere expectancy and hence was part of the marital estate. The defendant husband had a presently enforceable right to use the Trust property for his benefit and he did so by using one of the units for his marital domicile. He could live there or rent it out and generate income. He had a vested right to receive the distribution of his share of the legal title to the property subject to divestment only if he didn't survive to the date of distribution. At the time of the decision, he was 26 years old and the likelihood is that he would survive to take final distribution of his share. The Court specifically ruled that the husband's interest is unlike a mere expectancy of the type that could have been held to be outside the divisible estate, citing cases including Davidson v Davison, 19 Mass App Ct 364 (1985), dealing with an anticipated inheritance from a living testator. The Trial Court in its memorandum made note of the fact that the Trust share was the only asset of any value in the marriage and that the plaintiff needed it financially. The questions of valuation of the interest of the husband and division were sent back to the Trial Court for determination.
Note that even if the facts were marginally different and the defendant husband's interest looked more like an expectancy, the Court could still consider the interest in the house as an "opportunity of each for future acquisition of capital assets and income" and it can be considered as a marital asset.
Thus, in Massachusetts, the beneficial interest in a trust may be kept out of the sink only if the party in question can make no claim to the underlying assets that rises to the dignity of being an interest in property From the foregoing we gather that as a matter of general principals: Equitable division of assets does not necessary mean equal division of assets. The Court may have to get its desired result by looking to non-Trust assets to make up for Trust assets that it cannot get at.Divorce Courts will not consider themselves bound by conventional Trust and Estates concepts of vested interests, or contingent interests when deciding when a divorce litigant has an interest in a Trust. If a jurisdiction differentiates between marital property and separate property, if the asset happens to be in a third party created Trust, the more likely the beneficiary-spouse is to end up with the asset by reason of having a remainder interest, the more likely the asset will be flagged for inclusion. In states like Massachusetts and others that follow it, the only way a Trust interest will not be included in the marital asset mix will be if the spouse has only a very remote chance of ever enjoying outright ownership or its equivalent. States differ on the degree which appreciation in a trust fund during the marriage will be included in marital property. Michigan does not include it unless the beneficiary participated in management of the Trust or the underlying asset. Colorado includes it irrespective of the degree of beneficiary involvement in management.
There is no dearth of materials available on this subject. Of particular interest for the breadth of its scope and details is an article entitled: "Third Party Trusts and Divorce: Is a Beneficiary's Interest Marital Property?" Jeffery N. Pennell, Esq. 2013/2014 South Palm Beach County Estate and Tax Roundtable series.
John A. Scott, John A. Scott, P.C. Traverse City, MI. July 6, 2015