Colorado Divorce: Does My Spouse Have Any Claim to My Family Trust?
Whether your spouse has any right to the assets of a trust your family created in the event of divorce is a complex question.
First you must determine whether your interest in the trust is even considered a property interest, and that issue is quagmire of case law and statutes exacerbated by the many different types of trusts.
Assuming your interest in the trust is considered a property interest, then you need to know if it constitutes marital or separate property.
- Marital property is generally any property acquired during the marriage with a few noteworthy exceptions. Marital property is subject to distribution in divorce.
- Separate property is essentially the property you owned prior to the marriage plus gifts you received during the marriage. Separate property is not subject to distribution in divorce, but the appreciation of separate property which occurs during the marriage is considered marital property. Separate property can be converted into marital property during the marriage in some cases.
The law of trusts involves a language all its own, so a brief vocabulary lesson may be helpful.
- The trustor (also called settlor or grantor) is the person who deposits assets into the trust
- These assets comprise the principal (also know as the corpus)
- The trustee manages the trust
- The beneficiaries receive disbursements of trust assets from the trustee
Once created, a trust typically earns interest which can be distributed to income beneficiaries or reinvested into the trust, and when the trust expires whatever assets still exist are distributed to the remainder beneficiaries. A beneficiary's interest may be described as contingent where their right to receive trust assets is dependent upon the occurrence of some event, or vested when no such contingency exists. A trust is designated discretionary where the trustee has authority to decide whether or not to dispense trust assets to a beneficiary. Finally, a trust can be revocable or irrevocable indicating whether the trust may be modified or terminated before it expires.
An interest in a trust is considered a property interest only if the beneficiary has an enforceable right to receive some benefit from the trust. Whether or not a person has an enforceable right can be complex and depends highly on the terms of the trust. Generally, this occurs when the beneficiary has a “guaranteed” interest such as a vested remainder in an irrevocable trust or an income beneficiary of a nondiscretionary trust.
Nevertheless, the interest of an income beneficiary of a nondiscretionary trust will be deemed separate property if the trustee has discretion to allocate earnings to principal or income. In addition, income from a trust received during the marriage could be deemed a property interest is considered marital property even though the trust itself may be considered separate property.
Conversely, Colorado Courts have deemed vested and contingent beneficiary interests in revocable trust corpuses to mere expectancies. If an interest in a trust is not deemed to be a property interest, then income payments received during the marriage could be considered gifts which constitute separate property. Moreover, the corpus of a discretionary trust is not considered a property interest of an income beneficiary, so any increase in the corpus during the marriage is not marital property.
Colorado does not recognize self-settled trusts as legitimately protecting the grantor from creditors. As such, domestic asset protection trusts formed in other states by may not protect assets from a dissolution of marriage action here in Colorado.
Seeking Professional Advice
It is best to seek the advice of an attorney experienced in working with family trusts to ascertain whether a specific trust is subject to property distribution during divorce. If you have questions about trusts and divorce, call The Harris Law Firm to speak personally with an attorney.