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Trusts in Colorado Springs Divorce

Trusts in Colorado Springs Divorce

Are you involved in a high asset divorce or family law case involving trusts? You could consult with a high asset divorce attorney who understands trusts.

Trusts in Colorado Divorce

Trusts are an asset to be considered and potentially divided in Colorado dissolution AKA divorce. Common reasons for transferring assets to a trust are estate planning, income and estate tax avoidance, charity, creditor protection, beneficiary incapacity, and concerns about a beneficiary misutilizing funds if given outright. The person who creates the trust is called the “Settlor” or “Grantor.”

A common trust scenario is when one or the other spouse is a beneficiary of a trust created by an extended family member, such as a parent or grandparent. These are third-party settlor trusts as third parties have created the trusts. In third-party settler matters, it is important to determine what type of interest a spouse may have in the trust and whether that interest is revocable or irrevocable. In re Marriage of Balanson, 25 P.2d 28, 41-42 (Colo. 2001).

In general, if the trust interest is irrevocable and the spouse is guaranteed distributions, then there is a marital interest in the appreciation of the trust during the marriage. If distributions are discretionary, then there is no property interest in the trust. In this scenario, the spouse's interest is merely an expectancy. In re Marriage of Rosenblum, 602 P.2d 892 (Colo. App. 1979). As with all property, a determination has to be made as to whether the trust is separate property, marital property or both. Balanson, 25 P.2d at 41-42.

Types of Trusts

A trust is an instrument that holds property for the benefit of one or more beneficiaries. Trusts are revocable or irrevocable, meaning the interest can be changed if revocable, or can not be changed if irrevocable. When someone places assets in an irrevocable trust, they transfer

title and ownership of the assets to the trust under the care of the trustee. The trustee administers the trust and distributes income and/or assets from the trust. Once property is transferred to an irrevocable trust like this, it no longer belongs to the Settlor and is no longer part of the Settlor’s estate. An irrevocable trust can not be divided, however a spouse can be compensated for his or her equity interest in the trust in other ways.

Spouses may have engaged in their own estate planning during marriage creating trusts for the benefit of their children, grandchildren, or even each other. Generally only one

spouse will be the Settlor of the trust. If the spouses agree that a trust is for children, then they may agree that it is not an asset to be divided at dissolution between themselves. However, there are also less common, self-settled trusts, created by one or both spouses during the marriage. A self-settled trust is a trust created by the Settlor usually for the

benefit of the Settlor. Sometimes there are also other beneficiaries in a self-settled trust as well.

There are many considerations upon dissolution with regards to self-settled trusts. For example:

  • How many parties are a beneficiary to the trust?
  • Is the trust revocable or irrevocable?
  • How was the trust funded?
  • Does Colorado have jurisdiction over the trust?
Marital and Separate Property

Under the Colorado Uniform Dissolution of Marriage Act, property of married couples upon dissolution is characterized as either “separate” or “marital”. Upon dissolution, marital funds and assets are treated differently than those of unmarried people, although the concepts of separate property and marital property arise only when filing for dissolution or legal separation. Until that time, property rights are governed by title. Love v. Olson, 645 P.2d 861, 863 (Colo. App. 1982). During the marriage, absent filing for dissolution or legal separation, the parties can distribute their separate property as they wish.

Marital vesting in the increase in the value of separate property during the marriage occurs at the time of filing for dissolution. United States v. 9844 South Titan Court, 75 F.3d 1470, 1476-77 (10th Cir. 1996) However, a court can look back six months to one year generally to determine whether assets were disposed of in anticipation of filing for dissolution. If the Court determines that assets were dissipated in anticipation of dissolution, the equity may be credited to the spouse disposing of the asset as though it were marital property being divided upon dissolution. Martinez v. Gutierrez-Martinez, 77 P.3d 827, 830 (Colo. App.

2003). Dissipation of assets applies to a party transfer of assets to a trust, however, there also must be an intention to deprive the other spouse of the assets during the course of a dissolution. In re Marriage of Kaladic, 589 P.2d 502 (Colo. App. 1978).

Separate property is property acquired prior to the marriage, by gift or inheritance or property acquired in exchange for property owned prior to marriage. C.R.S. §14-10-113(2). Marital property is property acquired during a marriage as well as the increase in value to separate property during the marriage. Income from separate property received during the marriage is also marital property. C.R.S. §14-10-113(2) and (4). Therefore, separate property almost always gains some marital value during the marriage due to appreciation in value. The value on the date of marriage is the separate property value, and the appreciation after the date of marriage becomes marital property. Gifts from third parties are separate property. C.R.S. §14-10-113(2)(a). However, gifts from one spouse to another are presumed to be marital property unless shown otherwise. C.R.S. §14-10-113(7)(a).

Economic Circumstance

Nevertheless, even if a trust interest is not marital property the trust can potentially be an economic circumstance of relevance to marital property distribution, though the interest itself can not be divided. In re Marriage of Pooley, 996 P.2d 230 (Colo. App. 1999). Also trust distributions during the marriage are considered to be marital income, thus relevant for family support purposes. C.R.S. §14-10-115(5)(a)(I)(L).

Options for Trusts Upon Dissolution

There are various options for handling trusts in dissolution. One option is that the spouse not holding the trust interest with marital equity receive an allocation of other assets resulting in equitable distribution. This works well if there are sufficient assets to allocate in this manner. A Court could also reserve jurisdiction until value is distributed from the trust and distribute equitably at that time. This course of action may be less desirable as it keeps the parties tied together and the proceedings pending. It does not offer the same finality, however may be the only method to ensure an equitable distribution.

Turning Knowledge Into Opportunity in Colorado Springs

A knowledgeable and experienced high asset divorce and family law attorney can guide you through the application of trusts in Colorado Springs divorce and family law matters. Sabra Janko from Janko Family Law Solutions has more than 20 years of legal experience and guides you through the difficult terrain of Colorado Springs divorce and family law. Contact us at 719-344-5523 for a free 30-minute informational consultation or complete our online form.

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