Are Trusts Considered Marital Property In Divorce?

Parties going through a divorce often wonder how their property will be divided between themselves and their soon-to-be ex-spouse. Colorado is an equitable distribution state which means courts will attempt to divide marital property, including both assets and debts, fairly, but not necessarily equally. C.R.S. 14-10-113 provides guidance on the process and considerations courts use to determine what is a fair and equitable division of property in your case.

When determining what property is divisible in a divorce, a court must first decide whether an interest can be characterized as “property”, and then whether the property is separate or marital. Martial property will be divided amongst the parties equitably while separate property will remain separate and cannot be divided by the courts. “Separate property” is: (a) Property acquired prior to the marriage; (b) Property acquired as a gift or as an inheritance; (c) Property excluded by valid agreement of the parties; (d) Property acquired by a spouse after a decree of legal separation; and (e) Property acquired with separate property. “Marital property” is all non-separate property acquired by either spouse after the marriage.

For example, if Wife had $50,000 in her 401(k) account prior to her marriage, but the 401(k) is worth $100,000 on the day of the divorce, then the initial $50,000 would be Wife’s separate property and the court would not have the authority to divide the original $50,000 between Husband and Wife. The remaining $50,000, however, which represents the increase in value accrued during the marriage, would be considered marital property and would be divided “equitably” between the parties.

Before a court will attempt to characterize property as “marital” or “separate” it must first determine whether the interest in question is even “property” at all. In divorce proceedings, courts define “property” as items that have an exchangeable value which makes up a spouse’s wealth or estate. Courts consider a number of factors when determining whether an interest constitutes “property” including whether it can be sold or transferred and whether it terminates on the death of the owner. Enforceable contractual rights constitute “property” while interests that are speculative are considered expectancies and will not be classified as “property”.

One particularly complex issue of property division in a divorce is determining whether a spouse’s interest in an irrevocable trust amounts to a property interest that is eligible to be divided equitably. In determining whether a property interest exists or not, Colorado courts focus on whether the beneficiary spouse has a contractual right to enforce payment of trust funds.

In the case of discretionary trusts, where the trustee has absolute discretion as to how much, if any, of the trusts’ funds are distributed, and where the beneficiary spouse does not hold a remainder interest in the corpus (assets or property) of the trust, then the beneficiary spouse has no contractual or enforceable right to either the income or principal of the trust. Therefore, the beneficiary spouse’s interest in the trust will not likely be considered property subject to equitable division and will remain untouched by the court.

If you have any questions or concerns regarding a trust and divorce, please contact us here at Divorce Matters.