Measuring Value in Trust Interests and Expert Witnesses on Trusts with Gerard Deffenbaugh, Esq. | Episode 112

Determining the value of an estate during divorce proceedings is incredibly complex, requiring experts to effectively and fairly evaluate such aspects. In the context of divorce, calculating interest from a trust can be particularly challenging. Today’s expert is Gerard Deffenbaugh, whose practice focuses on estate planning/administration, and trust administration. He often serves as the consulting expert in divorce cases where one of the parties has interest in a trust.

Gerard has also co-authored various articles on estate planning and trust interest for divorce proceedings in the Colorado Lawyer and is also involved in different legal education programs. Outside the office, he enjoys hiking, cooking, reading, and spending quality time with family and friends. 

In today’s show, we learn about the role of an estate planning attorney in divorce proceedings, how the opinion of an estate planner can impact a valuation, the different types of trusts that exists, the different contingencies that be can be triggered, how a revocable trust can change, how a discretionary trust works, and much more. 

Key Points From This Episode:

• The role of an estate planning attorney in divorce proceedings and why it is important.
• Aspects that need to be considered when determining interest from a trust.
• How the professional opinion of an estate planner impacts the valuation.
• What contingencies can affect an evaluation at different points in time.
• The basics of how a revocable trust works and how it can change.
• Whether or not a trust is regarded as property within estate planning.
• Some examples of how a power of appointment can be used for trusts.
• How power of appointment decisions can impact divorce agreements.
• We learn how a discretionary trust works and how this impacts divorce agreements.
• Other aspects of a discretionary trust concerning property interest.
• The economic circumstance with powers of appointment and discretionary interest in a trust.
• Trust income in the context of divorce.
• Gerard shares his professional opinion on the legal definition of economic circumstance.
• The different triggers and/or contingencies that exist to cater to different estate scenarios.
• Some scenarios where valuations can become challenging and uncertain to determine.

What is Divorce at Altitude?

Ryan Kalamaya and Amy Goscha provide tips and recommendations on issues related to divorce, separation, and co-parenting in Colorado. Ryan and Amy are the founding partners of an innovative and ambitious law firm, Kalamaya | Goscha, that pushes the boundaries to discover new frontiers in family law, personal injuries, and criminal defense in Colorado.

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DISCLAIMER: THE COMMENTARY AND OPINIONS ON THIS PODCAST IS FOR ENTERTAINMENT AND INFORMATIONAL PURPOSES AND NOT FOR THE PURPOSE OF PROVIDING LEGAL ADVICE. CONTACT AN ATTORNEY IN YOUR STATE OR AREA TO OBTAIN LEGAL ADVICE ON ANY OF THESE ISSUES.

Transcript

Ryan Kalamaya (4s):
I'm Ryan Kalamaya.

Amy Goscha (6s):
And I'm Amy gosha

Ryan Kalamaya (8s):
Welcome to the divorce at altitude, a podcast on Colorado family law.

Amy Goscha (13s):
The force is not easy. It really sucks. Trust me. I know besides being an experienced divorce attorney, I'm also a divorce client,

Ryan Kalamaya (21s):
Whether you are someone considering divorce or a fellow family law attorney listening for weekly tips and insight into topics related to divorce co-parenting and separation in Colorado. Welcome back to another episode of divorce at altitude. I am Ryan <inaudible>. We have previously touched on trust interests and how they're addressed in a cholera divorce. And one of the common themes in those various episodes is how progressive Colorado is on valuing trust interests. And specifically with marital property this week, we're going to be talking with an expert on trust interests in a color of divorce.

Ryan Kalamaya (1m 6s):
And when we're going to be joined by G Deffenbaugh, he is an estate planning attorney in Denver who frequently will consult and offer opinions on trust. And we're going to get into some pretty technical territory, such as a case balance and two, and why trust interests can be sliced and diced in a number of different ways. But let me tell you a little bit about Jeep he's practice is focused on the state planning estate administration and trust administration. He also serves, as I said before, as a consulting expert in divorce cases where one of the parties has an interest in a trust outside of the office, he enjoys hiking trails, experimenting in the kitchen, reading and spending quality time with his spouse, to kids and friends.

Ryan Kalamaya (1m 56s):
We do have some technical issues specifically with my audio recording, and we're hopeful that you can get past that and really kind of dive into what GE has to say, but without further do G welcome to the show.

Gerard Deffenbaugh (2m 13s):
Great Ryan, and I'm excited to have this conversation today.

Ryan Kalamaya (2m 16s):
Okay. G you, aren't a valuation expert. You are an estate planning attorney. So why does your opinion matter with respect to trust interests in a divorce?

Gerard Deffenbaugh (2m 33s):
Sure. And what one provide just kind of an overview and roadmap. So as we dive a little bit more into the details today, we have that to help guide us. The reason an interest in a trust can be important in the divorce context is it can affect the division of marital property. And that can be done a few different ways. First we're looking at whether or not this trust interest qualifies as property and specifically whether or not it's separate property. If it does qualify as separate property, then we need to look at that increase in value or that appreciation over the relevant time periods, because that does have a marital property component.

Gerard Deffenbaugh (3m 17s):
Even if it's not even if that trust interest is not property, it can still be an economic circumstance. And as you've touched on in previous podcasts, that economic circumstance is a relevant factor for the court when dividing the marital property. If we go through both of those and it's not property, it's not economic circumstance. Then at that point, you put the issue to rest and it's nothing.

Ryan Kalamaya (3m 42s):
So G with that particular situation in mind of Eric being a remainder interest holder in his father's trust, can you talk to me a little bit about what differences there could be with his father's irrevocable trust and how that could matter in divorce?

Gerard Deffenbaugh (4m 2s):
Correct. So balancing two dealt specifically with a remainder interest in an irrevocable trust. So pulling out the two main pieces there, remainder interest and irrevocable trust first, a remainder interest to try and translate it from the legal concepts to how it actually works is once a trigger, an event occurs and the trust is terminated. Anyone who's holding a remainder interest receives the remaining assets in the trust. So tying it back to the example that y'all use with both Eric and Melanie Wolfe, if one of them had a remainder interest in a trust, and they were the sole remainder beneficiary, when that trust terminated, they would receive all the remaining assets in the trust.

Gerard Deffenbaugh (4m 48s):
So that, that can be pretty significant just in terms of dollar amounts.

Ryan Kalamaya (4m 52s):
So G for listeners that may not understand if Eric Wolfe's father has a significant amount of money and he sets up a trust where Eric is the beneficiary, Eric has the remainder interest in his father's trust.

Gerard Deffenbaugh (5m 9s):
So the first piece is going to be, when are we going to start measuring any increase in value? So as a general rule, a someone who holds that remainder interest and is a divorcing spouse in this case, Eric, that trust interests would be considered separate property. And so first we need to look at when are we going to start measuring any increase in value, because that's going to have that marital property component with that first, if the trust is still ongoing, we're going to look at the later of the marriage date or when the trust was funded and that's settled by appellate Colorado law.

Gerard Deffenbaugh (5m 52s):
So that's a pretty straightforward issue. If the trust is still ongoing, there's some among experts on this issue of when are we going to start measuring that the first school of thought or the first approach is we're going to start measuring that increase in value until Eric actually gets the money. So the trust is terminated and fully distributed. And the rationale there is that those assets are now in Eric's pocket or his bank account. And so, you know, he can spend at will with them. And so there's a fundamental shift in the nature of that trust interest, because now he can write the check, he can buy whatever he wants with it. It's really unfettered control. The second approach is we recognize that Eric's still going to end up at the end of the day receiving these trust assets.

Gerard Deffenbaugh (6m 40s):
And so it's really going to be that starting date should really be focused in on the later of the marriage date or when the trust was funded. And until he gets that money in the bank, that's really just going to be a contingency, which is going to affect the valuation when you're looking at the marital property component. So it's first pegging that start date is critical because that's gonna be passed along to the valuation expert to start their calculations for increase in value, which is marital property.

Ryan Kalamaya (7m 12s):
Okay. So G an estate planning attorney, you're not denying valuation, but w how does your opinion matter for a valuation expert? And, you know, just as an example, we would have Eric six, who, you know, both of us know and work with, or Preston heifers, somebody that is in the valuation as CPA, that it really focuses on the value. We'll talk about the inner relationship, but why does your opinion matter G

Gerard Deffenbaugh (7m 43s):
Sure. And I'd break it down into three parts when we tie in the communication and interaction between a trust and estates expert and a valuation expert on this issue. So the first main piece that we need to answer is, do we have a property interest here if we don't then talking about any valuation over a period of time for increase in value, just doesn't make sense. So that that's the first ticket that needs to be punched. Is, is there a separate property interest? If so, then we continue on. And so once we answer that question, if the answer's yes, then at that point in time, we need to know what's a starting date. So, you know, some of these trusts can, you know, when they're set up, set up by older generations, either parents or grandparents, you know, they can be in existence for 30, 40, 50 years.

Gerard Deffenbaugh (8m 33s):
And so it makes a huge difference in terms of what data we're going to start measuring this increase in value. If we start later in time, that's going to be a smaller time span and conceivably would be a smaller increase in value

Ryan Kalamaya (8m 50s):
If just for a pooper, like if Eric Wolf, if his dad, if we want a 30 year period of which this trust is, for example, invested in the S and P 500, the, and stocks or, or bonds, or some sort of portfolio, the increase from 30 years is going to be significantly more than if it was invested five years ago. So that really, and then the valuation expert can, can calculate what that increase will bearing. But gee, your opinion as to it was property 20 years ago versus 30 years ago versus 10 years ago is, and it matters in terms of what triggering event or the language in that trust document.

Ryan Kalamaya (9m 38s):
Right?

Gerard Deffenbaugh (9m 39s):
Exactly. That that's a great way to tie it up on the second point in terms of communication.

Ryan Kalamaya (9m 44s):
Right? So the third point would be

Gerard Deffenbaugh (9m 46s):
That the third point would be what contingencies are going to affect this valuation. You know, when the valuation expert is calculating that increase in value, it's going to be subject to different contingencies at different points in time. So we also identify some of those contingencies and what's the relevant time period for those contingencies. If you think about it, just conceptually, the more contingencies you have, that's going to decrease what we're measuring, which is that increase in value. So, so that's another important piece.

Ryan Kalamaya (10m 18s):
And G for listeners that don't understand contingencies or what was involved in balance and to where there was an argument that future contingencies that resulted in the trust, interests being impossible to value. Can you tell our listeners a little bit about what it contingencies are and give us some examples and maybe explain balancing two?

Gerard Deffenbaugh (10m 45s):
Sure. So just kind of speaking generally, and maybe tying it back to the example of Eric Wolf in this case is usually a baseline contingency. We'll see, we'll see for someone who's going to be receiving everything that remainder beneficiary is they have to either live for a certain amount of time or they have to outlive an individual. Those are usually going to be different triggers of termination for a trust to say, okay, when Eric's dad actually passes away, that's the trigger. The trust will terminate and Aries can receive everything that's left. So the tie in there is the contingency is, you know, how old is Eric's dad?

Gerard Deffenbaugh (11m 26s):
How healthy is he? And the same analysis for Eric. We're looking at what's the likelihood of Eric surviving his dad in this context, because if he doesn't survive him, she's not going to receive that remainder interest, the remaining assets in the trust,

Ryan Kalamaya (11m 41s):
Right? We'll come back on this issue a little bit more later on, but you mentioned about property and whether or not a trust is even property to begin with. And in the episode with Kim and talk to her a little bit about Gorman and, and, you know, the, the statute date that Gorman was a case that said that irrevocable trust was a trust interest or property interests. And then, then the legislature came in and said, ah, no, not so fast, we're, we're going to correct that. So if haven't listened to the opposite, can you give us a little bit of, of kind of Lord of the land in terms of revokable trust and you know, also just with property interests and we'll talk about powers of appointment next, but just to set the ground work for where things stand on, revokable trust

Gerard Deffenbaugh (12m 28s):
Sure with revokable trust, the concept is the person who set up the trust that the set lore or the grant tour, those terms are used interchangeably. They can change that trust at will. So the example of Eric Wolf and his dad, if it's a revokable trust set up by Eric's dad, at any point during the lifetime of his dad, the dad can say, well, actually, Eric, I don't want you to get everything. You know, don't, don't like some of the choices you're making for whatever reason, or I just woke up and had an off Wednesday. I essentially don't want you to receive anything. When this trust expires, he can do that.

Gerard Deffenbaugh (13m 10s):
And Eric doesn't have any recourse against his dad for that. So a revokable trust can essentially be changed at will during the life of the person who set it up. And that that's the type of trust. That was an issue in Gorman. And once that came down, different sections of the bar, both trust and estates and family law said, whoa, whoa, whoa, let's pump the brakes a little bit here. You know, balancing two stands for the proposition of when we're dealing with irrevocable trust, okay. Gorman really shifted the landscape to also pick up revokable trust, which operate totally differently. And they said, no, no, no, we need to correct this.

Gerard Deffenbaugh (13m 51s):
And we're going to enact some new legislation. And so, as you already mentioned, the anti-government statute was the product of that. And the anti-German statute paraphrasing, it says when there is a third-party instrument. So think about a will or a trust in this case, as long as that's amenable or revokable any interests there under that instrument, aren't going to be property or an economic circumstance. So let's translate that to our example. So if Eric's dad has that revokable trust still, it doesn't matter that Eric's a named remainder beneficiary because that trust is fully revokable in that context.

Gerard Deffenbaugh (14m 36s):
As soon as Eric's father passes away, that trust becomes irrevocable and it's not subject to that same change on a whim sorta mechanism. And so in that example, when Eric's dad passes away, that's the triggering event that takes a revocable trust and turns it into an irrevocable trust.

Ryan Kalamaya (15m 1s):
Okay. So that's an, a circumstance where the revocable trust that the Eric's dad has is not a property interest. Let's talk about a different scenario where we're really focusing on the threshold issue of whether or not it's a property interest in to begin with. And so, you know, just a hypothetical that was related to a case that you and I had G where let's say Eric Wolf is there's an irrevocable trust. And Eric Wolf himself has the power of appointment over the trustee that he can control the trustee is, or, and so you wrote an article for the collar lawyers.

Ryan Kalamaya (15m 41s):
So tell me a little bit about powers of appointment and why that's unsettled. If someone's going through a divorce, listening to this, and they're like powers of appointment, what, what does it even mean? And why does it matter

Gerard Deffenbaugh (15m 53s):
To unpack that concept of powers of appointment a little more, we'll give a quick definition and then unpack why they're used and some examples. So a power of appointment is a personal power of disposition over trust assets, translating that into more plain English. It means whoever holds that power within certain boundaries can direct. Who's going to receive trust assets at what time. So that's a big deal. It's essentially changing the framework that the grand tour had when they set up the trust originally. So if someone's holding a power of appointment and they exercise it, then the people who thought were going to get Monday, yet as remainder beneficiaries may not get anything.

Gerard Deffenbaugh (16m 39s):
So tying it back into our example with a family of Eric Wolf, when Eric's dad, he has a tax problem, let's say, and he's trying to do some estate tax planning. And so during his lifetime, Eric's dad sets up an irrevocable trust. The reason that's done mechanically from an estate planning perspective is when a irrevocable trust is set up and funded, it's taking assets out of the grand tour's gross estate. The reason that's done is because of the estate tax, especially for high net worth families really starts to add up the rate applied to most assets is 40%.

Gerard Deffenbaugh (17m 20s):
So a lot of advanced planning for high net worth families involves how do we lower that number to reduce the estate tax burden when someone dies? So that's why Eric's dad may be doing something like this. He gets advice from his trust and estates attorney and says, let's set up this irrevocable trust here in your lifetime. And we're going to fund it with, to use round numbers, let's say $5 million. Okay. That $5 million is no longer part of the grossest state of Eric's father. So that's achieving his main mechanism, but he's like, well, I still want Eric to receive this money. And so at the end of the day, I'm going to name Eric, my remainder beneficiary.

Gerard Deffenbaugh (18m 4s):
And whatever's left in the trust. Once I die is going to pass to Eric. Now it can be a number of different triggering events. So I'm just picking one for purposes of an example. And so there, Eric would still be entitled to receive whatever balances in that trust when that triggering event occurs, when his father dies. Okay. If instead there is a power of appointment drafted into that trust, and let's say, Eric's uncle. So the grand tours brother holds that power of appointment. And the trust language specifically provides for a presently exercisable general power of appointment.

Gerard Deffenbaugh (18m 49s):
So that's very specific. That means Eric's uncle who's the power holder. Can't direct those assets to anyone including himself at any time. And so that essentially says, sorry, Eric. You're, if I exercise this, you're not going to get a bloody red nickel.

Ryan Kalamaya (19m 9s):
Right. And so tell me about how that would matter for Eric and Melanie's divorce is if Eric's uncle can go in there and theoretically take, you know, every bloody red nickel, what does that do for the trust interests in the divorce? And is there anything in Colorado specifically on that issue?

Gerard Deffenbaugh (19m 31s):
Yep. And in that example, the type of PowerPoint that we're using is very specific general refers to who can receive something as when it's exercised. So it's not limited, it's not a class and presently exercisable means it can be done right away. So when you add those two things together, presently exercisable and general, that's viewed as essentially having complete control over the trust assets, whoever's holding that power. So in this case, because Eric's uncle is holding a presently exercisable general power of appointment for all intensive purposes, he's the owner of those assets at that point, when you're looking at, in the context of divorce.

Gerard Deffenbaugh (20m 19s):
And so there's not anything that Eric can do if his uncle exercises that. And so the court recognizes just the practical realities of that.

Ryan Kalamaya (20m 30s):
Let's talk about discretionary trust because there's, you know, it's a similar concept. So for listeners, they don't know what is a discretionary trust. And can you give us some examples of a discretionary trust in the context of Eric and Melanie? Sure.

Gerard Deffenbaugh (20m 46s):
The discretion or piece refers to the trustee's discretion. So the trustee is the person who's writing the checks and controls how these assets are invested. So if Eric has a discretionary interest in a trust and his uncle is the trustee, if that discretion or interest is, is to both income and principal, which is pretty common, then Eric's uncle is going to be able to say subject to a standard that's in the trust agreement, I'm going to write you these checks, if you need it to fund your lifestyle. And there, that looks a lot different. So one, when we're analyzing an issue like this is, we want to know who the trustee is.

Gerard Deffenbaugh (21m 28s):
Is it a disinterested third party? Is it a friend? It is a, is it a family member as well as you know, we want to see how this trust operates and practice. So we have a lot of Colorado law about these trust interests, but also equally important in the eyes of the court is okay. We understand what the law is. How is this trust been operated? Let's say Eric's father set it up 20 years ago before the divorce. And over that course of 20 years, the trustee Eric's uncle has been riding, you know, $200,000 checks to Eric every year, based on that discretionary interest.

Gerard Deffenbaugh (22m 9s):
You know, when you do the math there, you know, that number starts to get pretty large, pretty quick, you know, are there any examples of Eric asking for money and the trustee saying no, or is the trustee really just saying yes to every request? And what's the size of that, so that the actual administration of the trust, it matters as well to be able to paint a whole picture.

Ryan Kalamaya (22m 32s):
Janine, let's kind of take it a step further if Eric Wolf there's your discretionary trust and his uncle has been check cashing or giving him checks of $200,000. You know, if that discretionary trust is not property, then does, is that just the end of the story? Or are there other issues, you know, in terms of separate property, they are, you know, related to that concept of the history of $200,000 distributions.

Gerard Deffenbaugh (23m 1s):
So there's a few points you touch on. There is one is when someone is a Trustman Fisher in this case, Eric and he's receiving those checks over time. If even the position that the court was taking was okay, it's, it's really not a property interest, even though it sounds like a duck walks like a duck, we're just going to say for purposes of conversation, it's not a duck, but even in that context, when that each time that check is written and ends up in Eric's personal bank account, that becomes property. And so if you're able to trace that over time, there's still going to be an increase in value with those checks and those values over time, let's say Eric takes, it turns around and buys an SOP, a index fund.

Gerard Deffenbaugh (23m 52s):
Each time you're going to have a number of different lots of, you know, each time that happened. But, you know, with a little legwork, you'd be able to say, okay, when this check, you know, 20 years ago was used to buy at an S and P index fund, we're able to peg that amount of shares and the increase in value over 20 years. So even though that initial trust interest isn't property, there's this tracing concept that comes into play and, you know, tracing applies to that separate property when it increases in value, which practically can make a large difference in this example,

Ryan Kalamaya (24m 29s):
Right? And for Wilsonart, as you move during a tracing episode, episode 29 with Annie bomb, and, you know, who's another valuation expert. So it's this inner relationship between valuation experts and a state planning experts in a divorce and moving analogy. The similar concept is the concept of, of income. So if someone's earning income, you know, the, once they received the paycheck and it hits the bank account, it converts from income into property in the same is with a trust. And then you've got these, these related issues.

Ryan Kalamaya (25m 9s):
So into the discretionary trust gene discretionary trust, or a power of appointment, you know, in terms of an economic circumstance, can you tell me a little bit about that? Because you know, the overloaded concept is that you've got these distributions that they're considered income for determining maintenance and child support. So if there's a history of Eric's uncle distributing $200,000 to Eric for divorce, court's going to look at the $200,000 of income historically every year in rural key factor that in for child support and maintenance, but also for property division as an economic circumstance, you can you tell me a little bit about the economic circumstance with powers of appointment and discretionary interests in, in a trust.

Gerard Deffenbaugh (25m 59s):
And so going back to that, a framework that we started with you have, it's not a property interest. The next question that needs to be asked is an economic circumstance. And that means can the court consider this when we're dividing the marital property? So there are a pellet cases in Colorado out there, Jones and Rosenbloom that say, even for discretionary interest, that's not property, it's still considered an economic circumstance. So that means you must not property. The court can still consider it when it's making that property division. If you think about it in practical terms, it's kind of like a, a blanket catch-all in case the court sees something and wants to be able to have the power to change that property division.

Gerard Deffenbaugh (26m 42s):
It gives them really broad. So that piece is really a tool in the toolkit of the court when it comes to property division.

Ryan Kalamaya (26m 49s):
Well, one other kind of trust that we haven't really talked about, gee, I'd love to get some insight and is mandatory income interests. And so can you tell our listeners, you know, in the context of an Eric and Melanie Wolfe divorce, what's a mandatory income interest and, and what happens in a divorce in that context?

Gerard Deffenbaugh (27m 11s):
So the name is pretty descriptive, but let's unpack it a little bit. That means whoever is the beneficiary has to be paid the trust income by the trustee. So going back to our example, Eric's uncle is deciding how the trust assets are going to be invested. You know, is it going to be all an S and P 500 with that broad-based equity index, or, you know, we're looking to generate a lot more income and looking more at a balanced bond fund. For example, the trustee gets a call the shots to say, you know, I want half in this broad-based S and P 500 fund, and I want half in this broad based bond fund.

Gerard Deffenbaugh (27m 53s):
You know, that looks a lot different in terms of how much income is being generated from the investments. Versus if the trustee says, well, you know, I, I think more 75, 25 is the right split. So that trustee is able to really drive a lot of the income that's going to be produced in that type of trust when we're just looking at public securities, you know, so practically that matters at the end of the day, the trustee is going to have to distribute to the mandatory income beneficiary, any income that's produced from those trust assets. You know, so if there's a hundred thousand dollars of trust income over the year, then all a hundred thousand dollars is going to need to be distributed to Eric.

Gerard Deffenbaugh (28m 36s):
And it's, the trust is going to say, you know, is that going to be a monthly payment? So it can be a quarterly payment, or is that just going to be one lump sum? And so the trust terms will guide that to tie that into how does Colorado view that the case on point there is the Gwyn case. And there, it has a very narrow holding when set, when it says the beneficiary that has this mandatory income interest, if they're not the trustee, so they don't have decision-making control over the assets and they don't have any other ownership in the underlying trust assets. So it's not coupled with any other trust interest or any other power, then we're not going to consider that property when we're looking at it in the divorce context.

Gerard Deffenbaugh (29m 18s):
And, you know, within our framework, if it's not property isn't economic circumstance, that Quinn court was silent on that type of trust interest of whether or not it was an economic circumstance.

Ryan Kalamaya (29m 29s):
And in Eric Wolf's examples, if he's the beneficiary and his uncle has to give him, you know, the income, and let's say it's a hundred thousand dollars per year, but it's, you know, it's, wouldn't be considered property. That's a mandatory income interest Eric's to get a hundred thousand dollars a year, and it's not a property interest because he may not get, you know, ultimately you, whatever the, the principal is in the, in their trust. So when you consider that for an economic circumstance, or at least it's, it's undecided, whether it would be under the green, because it was, it was silent, the court was silent in your experience, or, or from your perspective, you know, Jean, any opinions on whether or not it should be an economic circumstance.

Gerard Deffenbaugh (30m 17s):
It's one of those that the court does have pretty broad discretion. And so I think if you draw the analogy from the Jones and Rosenbloom cases where we're talking about, okay, this discretionary trust, interest, general rule, we're not going to consider it property, but it is going to be an economic circumstance. So we can consider it. I think within the framework of Colorado courts, it's not that far of a stretch to apply that same logic for mandatory income interest. When we're saying, even in this specific set of facts, it may not be a property interest. You know, I wouldn't see a stretch for the court to say, no, we understand that, but we were, we still want to consider it. So we're just confined the label of an economic circumstance for it.

Ryan Kalamaya (30m 59s):
You know, gee, could you give some listeners some kind of ideas of different triggering mechanisms or contingencies that exists because they they're just so varied about how families set up these, these trusts. And I'm sure in your practice, in doing estate planning, there are some notable ones that you come across.

Gerard Deffenbaugh (31m 25s):
Sure. A lot of practitioners will tie a trust termination to either someone passing away in this case, maybe an upstream family member, like a parent or a grandparent, or, you know, they can also tie it to, you know, once this beneficiary of the trust reaches a certain age, they're gonna receive different parts of the trust. So there could be a tiered or staggered distribution for Eric as remaindered trust beneficiary. And the trust could say, you know, I want Eric to receive a third when he's 35, a third, when he's 45 and a third, when he's 55 and the concept being you're giving the person who's receiving those trust assets time to hopefully build up the knowledge around them and how to manage that successfully.

Gerard Deffenbaugh (32m 15s):
And if for some reason that that money just goes out the door, there's another chance it's not a all or nothing sort of approach. And maybe there's some more life experience that happens in between those tier distributions. So, so those are two main mechanisms that we see is someone in the upstream family generation passing away, or, you know, different age based distributions. I'd say those are the bulk of what we see in practice, but it's really when the trust is being set up, there can be any number of different mechanisms. So it is very trust specific and what the goals of the person setting up the trust are.

Ryan Kalamaya (32m 55s):
Right. And then an example would be, there's a trust that I've dealt with where, you know, the beneficiary. So Eric Wharf, he had to do a volunteer project to, and the, his dad, for example, wanted him to kind of give back to the community in order to kind of earn, you know, a significant amount of money. And it makes sense, right. But you know, they have to do a community project and, you know, the question would be is, is that a contingency? Or like what, what's the likelihood, what if Eric's just a complete deadbeat and just, does he, you know, Darren do well and doesn't do his community project. Is that a contingency that a court is going to look at and say, you know, while I don't think it's property, any, any thoughts on, you know, that circumstance?

Gerard Deffenbaugh (33m 42s):
Yeah. I think the court is going to be able to look through in terms of the different contingencies and say, you know, how likely is this? You know, there's going to be some dispute from the experts on both sides, but practically if someone needed to put in X amount of time with the Veritas root task and the payoff was, it was something substantial, you know, something in the hundreds of thousands or millions of dollars, you know, for most people, less than we pretty good motivation. And so, you know, with that specific example, I think the court's going to be aware of just the, the realities and be able to, to look to what's going on, you know, w w when we're talking about, you know, this whole conversation of what's the likelihood of different things that's put into this trust rapper, you know, if there are certain actions that someone needs to take, how likely is that if someone needs to live to a certain amount of time, how likely is that?

Gerard Deffenbaugh (34m 37s):
And it's not a straightforward calculation. That's why there's valuation experts, but we've seen a practice that those calculations can be done, not only with, with a different type of asset of pensions, but also in the context, you know, in almost 20 years since balancing two, in terms of countless cases where a valuation expert is measuring an increase in value over time and take into account different contingencies,

Ryan Kalamaya (35m 5s):
Right? And your, your article, our that was fantastic about measuring value. And you can really lay out the motivations. And just for listeners that, you know, are still hanging in there and listening to this, just to give another example, in terms of the valuation issues, Eric Wharf, his grandfather could still be alive and has set up a trust that says, you know, he, his grandfather, his money is going to go to Eric's father and then to Eric. And so then you've got these contingencies when's Eric's grandfather going to die. And then how old is his father? How old is he? You know, like how old is his grandfather? What are their health?

Ryan Kalamaya (35m 45s):
And know one could say, and it was argued in balanced, and today there's show many uncertainties. There's no way we could value it. But as you said, gene pensions, it's the same circumstance in the sense of, we don't know what's going to happen in, in the future. And either really, it's kind of getting into the measuring of events, the triggering events, and that's where you really come into play. But the valuation experts kind of take the hand off, you know, to use a football analogy. And then, you know, they, they punch it in and we've got different wings, the divorce lawyers, if it's, if there's Germany, future contingencies in the party's interest to say, you know what, we're going to defer this decision, and we're going to deal with it when something happens.

Ryan Kalamaya (36m 32s):
So if Eric does that charitable organization, then they, at that point, then, you know, address it, even if it's five years down the road, or, and obviously there's some tax issues that we have to navigate, but, you know, for pupil, they might defer that. But as you have seen in balance and two and pension cases, the courts are generally, they prefer to do valuations right now. And that's when you getting involved with the measuring events and that, or the triggering events. And that's why the opinion on is it 30 years ago that matters, or is it 10 years ago? Rule can drive things because there is this general preference to value it now and just be done with it.

Ryan Kalamaya (37m 18s):
Even though there could be a lot of questions.

Gerard Deffenbaugh (37m 21s):
That's right. So it's really, where are we going to put the flag in the sand for measuring? Is it going to be 10 years ago? Is it gonna be 30 years ago? Because the numbers make a lot of difference, especially when you're looking at, you know, the underlying trust assets, you know, of hundreds of thousands or millions of dollars, that time period really matters if it works for you. Right. Which is like to tie off a little bit more of that power of appointment conversation. Cause we left a little bit of a hanger there. In our previous example, we kind of shifted to one end of the spectrum. When we were talking about the power that Eric's uncle had, that presently exercisable general power of appointment, we want to be aware of when we're talking about powers of appointment, they come in all shapes and sizes.

Gerard Deffenbaugh (38m 2s):
And so that type of power is very specific. If we go to the other end of the spectrum, something that looks a lot different, has a big effect on the analysis would be okay, you can't exercise it during the life, the power holder. They can only exercise it when they die. So it's going to be a Testament, Terri power. So it can only be exercised when they die. And instead of being able to exercise it for anyone, we can only exercise it in favor of two people to kind of the two favorite cousins. And in that case, it would be a limited test Mary power of appointment. So if we're looking at a spectrum, that's the far end of the spectrum from our other example, and there something like that, realizing that it can't be exercised and effective until that power holder passes away and real Scully with that power holder, exercise it in favor of these two favorite cousins.

Gerard Deffenbaugh (39m 2s):
The level of control of that power holder just looks a lot different. So the court can say, and this is where, when we talk about some of the details and differences of opinion among experts, no, would it be reasonable for the court to say, well, this other type of power, this limited testamentary power of appointment that doesn't look like outright ownership like this other one does. So instead of that affecting the discussion of property, whether or not this trust interest is property, we're going to say, yeah, it's still property, but this, this specific type of power appointment, we're just going to call it a contingency and it's going to be valued as such. So really the effect there is on the valuation with just an additional contingency, which is a very different point than before when it was affecting whether or not it's property.

Gerard Deffenbaugh (39m 51s):
So it's very nuanced

Ryan Kalamaya (39m 53s):
G well, you know, as you said, it's, it's super nuance and I couldn't agree more. So people that don't know where to find you or are interested in finding out more, whether it be an estate planning or their divorce client or lawyer working for a consulting expert, Jean will have information on you in the show notes, but for those just listening, what's the best way to, to reach out and, and get in touch with you.

Gerard Deffenbaugh (40m 19s):
You know, our firm website has all our contact information as I'll just give that to you right now. That's www.dwkpc.net, and they'll have our office line. They'll have my email there, you know, with the long last name, it's easier just to look it up, but you can find that online www dot DWK, pc.net, and then you can click, click on our pages and you can find my contact as well.

Ryan Kalamaya (40m 44s):
And I know on your website, you have links to your car, a lawyer articles, one in March of 2022, as well as the, the one from the powers of appointment that you did, you know, thanks for the time. G always learning in end. Interesting for me. And I hope listeners were able to, to understand at least, you know, some issues relating to trust interests and how measuring value can really matter in a divorce. But until next time, this is Ryan Kalamina on divorce. The altitude. Thanks for listening in,

4 (41m 22s):
Hey everyone. This is Ryan again. Thank you for joining us on divorce at altitude. If you found our tips, insight or discussion, helpful, please tell a friend about this podcast for show notes, additional resources or links mentioned on today's episode. Visit divorce@altitude.com. Follow us on apple podcasts, Spotify, or wherever you listen in. Many of our episodes are also posted on YouTube. You can also find baby and me@calamansi.la or 9 7 8 3 1 5 2 3 6 5. That's K a L a M a Y a.law.