Trust Interests in a Colorado Divorce | Episode 124

During a divorce, a lot of families will enlist family planning services and a variety of different tools to make sure that their money is going to go where they desire it to. One of the key issues that come up in divorce cases when a trust is involved is the issue of whether the trust is property or non-property. Determining whether a trust is property or non-property can cause a lot of tension and uncertainty! 

Amy has just wrapped up a case involving a complex trust, so in today’s episode, Amy and Ryan dive into the topic of trust interests in a Colorado divorce, including the relevant types of interest, examples of some real-world Colorado cases, declaratory judgments, the two main models of tracing, and more! If you’ve recently gone through a divorce or another major life change, do yourself a favor and have your estate planning reviewed. 

Key Points From This Episode:

• An overview of today’s topic.
• Understanding property versus non-property in a divorce case under Colorado law. 
• Different types of interest as defined by the Division of Property Statute.
• Exploring real-world Colorado divorce cases where a trust is involved. 
• An explanation of what a declaratory judgment is and when it is useful.
• The importance of consulting with estate planning attorneys during a divorce case when a trust is involved.
• Why history is the best predictor of the future in these types of cases.
• Factors that the court needs to take into consideration with regard to spousal maintenance.
• The two main models of tracing.
• Previous Divorce at Altitude episodes that relate to this topic. 
• The importance of reviewing your estate planning after a divorce.

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.

To subscribe to Divorce at Altitude, click here and select your favorite podcast player. To subscribe to Kalamaya | Goscha's YouTu

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.

To subscribe to Divorce at Altitude, click here and select your favorite podcast player. To subscribe to Kalamaya | Goscha's YouTube channel where many of the episodes will be posted as videos, click here. If you have additional questions or would like to speak to one of our attorneys, give us a call at 970-429-5784 or email us at info@kalamaya.law.

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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 (3s):
Hey everyone. I'm Ryan Kalamaya.

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

Ryan Kalamaya (8s):
Welcome to the Divorce at Altitude A Podcast on Colorado. Family Law.

Amy Goscha (12s):
Divorce is not easy. It really sucks. Trust me I. Know. Besides being an experienced divorce attorney, I'm also a Divorce client.

Ryan Kalamaya (20s):
Whether, you are someone considering divorce or a fellow family law attorney. Listen in 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. This is your co-host, Ryan KK and This Week I am joined by the other co-host Amy Goscha. Amy. How are you doing today?

Amy Goscha (49s):
Great, How, are you doing Ryan?

Ryan Kalamaya (51s):
I'm good. We are here to talk about trust. We have addressed trust and, and obviously you can talk about kind of relationships and how you can trust somebody, but that's actually not what we're gonna talk about. We're gonna talk about the legal entities of trust and how they can impact Colorado. Divorce. We've covered some of these issues, but can you give Amy a some list the listeners an overview of kind of what we anticipate on talking about today in this episode?

Amy Goscha (1m 21s):
Yeah, absolutely. So a lot of families go through family planning. They, you know, they want to get, they wanna make sure that their family money goes to, you know, their children and not their children soon to be expo. So they will put together trust, they'll do wills, you know, those various vehicles for, you know, like transferring wealth. And that comes up in the middle of a Divorce case if someone has, you know, like a trust or their parents do, it's something that we have to look at and consider in, you know, Divorce cases. And so what Ryan, And I are gonna talk about today, you know, you have to look at whether or not is a trust interest property. It's also important like the type of Interests you know, that your client has within that trust.

Amy Goscha (2m 4s):
So we'll talk about the various types of Interests that are important. And then Ryan is gonna talk about kind of the benchmark cases in Colorado when you know, an interest is property and if it's marital or not. And then we're gonna wrap up with as an attorney, you know, what kind of things can we file with the court to try to reach a resolution. If it's a gray area, we need an answer, you know, on a trust interest to figure out how to, you know, resolve the case, you know, what we can do. And then, and also Colorado dealing with support, it also has trust affect fossil maintenance and child support. Depending on If you get income from a trust, you know, so we'll talk about those issues as well as whether or not a trust can be considered an economic circumstance when dividing property or Determining spousal maintenance.

Amy Goscha (2m 56s):
And then Ryan is gonna wrap up with talking about tracing issues and trust. So there's a lot of great kind of meaty subjects that we're gonna get into.

Ryan Kalamaya (3m 6s):
Yeah. So we are gonna first start off with property and this issue Amy for me, it's kind of like the US Supreme Court. They have the famous case about whether or not a corporation is like a person and Divorce when we talk about property or not property, that I think for people like lawyers they can hear that. But just for listeners that don't understand, what do we mean by property versus not property?

Amy Goscha (3m 34s):
Yeah, so in Colorado, in order for a court to even divide an asset And, we have to determine, you know, if it's property and then the next step is to determine is it separate property or is it marital property? And so, you know, the normal type of property we think of is, you know, like a house or a bank account. But when it comes to a trust, you know, that gets really confusing. You know, is an interest property or is it not? You know, like if this vehicle, a trust was set up, you know, a cor, a trust corpus was meant to, you know, move on to like, you know, children, but there's certain Interests within a trust that can be considered property. So that's as lawyers what we have to first figure out.

Ryan Kalamaya (4m 15s):
And so Amy, when we get someone that comes into our office or calls us and they say, you know, I have a trust, I'm a beneficiary of a trust, but it's bulletproof, there's no way that the other person can get to it. How does that conversation go when you are explaining to them about property versus not property?

Amy Goscha (4m 35s):
Yeah, so I mean the first thing I wanna see is I wanna see the trust document And, I wanna see the trusted agreement because in Colorado And we will get into it. But if you know the document, if the interest is revocable, which means you can change it at any time, you know it might not be considered property. If it's irrevocable in certain, you know, in certain circumstances it is property. So the first thing I wanna look at is the actual document so I can review it to see, you know, the structure of it, you know, and so what I tell people is just because you're estate planning attorney said that it's bulletproof, it might not be in under Colorado law

Ryan Kalamaya (5m 12s):
In Colorado, we've, you know, talked about this with Kim Willowby on a previous episode involving trust Interests, but Colorado is very progressive in the sense of how it views property if it is involving trust. So, but you mentioned the trust document and the types of Interests and how important that is. So can you talk to me a little bit about the different types of Interests and and why that's important?

Amy Goscha (5m 41s):
Yeah, so under the Division of property Statute, essentially it defines, it says any essentially amenable or revocable like trust interest usually is not property under Colorado law, however, you still need to look at that document to see what are the types of Interests that your client holds. So one would be called like a remainder interest. So that's typically when a right is reserved where a portion or all of the trust would be given to the beneficiary, who is the client, you know, at some point in the future. So that's one type of interest. And that's usually property or it is property income.

Amy Goscha (6m 21s):
We look at, you know, for instance someone might be able to request from the trust corpus or the trustee, you know, income or periodic payments distributions from the trust during the lifetime. And so you look at that, you know, as to whether or not there's property or you know, is it income for PURPOSES of Determining maintenance and child support? We also look at the power of appointment, meaning the power of appointment of the trustee, depending on how that looks, if there's a limited power of appointment versus a general power of appointment, that can affect whether or not a trust is property. Another important provision that we look at is the governing law provisions.

Amy Goscha (7m 1s):
A lot of times we have people who have trust documents and agreements that were drafted in other states. And there's always usually a choice of law provision within the trust agreement that states which state controls when interpreting the trust. So it's really important and can get kind of complicated because If, you have a trust that's drafted in another state and the governing law provision says that that state controls on interpretation. As an attorney you need to make sure that you're consulting with another attorney in that state,

Ryan Kalamaya (7m 33s):
Right? And then when we get into the actual cases really for Divorce lawyers, they often will delineate whether it's balancing or Jones. And the way that we do that for non-lawyers is because Colorado in how the laws developed is that there'll be case names and then that will, you know, like Roe v Wade is something that people are pretty common with or Miranda with Miranda rights. And so in Colorado, the guiding law is set out by balancing and Jones on trust and the case NRA marriage of balance. And actually there were multiple NRA marriage of balancing cases, but really the main point takeaway for people is whether or not the trust is going to distribute at some point to a beneficiary.

Ryan Kalamaya (8m 25s):
And under balancing it was the, the really kind of, it's helpful for people to kind of understand is that there was this trust that was created and then in essence the wife was going to at some point receive the, she was a beneficiary under that trust and the trustee or the person that kind of had the trust, they could spend it as they saw fit, but then eventually she was going to get something. It was just a matter of how much was that going to be. And she made the argument and Amy, you And I see this all the time with stock options or business valuations. How can you value something far off in the future when you don't know when it's gonna happen?

Ryan Kalamaya (9m 9s):
Things can change as we are recording this, the stock market is up and down and interest rates are, everyone's kind of talking about the volatility. And given that, how can you really put a, a number on something that's gonna potentially happen in 20 years, well that is really balanced and said it doesn't matter that it's, you know, really difficult to value. There is going to be value there and they leave it to the experts, the financial experts to really talk about what that is. And that's something that a court can take into consideration and we'll get into this a little bit down the road and that is in contrast to Jones.

Ryan Kalamaya (9m 48s):
And in the Jones case, really the issue was whether the person had the ability to get money in the first place. And it kind of is the same, just I think intellectually is the same concept behind the revocable trust. And that is that a will or a revocable trust, it can be changed in the future. And so there's no real entitlement for someone to get the money in the trust. And the same thing applies to Jones. And oftentimes what we see are these spend thrift provisions Amy where someone, the trustee will have the ability to distribute money and it's based on certain conditions, health, education, those sorts of things.

Ryan Kalamaya (10m 34s):
And the, it's really up to the trustee's discretion on whether or not they can distribute that. So ultimately a discretionary trust, a Jones trust is not property and but then that raises the issue of you know, how do you figure out, because Amy these cases and the Interests in whether it's property or not, it really can cause some uncertainty in a Divorce because you know, one, the husband could say, Eric Wolf could say, well it's not property. And then Melanie Wolf could argue, well it is property, so what are we to do? Like what are the options if that uncertainty exists in a Divorce Amy,

Amy Goscha (11m 15s):
Well we can use certain vehicles to, such as filing like a declaratory judgment, which I'll get into. But one interesting thing I wanted to mention about the Jones case, because we will be talking about economic circumstances, that case, even though they found that the discretionary trust wasn't property, it could still be taken into consideration when we talk about an economic circumstance when dividing properties. So we'll get into that. So that's why there's such a gray area and why, you know, there are certain things as attorneys that we can ask the court to do, such as And I did it recently in a case where you can file what's called a declaratory judgment, judgment, you're asking the court essentially to define a right, if there's this gray area, you know, and you're about to go to mediation and one side is saying that it's property and the other side is saying that it's not property, you know, there's millions of dollars within the corpus of the trust that really can affect, you know, the outcome and you're almost at an impasse at that point.

Amy Goscha (12m 15s):
So as a family law attorney you can, you know, you can ask the court essentially to clear whether or not your client's interest as a beneficiary is property or not. And certain things you have to weigh regarding that are if the court comes down, you know, not in your favor on that type of an issue, you know, how does that affect the rest of your case, you know, but there are certain circumstances where you can ask the court essentially to make a determination on that rate,

Ryan Kalamaya (12m 46s):
Right? And you can ask for a hearing, you can ask to essentially bifurcate the issue. When I mentioned bifurcate, that means kind of splitting in two. And so really you look and and Amy, you And, I, we do this with premarital agreements where there's a really up and down vote on is it valid, is it not valid? And in a case involving a trust, you know, if there's 10 million in that trust, well you know that could really matter. And if Eric and Melanie are arguing over whether it is or is not property, one option is for them to go and the declaratory judgment is in part with this in that you really get a decision from the judge, Hey judge, we can't decide Eric's business or we can't decide what to do with Eric's business or the house or the car and to really divide the marital estate until we know is this for example 10 million trust, is this really even property or not?

Ryan Kalamaya (13m 44s):
Because it's gonna really drive the negotiations. And to your point is that there might be a reason that Eric, for example, he knows maybe you know, he's consulted with in estate attorney on as an expert witness and they've said, you know that this is a loser of an argument. There might be a reason for him strategically to hold back and to make this argument and there might be some sort of discount or lower valuation. So there's gonna be some strategic reasoning behind whether or not to push that issue forward. Of course, if Eric you know, really believes that this trust is not property, then he's gonna really wanna address that upfront and probably take an aggressive standpoint.

Ryan Kalamaya (14m 26s):
So anything other, you know, thoughts that you have on that issue Amy? Yeah,

Amy Goscha (14m 31s):
I think the other issue is looking at like the type of assets within the corpus of the trust because you know, like if you're at an impasse and you can't agree if it's property or not and you represent the person that you or the client that says it's not property, you're not really gonna wanna spend thousands of thousands of dollars valuing the assets within the trust. So that's another I guess point where you would wanna consider maybe a declaratory judgment on if it's property or not to give direction on whether or not the assets within the corpus need to be valued.

Ryan Kalamaya (15m 5s):
Right? And there might be a conversation between Eric and Melanie's attorneys about, hey we need to decide whether or not this trust is or is not property, okay, we don't agree, let's kind of fast forward that particular issue and bifurcate because the trust might own a commercial shopping center in Austin, Texas and then a bunch of other things that need to, you know, appraisals which are expensive and it's kind of a waste of money if you're going to have all these appraisals and all this, you know, hoopla over the value if it's not even gonna be property. Now that's, it still might be relevant because there could be an economic circumstance or there's income but you know, I think listeners can kind of understand the point.

Ryan Kalamaya (15m 50s):
And then the issue for you Amy that you referenced that I wanted to kind of piggyback on is that oftentimes Eric will come into my office or call me And I don't know whether it is or is not property. I'll take a look at the trust agreement but man they can get really complex and we're gonna have some future episodes from estate planning attorneys to talk about some of the nuances. But we're not estate planning attorneys. Amy, neither you nor I know you've done some estate planning but really some of the high end estate planning attorneys and they're always changing and you know, some of these trust agreements like the Rockefellers or other, you know, wealthy long, you know, standing families, they can have trust agreements from like the 1920s that are arcane and really difficult.

Ryan Kalamaya (16m 43s):
So we will search out and consult with the state planning attorneys And, I've done it where I've gotten kind of an oral opinion, hey I just wanna do my due diligence to make sure that Eric, you know, knows whether it is or is not property. And so those, you know, coordinating with those attorneys can be very helpful. We had an episode with one such attorney that works in that field. It's G Defen BA and that's episode one 12 And, we talk a little bit about that process but Amy one thing that G mentions in that episode on trust Interests is income. So what relationship or what you know is relevant for income in trust for support PURPOSES?

Amy Goscha (17m 25s):
I mean, so under the ma, under the spousal maintenance step, she, which is alimony essentially trust income and distributions is considered income for PURPOSES of Determining, someone's income for spousal maintenance, same thing in child support. So you have those provisions, but we have one case in Colorado, you know, on point that really talks about a discretionary trust and that for PURPOSES of Determining income that you know, wife's income from that is included as income for PURPOSES of you know, child support. So even if the trust is a discretionary trust and is not property, if your clients are receiving income from that discretionary trust, it is includeable as income when Determining, you know, spousal maintenance and child support.

Amy Goscha (18m 15s):
You know, so you can't forget the support piece. You have the income piece from a trust and then also whether or not a trust is property or not And,

Ryan Kalamaya (18m 23s):
I think that it's helpful for people to know. Usually what we do is we'll look at history, History is the best predictor of the future. And so if Melanie Wolf has historically received $10,000 a month from a trust it may not be property, but for PURPOSES of Determining her income in the Divorce, then it's fair to, you know, say Melanie's going to receive $10,000 from this trust in the future and So that could mean that Eric doesn't pay maintenance or it can reduce the amount of child support depending on the, the circumstances And So that really is something that people I think often lose sight of Amy.

Ryan Kalamaya (19m 6s):
One thing that I, I've dealt with and I'm curious what your thoughts are is you know the trust that distributes, you know, some income or a partnership, a family partnership that distributes income and it's only to cover the person's tax liabilities, you know that because, but they actually don't receive, you know, any net income and that might be where a partnership or a trust, you know it's gonna generate a $50,000 tax bill for you know, Melanie and so therefore you know the trust will distribute $50,000 of income. Any insight into that particular issue and whether or not that's $50,000 is actually income.

Amy Goscha (19m 47s):
I mean yeah that comes up a lot. I mean I haven't dealt with that recently but I, I'm pretty sure in my cases it is considered income.

Ryan Kalamaya (19m 54s):
It is. But Melanie, you know, understand is gonna say well I didn't have, it's a net zero because I had this bill And I think that those are the kind of arguments that people when they hear about their like wow, like now I understand why there's Divorce lawyers or people to argue cuz it's not you know, clean cut but in any event what's not also clean cut is Division of property and that raises economic circumstances. A lot of people Amy I'm sure you know, will call you and they'll say, well isn't Colorado you? Don't you divide property equally? And I always explain. Well no, not necessarily because it really depends on what's fair and the example that I oftentimes give is if I go into a bar with Bill Gates And, we sit down and have a beer, then the bartender knowing that it's Bill Gates is gonna say, Hey Bill, Bill you can pick up the tab for Ryan because you have billions of dollars and that's gonna be a different circumstance than maybe you and me Amy, we walk into a bar And, we, you know, each get a drink, I know you're not really much of a beer drinker but you know you might get a drink And, I'll get a drink and the bartender's probably gonna say, Listen, you guys can just split it equally because you know we're on equal financial footing and So.

Ryan Kalamaya (21m 13s):
That really is an example of, you know, if someone has a 10 million trust or is the beneficiary Eric's a beneficiary of a 10 million trust, then even if it's not property and that $10 million may not go to him, if the court knows that Eric is potentially gonna get some money or that historically that you know he's received income, the court can take that into consideration and it doesn't just have to turn a blind eye. And Colorado law does allow for disproportionate allocation and that is oftentimes going to come into play if there is a trust involved because it's kind of a passive asset.

Ryan Kalamaya (21m 56s):
Both parties, both Eric and Melanie are gonna argue about the relevance, you know, of that because Eric is gonna say, well that's family money Melanie, you really had nothing to do with the acquisition of that. And then Melanie's gonna say, well no one has to worry about your financial circumstances Eric cuz you're going to, you know, likely inherit 10 million. So those arguments are, are presented anything you know, related to financial support or spousal support Amy when it comes to economic circumstances.

Amy Goscha (22m 29s):
Yeah, there's actually language within the spousal maintenance Statute that says that the court has to take into consideration the financial resources of each party when they're making findings about spousal maintenance and whether or not someone can pay spousal maintenance or should receive spousal maintenance. So it's not just the property, you know, the economic circumstance there. It's also within the spousal maintenance Statute. And then also one point I wanted to make about just a discretionary trust with income, a lot of times you'll see provisions that say that maybe a beneficiary has a right to, you know, like ask for a distribution, like an annual distribution of a percentage of trust assets.

Amy Goscha (23m 11s):
And if someone hasn't taken that on a yearly basis, like Ryan said, you know, you look at history but also a court can't necessarily compel a beneficiary to take that on a, on an annual basis and include that as income for PURPOSES of Determining special meetings and child support.

Ryan Kalamaya (23m 27s):
Yeah, I mean history matters as much as Divorce lawyers. We like to, you know, tell people, listen you guys are going through change, what happened during the marriage is irrelevant in terms of why you guys are getting a Divorce financially I find it fascinating because it really does matter whether it be income you get from a trust or what has all happened, it really does matter. And what, when we're looking at history, we're talking about tracing separate property and that is always something that comes up and is a historical perspective. And, we've done, there's an episode with Andy Baum that I did on episode 29 tracing separate property and it really does matter for trust.

Ryan Kalamaya (24m 11s):
And the point is is that there's two different main models of tracing when we are getting in and they can often matter in trust. And that is really, if the trust has multiple investment accounts and multiple, you know, investments, Microsoft, Amazon, Tesla stock, do you look at the individual stocks, which is a burford, the case burford and you really drill down and, and ultimately what that means is the valuation is going to result in a lower amount of, of separate property or do you look at the trust overall as a whole entity and that's the Powell or entity approach.

Ryan Kalamaya (24m 55s):
I think it's safe to say, or at least logically it makes sense to really look at the entity approach when it comes to a trust. But there's always gonna be arguments. There's no case that says in a trust you have to use an entity or a a Powell approach. But I think most people are probably going to employ that because a trust in and of itself is an entity. But I think people can gather that there's just so many different issues when involving a trust and that's why we wanted to do an episode that kind of tied all those issues together. We've done episodes episode 20 with Kim Willowby, as I referenced before. There's Andy Baum and and G dba, but we've done episode 86 and episode 92 on their howto episodes.

Ryan Kalamaya (25m 41s):
But Amy I know you just wrapped up a case involving a, a complex trust. Anything else that you want listeners to understand when it, if they're confronting a trust in their Divorce, whether they be a lawyer or a client?

Amy Goscha (25m 55s):
Well I think just even moving forward, like once your client is divorced, just make sure that that client understands that they should have their estate planning looked at again. You know, and also to maybe have the Divorce lawyer such as myself, you know, if there were issues that came up with drafting to make sure that those issues are, you know, dealt with for the future. So I think a lot of times when people are done with their Divorce, they're like, ah, thank God, like I'm done with my Divorce and then it takes them a little while to, you know, update or redo their estate planning. But I think it's important, you know, like with any major life change that you go through to review, have your estate planning reviewed and revised.

Ryan Kalamaya (26m 37s):
I agree And, we are gonna have a future episode with a high end estate planning attorney to talk about drafting and how he views things and you know, if someone goes through a Divorce and they really see that the placement of a comma can matter or a typo can matter, then it's, they're incentivized or at least they're motivated to, you know, make sure that their estate planning documents are accurate because if their children go through a Divorce or their grandchildren go through a Divorce, it can obviously matter. So, you know, there's so many different interesting issues. Amy, you And, I, were talking about a case I have where there's the party can't find the signed trust agreement.

Ryan Kalamaya (27m 18s):
And, we frequently will get these, especially when it involves historical documents, you know, trust agreements from 1920s, And, I. Think another final point is that people I think are often surprised when we even bring this issue up and they may not even know, oftentimes Eric and Melby, they don't even know what is out there and so they have to go and ask their parents and hopefully after hearing an episode like this, they can understand why we have to go through that because there's nothing worse than having to go through a Divorce, but to re-litigate after, you know, a party defines out that there's some out something out there that wasn't disclosed or there's some Divorce remorse where someone tries to re a Divorce when you haven't disclosed things that can really result in some sticky issues.

Ryan Kalamaya (28m 9s):
So we hope that this has been a helpful episode for anyone, whether they be a Divorce lawyer or a person going through a Divorce in Colorado when there's your trust involved. Until next time, thanks for joining us on Divorce at Altitude. 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 dot com. Follow us on Apple Podcasts, Spotify, or wherever you listen in. Many of our episodes are also posted on YouTube.

Ryan Kalamaya (28m 50s):
You can also find Amy and me at kalamaya.law or at 970-315-2365.