Marital property is an important concept primarily used in a proceeding for dissolution of marriage. Property in the context of a marriage can either be held as separate property or marital property. Colorado defines marital property as all property acquired by either spouse subsequent to the marriage, with 4 exceptions: 1. Property acquired by gift or bequest; 2. Property acquired in exchange for property either acquired before the marriage or by gift or bequest; 3. Property acquired by a spouse after a decree of legal separation; and 4. Property excluded by valid agreement of the parties. Colo. Rev. Stat. Ann. § 14-10-113(2) (West) These 4 exceptions, plus any property acquired prior to the marriage, could therefore be considered as the separate property of a spouse.
So, let us examine a married couple in their 50s, married for 20 years, whom we’ll call Harry and Betty. Harry came into the marriage with $500,000.00 in assets, while Betty had $50,000.00. Harry has been the primary wage earner, while Betty has been managing the house and raising the children. Betty received an inheritance during her marriage when her parents died of $150,000.00. Harry’s separate account is currently worth $1 million while Betty’s separate account is currently worth $300,000.00. If Harry and Betty kept their respective accounts separate and did not comingle those assets with marital property, each account would still be considered separate property.
Now, let’s look at a few scenarios and see how Colorado law would treat it.
Harry and Betty contribute all their property into an undivided joint living trust, with each as beneficiaries, along with their children as remainder beneficiaries. The funding of the joint revocable living trust with separate property would be a gift from one spouse to the another, whether in trust or not, and shall be presumed to be marital property. This presumption may only be rebutted by clear and convincing evidence. Colo. Rev. Stat. Ann. § 14-10-113(7)(a) (West);
Harry and Betty each contribute their separate property into an individual revocable living trust for their respective benefit and create a joint revocable living trust for their marital home and joint checking account. The joint revocable living trust will be considered marital property, because its assets were acquired after marriage. Colo. Rev. Stat. Ann. § 14-10-113(2). The $500,000.00 increase in value of Harry’s separate individual revocable living trust ($1 million value today minus the beginning value of $500,000) and the $100,000 increase in value of Betty’s separate individual revocable living trust ($300,000 value today minus the beginning value of $50,000 and the inheritance of $150,000.00) would also be considered marital property. Colo. Rev. Stat. Ann. § 14-10-113(4).
In a proceeding for the dissolution of Harry and Betty’s marriage, the court shall divide the marital property, without regard to marital misconduct, in any proportions the court deems just after considering the following the factors: a. each spouse’s contribution to the acquired marital property, including Betty’s contribution as a homemaker; b. The value of the property set apart (each spouse’s separate property); c. The economic circumstance of each spouse at the time of the division of assets; and d. any increases or decreases in the value of the separate property of each spouse or the depletion of separate property for marital purposes. Colo. Rev. Stat. Ann. § 14-10-113(1)(a-d).
This gives Colorado judges enormous discretion in how they account for the value of separate property when making the division of property for the dissolution of marriage. The division of marital property uon dissolution of marriage is committed to the sound discretion of the trial court – there is no rigid mathematical formula that the court must adhere to. In re Marriage of Graham, 1978, 574 P.2d 75, 194 Colo. 429; Carlson v. Carlson, 1972, 497 P.2d 1006, 178 Colo. 283. See also a trial court’s erroneous determination that wife held property interest in a family trust was harmless, where trial court specifically found that even if wife’s interest was not marital property, said interest remained the economic circumstance of the wife and was appropriately considered in making the overall division of property equitable. In re Marriage of Balanson, App.1999, 996 P.2d 213, rehearing denied, certiorari granted, affirmed in part, reversed in part 25 P.3d 28, modified on denial of rehearing.
“Go ahead and sue me, you are paying for my defense anyway” – In Colorado, can a trustee use trust assets to defend a lawsuit against that same trustee, and what does that mean to the beneficiary?
In general, Colorado follows the traditional American Rule that, absent statutory authority, an express contractual provision, or a court rule, the parties in a lawsuit are required to bear their own legal expenses. See Bernhard v. Farmers Ins. Exch., 915 P.2d 1285 (Colo.1996).
In Heller v. First National Bank, supra, 657 P.2d at 999, and, subsequently, in Buder v. Sartore, supra, 774 P.2d at 1390, Colorado appellate courts created an exception for prevailing beneficiaries in breach of trust and breach of fiduciary duty actions. However, Colorado however did enact a statute which states that if a fiduciary receives notice of proceedings for his, her, or its removal, the fiduciary shall not pay compensation or attorney fees and costs from the estate without an order of the court. Furthermore, a court shall order a person who receives excessive compensation or payment for inappropriate costs to make appropriate refunds. Colo. Rev. Stat. Ann. § 15-10-602(5) (West).
Also, if a fiduciary is unsuccessful in defending his/her conduct alleging breach of fiduciary duty, said fiduciary shall not recover the fees or costs of that defense, as the court deems equitable. Colo. Rev. Stat. Ann. § 15-10-605(4) (West). Thus, it appears that fiduciaries are at great risk, given that beneficiaries may institute a lawsuit against the fiduciary for many reasons and chances are the fiduciary may not be reimbursed for their legal cost to defend.
Are there instances where a fiduciary may recover their cost to defend from trust assets?
The legislature did allow for an instance where, if the court determines that any proceedings or any pleadings filed in such proceedings, were brought, defended, or filed in bad faith, the court may assess fees and costs, including reasonable attorney fees, incurred by the fiduciary and other affected parties in responding to the proceedings or pleadings, against anyone or entity that brought or defended the proceedings or filed the pleadings in bad faith. Colo. Rev. Stat. Ann. § 15-10-605(1) (West)
The statute also provides that if any fiduciary defends or prosecutes a proceeding in good faith, whether successful or not, the fiduciary is entitled to receive from the estate reimbursement for reasonable costs and disbursements, including but not limited to, reasonable attorney fees – unless the fiduciary acted in bad faith or was unsuccessful in defending against a breach of fiduciary duty. Colo. Rev. Stat. Ann. § 15-10-605(6) (West)
A final note – while the statute may say that a fiduciary may be reimbursed from trust assets, the final determination can ultimately be made by a judge. A personal representative of a testator’s estate was not entitled to attorney fees incurred, even though he prevailed in an unsuccessful will contest by the testator’s son. The court determined that although the son did not prevail, his claims were not groundless, frivolous, or vexatious. In re Estate of Fritzler, App.2017, 413 P.3d 163.
I am the trustee of a Special Needs Trust, are there any special requirements or concerns that I should have?
To answer this question, we will highlight some concepts discussed in an article by Jersey M. Green & Marilyn W. McWilliams – Preserving the Disabled Plaintiff’s Access to Public Benefits with the Special Needs Trust, Colo. Law., MAY 1996, at 49, 50.
Special Needs Trust planning is a complex and specialized area of the law which is very case and fact specific. Every case has different facts and circumstance and should be analyzed individually. These trusts were authorized under the Omnibus Budget Reconciliation Act of 1993 (“OBRA-93”), which was signed into law by President Clinton in August, 1993. This type of trust allows family members to put funds in trust to provide for any “supplemental needs” of a disabled person that would otherwise not be provided for by obtaining governmental benefits. Because these trusts are supplemental in nature, no trust distributions can be used for “support,” (ie. To purchase basic items such as food and shelter)
The current position of the Social Security Administration is that the trust, even though fully discretionary, must include language stating that the intent is to only supplement, and not replace, public benefits or the entire trust corpus will be considered an available resource to the beneficiary. Marsha Goodman, Special Needs Planning for Non-Practitioners, Ariz. Att’y, June 2021, at 36, 38–40.
In essence, these trusts are “discretionary” trusts, wherein the trustee has the sole discretion as to whether to make payments to cover any medical needs of a beneficiary not provided by any public agency. Such trusts would not be included as an asset of the beneficiary for Medicaid purposes. Hecker v. Stark Cty. Soc. Serv. Bd., 527 N.W.2d 226 (N.D. 1994).
What type of expenditures are allowable from the trust? It is not considered income for the SNT to pay for the beneficiary’s supplemental needs. These include health care costs such as supplemental insurance, deductibles, and copays; therapeutic care that would not generally be covered by health insurance, such as massage therapy and adaptive equipment; and expenditures for personal care such as non-medical caregivers, incontinence supplies and skincare products. It also includes education, entertainment, transportation (including a vehicle), internet or cellphone charges. Finally, the SNT can cover legal, financial, and administrative expenses such as professional fees for attorneys, accountants and financial advisers retained to advise the trustee or the beneficiary; taxes; and prepaid funeral and burial charges or irrevocable insurance policies purchased for that purpose. The SNT can also cover the cost of a companion to travel with the beneficiary on vacation, especially if his or her disabilities prevent him/her from traveling alone, but cannot cover the cost of other family members who also may be joining them. Marsha Goodman, Special Needs Planning for Non-Practitioners, Ariz. Att’y, June 2021, at 36, 40
What type of expenditures are NOT allowable from the trust? Payments from the SNT made directly to the provider for food and shelter, called In-kind Support and Maintenance (ISM). Such payments are counted as income, and could affect the amount of public benefits that the beneficiary can receive. Payments for “food” include meals in restaurants as well as groceries, and the provision of “shelter” includes room and board in someone else’s home (including a parent’s) at no charge, mortgage payments, rent, property taxes, homeowner’s insurance, gas, water and electric, but not cable or satellite or inside/outside household maintenance. Marsha Goodman, Special Needs Planning for Non-Practitioners, Ariz. Att’y, June 2021, at 36, 40.
Does the direct payment of medical expenses, tuition, etc. from trust funds by a trustee qualify as an exception to the federal gift tax? If not, who pays the gift tax, the beneficiary or the trustee from trust funds?
Generally, there are 2 broad categories of trusts, revocable (the trust-maker retains the right to change the terms of the trust) and irrevocable (the trust-maker gives up all rights to change the trust terms by themselves.) In a revocable trust, because the trust-maker (aka – grantor or settlor) is retaining enough rights to have the trust assets included in their estate, no gifting has occurred in either the funding of the revocable trust or when the grantor takes assets out of the trust. If, however, the grantor of a revocable trust makes a distribution of cash from that trust to a third party other than their spouse, there is a gift, and it must be determined if a gift tax is owed. Currently for 2021, an individual can gift up to $15,000.00 in total gifts to a specific individual per year (the annual gift tax exclusion) without filing a gift tax return and without that amount counting towards their lifetime exemption amount. This annual gift tax exclusion is for an unlimited number of individuals. The current lifetime exemption amount for an individual is $11.7 million dollars.
Thus, for a gift tax to be owed to the IRS, the gift would have to be greater than the $15,000.00 annual exclusion per person, plus the $11.7 million lifetime exemption for there to be any gift taxes payable to the IRS. If that were the case and a gift tax had to be paid, generally, the donor of the gift is responsible for paying the tax imposed because of the gift. 26 U.S.C.A. § 2502(c). If the gifts are larger than the annual exclusion amounts per individual ($15,000.00 in 2021), but smaller than your lifetime exemption amount ($11.7 million in 2021), you would be required to file a gift tax return this year where you would declare the amount of the gifts, calculate the gift tax on that gift and that amount would be deducted from your lifetime tax exclusion.
Thus, for a revocable trust, there are no gifts taxes when forming or funding the revocable trust; however, there could be the potential for gift tax returns needing to be filed and potentially gift taxes payable when gifts are made from the trust to children beneficiaries.
There are 2 additional exclusions from gift taxes that pertain to individuals and revocable trusts. Any amounts an individual paid directly to an educational institution for education purposes or to any person who provides medical care for the benefit of a beneficiary would not be treated as a gift for tax purposes. 26 U.S.C.A. § 2503(e) These transfers allowed are unlimited in amount.
Generally, there are 2 broad categories of irrevocable trust. The first is an inter-vivos irrevocable trust (a trust created and funded during the grantor’s lifetime). The second type is a testamentary irrevocable trust (a trust created under the terms of a will or a revocable living trust upon the decedents death). In both instances, there should be no gift taxes payable on distributions from the trust to its beneficiaries.
The inter-vivos irrevocable trust would have had the gift tax assessed at its funding, by either utilizing the annual gift tax exclusion to fund the trust or using up part of an individual’s lifetime exclusion amount. An important caveat to utilizing the annual gift tax exclusion to fund an inter-vivos irrevocable trust is that the trust must contain a provision that allows a present interest withdrawal right for a specific period of time for any beneficiary receiving a gift in that trust. Crummey v. Comm’r, 397 F.2d 82 (9th Cir. 1968).
The testamentary irrevocable trust would have been funded with assets from a decedent’s estate and therefore any estate taxes due would have been satisfied through the estate settlement process. Therefore, irrevocable trusts are basically the opposite of revocable trust when it comes to gift taxes. Gift taxes would have been accounted for upon funding the irrevocable trust, so when distributions of trust assets are distributed to children beneficiaries, no gift taxes would be due.