Valuing Interests in Family Trusts and Partnerships

Whether a beneficiary spouse’s interest in a trust is subject to equitable distribution upon dissolution of marriage depends on whether the beneficiary spouse’s interest in the trust constitutes “property” and, if so, whether any part of that interest constitutes “marital property.”

Is it “property?”

A beneficiary spouse will only have a property interest in a trust if he or she has an enforceable right to distributions of the principal.  Under C.R.S. § 14-10-113(7)(b), only irrevocable trusts create property interests in beneficiaries.  However, even interests in an irrevocable trust may not be considered “property” for purposes of dividing property in a divorce.  Such a determination depends on a number of considerations, including the nature of the beneficiary spouse’s interest and whether the interest has “vested.”  If the trust is discretionary and the beneficiary spouse does not hold a remainder interest in the corpus of the trust, it will likely not be considered “property.”  Even a beneficiary’s entitlement to mandatory income distributions will not alone be sufficient to create a property interest.

Is it “marital property?”

If a beneficiary spouse’s interest in an irrevocable trust is considered “property” under C.R.S. § 14-10-113, the next step is determining the marital portion.  In Colorado, increases in the value of a spouse’s separate property and income from separate property constitute marital property.  Accordingly, the marital portion of a spouse’s interest in an irrevocable trust, which is that spouse’s separate property, depends on the nature of the beneficiary spouse’s interest, when the beneficiary spouse’s interest vested, and the increase in value of the beneficiary spouse’s interest over the duration of the marriage.

Economic Circumstance

If a beneficiary spouse’s interest in a trust does not constitute “marital property” subject to division it may still factor into the equitable distribution equation as an economic circumstance for the court to consider in making an equitable distribution of marital property. This is not true, however, of revocable trusts.