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INTERESTS IN TRUSTS AS PROPERTY IN DISSOLUTION OF MARRIAGE: IDENTIFICATION AND VALUATION

Real Property, Probate and Trust Journal, Spring 2005 by Chorney, Marc A

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Valuation under Code section 7520 is a present value calculation that applies mortality and interest rate factors mandated by the Code.137 In other present value calculations, the selection of discount rates may vary depending upon market conditions and the specific assets being valued. Similarly, other mortality tables exist that produce values different from that required by Code section 7520.

For interests in trusts to which Code section 7520 would apply, a trial court likely could use those principles within the exercise of its discretion and eliminate considerable uncertainty in valuing future interests in trusts in a property division.138

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In valuing a remainder interest under Code section 7520 for gift tax purposes, the calculation does not take into account the risk that a remainder beneficiary's death may occur prior to trust distribution. In the context of a property division, reducing the value of a beneficiary's interest by a factor attributable to the risk that the beneficiary might not survive until the projected date of distribution (e.g., the death of the current trust beneficiary) may be appropriate. The same mortality tables could be used to determine a reduction in the value of a remainder interest attributable to the possible death of the remainder beneficiary prior to the distribution of the remainder interest.

Some interests in trusts cannot be valued actuarially for tax purposes because of a contingency, power, or other restriction,139 and if the tables are not applicable, the value for tax purposes is based on all the facts and circumstances.140 Diversions of income and corpus also may prevent the application of the Code section 7520 tables for tax valuations,141 as will a terminal illness for a measuring life.142 If valuation under the tables is not allowed for tax purposes in these situations, logic dictates that valuation by exclusive reliance on the tables for the purposes of a property division is also inappropriate.

Some interests in trusts, though subject to contingencies and diversions, will be certain enough to constitute property for purposes of property division. This category of interests will present the greatest challenge to a trial court. A number of factors may be relevant in valuing these interests, including a review of prior diversions of trust property and the resources of current trust beneficiaries. In those instances, qualitative analysis and creative solutions by trial courts will be required. Complex discovery and the participation of trustees and family members in the proceedings also will be required.

Even in those situations in which contingencies and diversions require a facts and circumstances analysis, tax valuation principles still may be useful to a trial court. For example, if a court determined that a power of invasion in a trust for the support of a divorcing spouse's parent might reduce the value of the trust corpus by as much as one-half, would a Code section 7520 valuation of the spouse's remainder interest utilizing one-half of the value of the trust corpus be beyond the bounds of a trial court's exercise of reasonable discretion? Tax law also may be useful, at least by way of analogy, in instances in which a trial court exercises discretion in quantifying contingencies and diversions.

INTERESTS IN TRUSTS AS PROPERTY IN DISSOLUTION OF MARRIAGE: IDENTIFICATION AND VALUATION

Real Property, Probate and Trust Journal, Spring 2005 by Chorney, Marc A

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