I’m only going to touch on one aspect of this decision, which is not intended as a disservice to the remainder of the court’s analysis, but this single part is more than complicated enough to make up one post. Plus, it which is an issue of first impression; specifically, whether an irrevocable life insurance trust is divisible as community property where neither spouse is a trustee or beneficiary.
The operative facts: the husband, prior to marriage, set up an irrevocable trust which stated, in part, that the trust “is and shall be irrevocable and shall not be altered, amended, revoked, or terminated by the [s]ettlor, or any other person.” Husband was not the trustee. The husband and wife then got married. The only significant asset in trust prior to, during, and after the marriage was the life insurance policy on the husband. It needs to be noted, as well, that the wife was a beneficiary of the trust, but lost that status due to the divorce (the decision isn’t clear, but it seems that she lost the status BECAUSE the divorce was initiated, because she had lost it by the time of trial).
The life insurance policy premiums were paid with community funds, until it was eventually funded through the dividends on the policy and loans taken against the policy. The community payments were made from 2000-03, and were treated as gifts to the couple’s children on their tax returns, as the kids were beneficiaries to the policy and the trust. In total, the community paid in excess of $200,000 toward the policy premiums. The trial court determined that the community owned a community lien on the trust as result of the community’s contribution, valued the lien in excess of $500,000, and awarded wife half the lien amount.
To begin the analysis, the Court first addressed New Mexico law on how to determine what property is community property, and what is separate. It restated that if the property at issue doesn’t belong to either spouse, it cannot be distributed. Property that is owned can either be separate or community. Once property status is determined, the law then requires equal distribution of community property in a divorce. In some instances, though, the community is entitled to a lien on separate property that is attributable to community labor during marriage.
The Court then reviewed the law of trusts, stating that a trustee of the trust owns legal or equitable title in the trust, but that beneficiaries of the trust may own ONLY equitable title. With that principle in mind, the Court explored decisions in other states that addressed situations similar to this case. Ultimately, it adopted the reasoning that because an irrevocable life insurance trust allows the settlor to avoid estate implications, due to the settlor’s inability to exercise control over the trust after settlement, property of the irrevocable trust is not subject to divorce division. Thus, in divorce cases, the Court may only divide the beneficial interest a spouse in the trust, i.e. his or her equitable title.
In this case, neither spouse was a trustee or a beneficiary of the irrevocable trust. Therefore, they had no interest in the trust’s property. Absent any fraud that would allow for an equitable invasion of the trust, the Court held that the trust’s property was improperly distributed to the wife.
Essentially, therefore, the wife put in a bunch of the money she contributed to the community into an asset that she ended up with no interest in. That is a hard result for her. So, if you marry someone that has a irrevocable life insurance trust set up, you better make sure you think hard about whether to let community assets be used to pay for that policy, and be sure who is beneficiary and whether that beneficiary status can be taken away. Otherwise, you can end up dropping a lot of coin with nothing to show for it.