By Andrew Z. Soshnick
The treatment of trust interests as marital property under Indiana law has an underdeveloped and confusing history. The 1973 Indiana Dissolution of Marriage Act and statutory amendments do not directly address the issue of what trust interests are marital property. Likewise, few appellate opinions attempt to clarify when trust interests are included in marital estates and how they are valued. This lack of guidance and controlling authority understandably leads to disputes in divorce cases.
Historically, this issue should not be confounding. Contemporaneous with the act, the Indiana Supreme Court confronted the issue of trust interests as marital property in Loeb v. Loeb, 301 N.E.2d 349 (Ind. 1973). Loeb considered a trust established by the husband’s mother that paid the net income from the trust to her during her lifetime and distributed the principal of the trust to her three children or a deceased child’s children in equal shares at her death. Id. at 351-52. The wife contended that the husband had a vested remainder interest of pecuniary value that was marital property and the husband contended that his interest was contingent and not marital property. In agreeing with the husband, the Supreme Court determined the central question to be whether the future interest was “so remote” that it was not marital property rather than whether the interest was vested or contingent.
The Supreme Court observed that words of condition as to remainder interests may be “vested” or “contingent” and noted that cases examining this issue were difficult to reconcile. Id. at 353. Reasoning that remainder interests are vested or contingent depending on whether conditions are precedent or subsequent, the Supreme Court concluded that the husband had a vested remainder interest subject to a condition subsequent (i.e., the husband’s interest was subject to complete defeasance if he predeceased his mother). As the husband “had no present interest of possessory value” and was “not presently possessed of any pecuniary value which could have been before the trial court for disposition,” the Supreme Court held in a case of first impression that the trial court properly refused to include the “remote interest” as marital property. While these statements were fragmented in different parts of the opinion, Loeb seemed to establish that trust interests that were not absolute as to a beneficiary’s right to income or principal were not marital property.
Over a decade elapsed until the next development affecting trusts. In 1985, Indiana Code § 31-1-11.5-2 was enacted to define marital property as “all the assets of either party or both parties” and referenced three non-exclusive types of property interests that did not include trusts. Nine years later, the Court of Appeals of Indiana had occasion to reference both this statute and Loeb in Fiste v. Fiste, 627 N.E.2d 1368 Ind. Ct. App. 1994). Fiste involved a remainder interest in real estate, and the Court of Appeals, citing both Loeb and the subsequent statutory definition of marital property, declared that some property interests were “still considered too remote to be assets capable of division.” Id. at 1372. The husband in Fiste did not possess “a present interest of possessory value” and was subject to complete defeasance if he predeceased his mother, and the Court of Appeals followed Loeb in affirming the trial court’s exclusion of the husband’s real estate remainder interest from the parties’ marital estate.
In 1997, the former statutory definition of marital property was repealed and recodified at I.C. 31-9-2-98. This new statute continued listing three non-exclusive categories of marital property and reiterated that “property” means all the property of one or both parties to a divorce. I.C. 31-15-7-4 and 5 also recodified that all of the “property” of the parties to a divorce must be divided in a “just and reasonable” manner that is presumptively equal. Although these recodifications did not appear to change existing law, the Court of Appeals of Indiana shortly thereafter appeared to question otherwise in Moyars v. Moyars, 717 N.E.2d 976 (Ind. Ct. App. 1999). Moyars also involved a remainder interest in real estate partially possessed by the husband and the wife for many years and which the husband could sell and mortgage. Id. at 979. Reaching a conclusion that was distinguishable from Fiste based on facts, the Court of Appeals held that the husband’s vested remainder interest was not too remote to be included in the property division, as it represented “a present pecuniary interest.” Id. The Court of Appeals referenced without explanation that remainder interests, like fee simple interests, were capable of valuation. Id. Additionally, the Court of Appeals noted that I.C. 31-9-2-98 was enacted after Loeb in its effort to draw a distinction in reversing the trial court. Id. Moyars, at a minimum, directly attempts to limit Fiste and implicitly raises questions as to the precedential value of Loeb.
Not until 2017, 44 years after Loeb, did the Court of Appeals again directly consider the issue of trust interests as marital property. In Harrison v. Harrison, 88 N.E.3d 232 (Ind. Ct. App. 2017), the wife and her four sisters were co-trustees of six irrevocable family trusts. Id. at 233. Income and principal could only be distributed by majority vote of the co-trustees in their sole discretion, and no distributions were required. Id. At the death of the co-trustees’ parents, the co-trustees were to apportion and divide the trust property and set aside equal shares to the living co-trustees, with a subsequent vote to determine whether to distribute the shares in full to each co-trustee or her descendants. Id. The wife argued she had no present interests or control over distributions from the trusts, and the trial court agreed the interests were too remote and speculative to be marital property. Id. at 234. The Court of Appeals affirmed, followed Loeb and Fiste, and observed that, in addition to the wife’s interests in the trusts being subject to complete defeasance, they were “too remote” and the wife was “not presently possessed of any pecuniary value which could have been before the court for distribution.” Id. at 235-36. The Court of Appeals took the opportunity to declare that “Loeb is still good law,” note that Loeb was not overruled by the enactment of repealed and recodified I.C. 31-1-11.5-2, and opine that the wife’s “interests are not capable of valuation.” Id. at 236 n.2.
Harrison should put to rest any question of the vitality of Loeb and raises the important, unaddressed question of how trust interests can be or are valued. A good start would be to take the distinctive words and passages from Loeb and concisely compile its intention and meaning in either a subsequent opinion or statutory amendment, or both. As to the complex issue of how to value marital property trust interests, a tutorial in present value, probability, statistics and actuarial tables may educate but still will leave a gaping and vexing hole when valuing and dividing trust assets that are part of marital estates.•
• Drew Soshnick is a partner in the Indianapolis office of Faegre Drinker Biddle & Reath. He is a past chair of the Indiana State Bar Association Family & Juvenile Law and Indianapolis Bar Association Family Law sections and a fellow of the American Academy of Matrimonial Lawyers and the International Academy of Family Lawyers. Opinions expressed are those of the author.