Opinion
NOT TO BE PUBLISHED
Santa Barbara County Super. Ct. No. 1165965, Thomas P. Anderle, Judge.
Marshall S. Zolla and Garret C. Dailey for Appellant.
Misho & Associates and Jacqueline Misho for Respondent.
YEGAN, A.P.J.
Alicia R. Lancashire (Wife) and Christopher W. Lancashire (Husband) transferred community property into an irrevocable trust in which both parties retained a beneficial interest. The trust contained no transmutation provision.
We agree with the trial court that the beneficial interest in the trust is community property. We also agree with the trial court that a valuation of a survivor's benefit in the trust need not be adjusted for income or estate taxes or for the possibility Husband may survive Wife. Nor did the trial court double the value of the Wife's survivorship benefit. Finally, the trial court did not abuse its discretion in valuing the survivorship benefit and ordering Wife to make an equalizing payment instead of some other disposition.
Facts
The parties were married in December 1986 and separated in January 2005. Husband is 17 years older than Wife. During the marriage, the parties started Computec International Resources, Inc. (Computec), a company that provided information technology staffing to businesses.
In 1997, the parties sold Computec. While the sale was pending, Computec's attorney advised the parties to establish a Charitable Remainder Unitrust (CRUT). The parties executed the trust document on April 2, 1997. They funded the trust with 240, 000 shares of Computec. The sale of Computec closed on April 29, 1997. The trust is irrevocable. Under the terms of the trust, each party receives four percent of the principal value of the trust each year for his or her life. Upon the death of the first party to die, the survivor receives the deceased party's four percent in addition to the surviving party's four percent. Upon the survivor's death, the remainder goes to designated charities. The parties took a tax deduction for a charitable contribution for the year the trust was funded.
Wife filed for dissolution of the marriage in April 2006. The trial court bifurcated trial on the disposition of the trust's survivorship benefit. Husband requested that the survivorship benefit be evaluated and allocated to Wife with an offsetting payment to him. In the alternative, he requested that the CRUT be divided into two separate trusts. He offered an expert who would testify that the trust could be divided or the parties' beneficial interest in the trust could be sold. The trial court sustained Wife's objection to the expert's testimony. Thereafter, Husband withdrew his request that the trust be divided. Wife argued that community property transferred into an irrevocable trust is no longer community. Thus she contended the trial court had no jurisdiction over the CRUT.
At trial, Husband's expert, Michael Miskei, a certified public accountant, testified the value of the survivor benefit is $3,830,427. That is half of the total $7,660,854 value of the entire eight percent income stream.
Wife's expert actuary, Michael Preston, testified the gross value of the four percent survivor's benefit is $3,467,571. He also testified, however, that this value should be adjusted for income and estate taxes Wife will have to pay, and for the possibility she may survive Husband. Preston calculated the adjusted value of the survivor's benefit to be $600,464.
The trial court ruled the survivor's benefit is community property. It found the value of the survivor's benefit was $3,467,571, the gross value given by Wife's expert. The court refused, however, to adjust that amount for taxes or the possibility that Wife might survive Husband. The court found the taxes are not immediate or specific. Thus no adjustment could be made for taxes under In re Marriage of Fonstein (1976) 17 Cal.3d 738. It further found that the reasoning in Fonstein prohibited an adjustment for the possibility that Wife may predecease Husband. The trial court ordered Wife to pay Husband $3,467,571 for the "buy-out" of Husband's interest or the amount with interest would be deducted from Wife's share of the proceeds from the sale of the family residences.
CRUT As a Community Property Asset
Wife contends the trial court had no jurisdiction over the trust assets because the assets are not community property. This contention is without merit. Family Code section 761, subdivision (a) expressly provides that community property transferred into certain revocable trusts remains community property. But subdivision (e) of the section provides in part, "Nothing in this section affects the community character of property that is transferred... to a trust other than described in this section." Thus subdivision (e) does not speak to the question whether spouses who retain a beneficial interest in an irrevocable trust funded with community property have a community property interest.
All statutory references are to the Family Code.
Here there is no question that the property the parties transferred into the trust was community property. Wife argues, however, that when the parties transferred their property into the trust, it became the property of the trustee, and hence, ceased to be community. But a trustee does not take absolute title to the property. Instead, only so much title as is necessary to carry out the purpose of the trust is vested in the trustee. (See Noble v. Learned (1908) 153 Cal. 245, 250.) Where, as here, the trust settlors are also beneficiaries, the most reasonable conclusion is that they simply retained whatever interest they did not transfer to the trustee. It follows that because all the property transferred into trust was community, the beneficial interest they retained continued to be community. The trial court's order did not purport to affect the legal title held by the trustee. It only divided the parties' beneficial interest in the trust.
Wife points out the parties no longer have control over the property they placed in the irrevocable trust. Wife insists that when the parties transferred their property into trust they obtained a new interest. Even if we assume that to be true, this does not dictate reversal of the judgment.
The parties created the trust during their marriage. Section 760 states, "Except as otherwise provided by statute, " all property acquired during marriage is community property. Wife points to no statutory exception for beneficial interests in an irrevocable trust funded by community property.
Wife's reliance on section 2337 is misplaced. Subdivision (a) of the section authorizes the trial court to sever the issue of the dissolution of the status of the marriage from other issues. Subdivision (c) of the section authorizes the trial court to impose conditions on granting the severance. The conditions are designed to preserve the status quo pending a determination of community property issues. Subdivision (c)(7)(A) of the section authorizes the trial court to make an order that a beneficiary designation for a spouse in a nonprobate transfer be preserved. Section 2337, subdivision (c)(7)(B) provides in part, "Except upon a showing of good cause, this paragraph does not apply to any of the following:... (ii) An irrevocable trust...." Nothing in section 2337 provides that the beneficial interest in an irrevocable trust is not community property. When the Legislature creates an exception to the community property presumption, it does so in unequivocal terms. (See, e.g., § 770 [defining separate property of a married person].) Section 2337 is not even arguably relevant here.
Wife cites what appears to be a Senate Judiciary Committee staff analysis of a bill amending section 2337. The analysis states in part: "To ensure that a nonprobate transfer asset in which a spouse or partner has no interest is not unnecessarily tied up by such an order, AB861 exempts, except upon a showing of good cause, the following nonprobate transfer assets from this provision, among others:... (2) an irrevocable trust...." (Sen. Com. on Judiciary, Analysis of Assem. Bill No. 861 (2007-2008 Reg. Sess.) hearing date June 26, 2007.) Wife claims this shows that a spouse does not have an ownership interest in assets transferred to an irrevocable trust.
It may well be that some settlors of an irrevocable trust retain no ownership interest in the trust. But that is clearly not the case here. The parties retain a beneficial interest. The legislative staff analysis relied on by Wife is not persuasive.
There is no substantial distinction between the parties' beneficial interest in the trust and an annuity contract purchased with community funds or a pension earned by a spouse during marriage. They are community property even though the parties have no control over the assets that produce the stream of income. (See Estate of Peterson (1994) 28 Cal.App.4th 1742, 1750 [annuity contracts purchased with community property funds are community property]; In re Marriage of Lehman (1998) 18 Cal.4th 169, 177 [retirement benefits accrued by a spouse during marriage as deferred compensation are community property].)
The cases Wife relies on are distinguishable. In Laycock v. Hammer (2006) 141 Cal.App.4th 25, the court concluded that the proceeds of an irrevocable trust were exempt from the claims of the deceased settlor's judgment creditors. The trust provided in part, "'... Trustor shall have no right, title or interest in, or power, privilege or incident of ownership in regard to any property in this Trust...." (Id. at p. 27.) The settlor made his granddaughter the sole beneficiary. The court stated the settlor was not the owner of the assets of the irrevocable trust. (Id. at p. 30.) But here, unlike Laycock, the parties retained a beneficial interest in the trust. They did not give up all incidents of ownership.
In In re Marriage of Benson (2005) 36 Cal.4th 1096 (Benson), wife's father gave the parties a house. Thereafter, he talked the parties into transferring the house into an irrevocable trust of which wife was the beneficiary. Husband testified he transferred his community property interest in the house in exchange for wife's oral promise to waive her community property interest in husband's retirement accounts. The trial court concluded that husband relinquished his community interest in the house when he deeded it to wife's trust, and that was sufficient " 'part performance' " of the oral transmutation agreement so as to permit enforcement against wife. (Id. at p. 1102.) Our Supreme Court reversed on the ground that section 852 requires a transmutation agreement to be in writing. The Court stated the Legislature did not intend to incorporate traditional exceptions to the statute of frauds into section 852. (Benson, supra, at p. 1109.)
Here Wife relies on the conclusion of the trial court in Benson that husband lost his community property interest in the house when he deeded it to his wife's trust. But that is because wife was the sole beneficiary of the trust. Here both parties are beneficiaries of the trust. Moreover, Benson concerned the requirement of a written transmutation agreement. The relinquishment of husband's interest in the house was not an issue in the case. A case is not authority for issues not considered. (Contra Costa Water Dist. v. Bar-C Properties (1992) 5 Cal.App.4th 652, 660.)
Finally, in Aguilar v. Aguilar (2008) 168 Cal.App.4th 35, husband and wife created a trust giving the trustors use of the corpus during their lives and upon the death of the last trustor to their children and stepchildren free of the trust. The trust was revocable during the trustors' joint lives, but became irrevocable on the death of the first spouse to die. The trustors transferred their principal residence into the trust. Husband died first, and wife, as trustee, attempted to remove her community property interest in the residence from the trust. A remainder beneficiary objected. The court held wife could not remove assets from an irrevocable trust that was created for the purpose of preserving the assets for the trustors' children and grandchildren. (Id. at p. 40.) Aguilar is inapposite. Here neither party is attempting to remove any assets in contravention of the terms of the trust.
Wife does not contest that the stock the parties transferred into the CRUT is community property. Nor does Wife point to any express transmutation. (§§ 850 & 852.) As we stated in In re Marriage of Starkman (2005) 129 Cal.App.4th 659, 664, "A party does not 'slip into transmutation by accident.' [Citation.]" (Quoting In re Marriage of Koester (1999) 73 Cal.App.4th 1032, 1037, fn. 5.) Transferring community property into an irrevocable trust in which both parties retain a beneficial interest, does not change the character of the interest.
Adjustment of The Value of Wife's Interest in The CRUT
Wife contends the trial court erred in refusing to adjust the value of her interest in the trust to account for income and estate taxes and the possibility that she may predecease Husband.
In In re Marriage of Fonstein (1976) 17 Cal.3d 738, husband was awarded his interest in a law partnership. In calculating the value of his interest, the court considered payments to which husband would be entitled upon voluntarily withdrawing from the partnership. The trial court reduced the value of the payments in accordance with an estimate of the potential state and federal income tax consequences of husband's receipt of the withdrawal payments. (Id. at p. 744.) Our Supreme Court held the trial court erred in applying a discount for the estimated income taxes. In so holding, the Court stated: "The amount of taxes which [husband] will incur if he ever withdraws from his firm will depend upon a number of variables, the variety of which makes impossible anything more than a speculative approximation of the potential tax liability." (Id. at p. 750.) No adjustment for taxes is justified absent a showing of " 'immediate and specific tax liability.' " (Id. at p. 749, fn. 5, citing Weinberg v. Weinberg (1967) 67 Cal.2d 557, 567, italics added.)
Wife's expert testified the value of her survivor's benefits should be reduced by $1,352,353 to account for the income taxes she might have to pay on the benefit. He projected a 39 percent combined federal and state tax bracket based on the expected long term tax rate.
But the tax calculation is based on the present value of the tax liability Wife might incur over the remainder of her life. It is not an adjustment for an immediate tax liability. Nor is Wife's liability specific. Over Wife's lifetime, she might be able to shelter some of her income from taxation, or the tax rates may change, or her income may change.
Wife cites cases in which an adjustment for income tax liability was approved or required. Suffice it to say, none of those cases involve the uncertainties of calculating tax liability over a lifetime. Thus, in In re Marriage of Epstein (1979) 24 Cal.3d 76 (Epstein), the trial court ordered the sale of the family residence and the proceeds divided to equalize the division of community property. Because husband received a larger share of the parties' personal property, wife would receive a larger share of the proceeds from the sale of the house. Our Supreme Court interpreted the trial court's order as requiring that the division of the proceeds take into account the capital gains tax liability resulting from the sale. As so interpreted, the Court affirmed the order. The Court stated that any uncertainty in capital gains tax liability stems from the possibility that one or both parties may defer the tax liability by purchasing a new residence within a year of the sale. The Court noted that the uncertainty would be resolved within a year or two of the trial court's order. (Id. at p. 88.) The Court further noted, however, that if the parties elect to defer tax liability by purchasing a new residence, the possible future tax burden would be an example of the speculative and uncertain tax consequences the court need not consider under Epstein. (Id. at p. 88, fn. 10.)
Epstein factually supports Husband's position here. This is not an attempt to calculate tax liability on a one-time sale in which the uncertainty will be resolved in a year or two. This is an attempt to calculate incremental tax liability stretching over many years. Clearly, this is the type of speculative and uncertain tax consequence the court need not consider under Fonstein.
The trial court did not err in refusing to reduce the value of Wife's interest by the estate tax she might have to pay. Given that both parties are still living, the estate tax is not immediate. Even Wife's expert admitted he had no idea when the estate tax would be due. Nor is the estate tax specific. No one knows what the estate tax law might provide, or whether there will even be an estate tax, when one of the parties dies.
Finally, the trial court did not err in refusing to reduce the value of Wife's interest by an amount that takes into account the possibility she might predecease Husband. Here the trial court could reasonably conclude that Wife will survive Husband. Not only do women tend to live longer than men generally, but Husband is 17 years older than Wife. Wife cites no authority that requires the trial court to take into account the unlikely possibility that Wife may predecease Husband.
Alleged Doubling of Value
Wife contends the trial court erred in doubling the value of the survivor's benefit. She appears to argue that the $3,467,571 awarded to Husband represents the entire eight percent income stream that she will receive from the trust on Husband's death. Wife points out that under the terms of the trust four percent of the income is hers. Thus she believes the court doubled the value of the benefit she will receive on Husband's death.
But the $3,467,571 represents the four percent Wife will receive from Husband's interest upon her surviving him. Wife concedes as much in her further request for statement of decision and statement of controverted issues and proposals. Summarizing her expert's testimony she states, "[Wife's expert] concluded that the gross value (before tax adjustments) of the 4 [percent] survivorship benefit if [she] were to be the survivor is $3,467.571 (as to the 4 [percent] benefit)."
Moreover, the survivorship benefit will be paid solely to Wife as the survivor. Husband will receive no benefit from it. Thus the trial court was justified in charging Wife with the full value of the 4 percent benefit. It did not double the value of the benefit.
Theory of Trial
Finally, Wife contends the survivor's benefit should not have been valued at all. She is not permitted to change her theory of trial on appeal. (See 9 Witkin, Cal. Procedure (5th ed. 2008) § 407, PP. 466-468.) Here both parties tried the case on the theory that the survivor's benefit would be valued. The court stated in its statement of decision: "The court would not have been reluctant to find another method or option of dividing the interest in CRUT but [Husband] withdrew his request for other 'options' and [Wife] provided no request for other options other than 'to defer any decision until the time of death of the first of the grantors to die.' That option is unacceptable and would require that the court defer a decision for years, perhaps decades. Other than that option the court has no persuasive evidence other than the 'buy-out' option which I selected even if I wanted to elect another method of resolving this issue."
The trial court has broad discretion in choosing the method of division of community property. (11 Witkin, Summary of Cal. Law (10th ed. 2005) Community Property, § 213, p. 807.) Wife cites no applicable authority to show error or an abuse of discretion. She relies on cases from outside of California. Wife concedes none of the cases involves a trust. Suffice it to say, the authority does not persuade us that the trial court erred or abused its discretion here.
The judgment is affirmed. Costs on appeal are awarded to Husband.
We concur: COFFEE, J., PERREN, J.