A Family Trust May Be Considered Marital Property in Some Cases
Smith v. Smith involves an appeal from a divorce decree, with a claim that the trial court misinterpreted the terms of a family trust and, consequently, improperly allocated certain property between the spouses. Sharon Smith and Keith Smith were married in 1979.
Sharon’s mother created a family partnership, which included Sharon and her siblings as limited partners. A portion of the partnership’s assets were distributed to Sharon and her siblings on a monthly basis. Sharon used her portions of the distribution for some years while she was married, and she used the money for family expenses. In 2006, the married couple created a family trust to shelter their real and personal property. This trust was made of two constituent trusts: the Keith L. Smith Trust and the Sharon L. Smith Trust. The Smiths also executed Schedule A, which was incorporated by reference in the main trust document. Schedule A was the primary mechanism through which the Smiths funded their family trust.
Sharon’s mother died in 2012, and Sharon received a large inheritance distribution from the family partnership by check. She deposited the check into two money market accounts in her own name. In 2013, Sharon and Keith separated their joint accounts and filed for divorce. Keith argued that he was entitled to half of Sharon’s inheritance or that he was entitled to alimony. The trial court rejected his argument and concluded that the inheritance was Sharon’s property. The trial court awarded the inheritance to Sharon, but since Keith had unmet financial needs, it ordered Sharon to pay alimony of $502 per month for a term up to the length of the marriage. Keith still disagreed, however, with the court’s decision that the inheritance belonged exclusively to Sharon.
On appeal, the court looked at whether the trial court properly awarded Sharon the entire inheritance from her family partnership. Keith’s argument turns on the interpretation of Schedule A of the family trust document, a question of law, which the Court of Appeals of Utah reviewed for correctness. The court looked at whether the inheritance changed in character from separate property to joint property simply because Sharon deposited it into a financial account. When a trust is unambiguous, which the parties agreed was the case, the court determines the parties’ intentions from the plain meaning of the trust’s language. The court looked at how all the provisions in Schedule A applied to Sharon’s inheritance, in particular the Partnership Provision, which assigns “all right, title and interest in and to” the family partnership to Sharon alone. However, if the Financial Accounts Provision controlled (which states that “all new accounts . . . in any and all other financial institutions in which new accounts are opened in the future” will be owned equally by Keith’s and Sharon’s individual trusts), Keith might have been entitled to half of the assets in Sharon’s accounts. Therefore, there was a conflict between the two provisions. A contractual interpretation concept the court used here is that general terms and provisions are restricted by specific terms and provisions following them. The court determined that the Financial Accounts Provision was general in nature, but the Partnership Provision applied particularly and exclusively to Sharon’s interest in the family partnership. The broad, general Financial Accounts Provision came before, which meant it was constrained in its breadth by the specific Partnership Provision that followed.
In conclusion, the court decided that the Partnership Provision in Schedule A of the family trust established that Sharon’s interest in the Family Partnership, and any distribution thereof, was her separate and exclusive property. The Financial Accounts Provision did not transform the inheritance into joint property when she deposited it into financial accounts in her name alone.