Colorado Court Leaves Valuation Question Unanswered When Valuing GRAT Appreciation

by BakerHostetler
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On March 20, 2014, the Colorado Court of Appeals, in Malias v. Malias, upheld the trial court’s determination that grantor retained annuity trust (GRAT) remainder interests were “property interests” for property division purposes, and the corresponding valuation of the GRAT interests for those purposes. Although the case has not yet been selected for publication, it provides interesting insights for both estate planners and family law practitioners.

In Colorado, determining the disposition of trust property between divorcing parties is a two-step process. A court must first determine if an interest in trust constitutes a “property interest,” and if so, must then decide whether it is “separate” property or “marital” property. Colorado statutes provide a rebuttable presumption that all property acquired after the marriage is marital property, except for gifts, inheritance, property acquired in exchange for separate property, and property excluded by agreement between the parties. Marital property also includes appreciation of, and income earned from, a spouse’s separate property, including gifted property.

Husband and Wife were married in 1999. In 2003, Husband’s parents created GRATs for the benefit of Husband and his brothers. The GRATs had four year terms and were funded with stock in Husband’s family’s business. The value reported for gift tax purposes of the GRAT established for the Husband was $2,341. At the GRAT’s termination, the value distributed to Husband exceeded $7 million. Issues reviewed on appeal, among others, were whether the trial court erred in determining that the GRAT remainder interests were property interests for property division purposes and whether its valuation of those interests was reasonable.

The appellate Court first upheld the trial court’s finding that Husband’s GRAT remainder interests were property interests. The Court based its decision on the facts that the GRATs were irrevocable and Husband’s remainder interest was subject only to his surviving the GRAT’s four year terms. Citing Colorado case law, the Court stated that Husband’s remainder interest was a “‘certain, fixed interest’ sufficient to constitute property for purposes of Colorado law.” As a property interest, the GRAT’s appreciation from the initial creation of the GRAT constituted marital property.

The Court next addressed the trial court’s valuation of the property interest for purposes of determining appreciation. Each party’s expert testified that the purpose of GRAT planning is to remove any appreciation realized during the term of the GRAT from the grantor’s estate. Wife’s expert testified that the value reported on Husband’s parents’ 2003 gift tax returns reflected the appropriate value of the GRAT remainder interests gifted to Husband because that value accounted for the uncertainty of any future appreciation. Husband’s expert explained that aggressive planners seek to “zero” out remainder interest values and, therefore, the gift tax values were artificially low compared to the contributed property’s actual value. But, the Court noted that Husband’s testimony revealed that he disagreed with the gift value only because he did not consider Husband’s remainder interest to be property until the GRAT terminated and Husband received the distribution. Husband’s expert did not challenge the accuracy of the gift tax values nor did he offer any alternative valuation or valuation methodology.

The Court affirmed the trial court’s decision to value the property interests by utilizing the value reported for gift tax purposes as of the date of the gift. Specifically stating that the gift tax returns were the only evidence of value available, the Court held that the record supported the trial court’s decision to adopt the values reported for gift tax purposes. And as a result, almost the entire value distributed to Husband at the GRAT’s termination was appreciation constituting marital property subject to division.

If the Court had been provided with alternatives for valuing the assets on the date of their contribution to the GRATs, would the Court have made the same value determination?

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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