Kelln v. Kelln

• Citation: 30 Va. App. 113,515 S.E.2d 789
• Decision Date: 29 June 1999
• Docket Number: Record No. 0871-98-1.
• Parties: Albert L. KELLN v. Amanda F.B. KELLN.
• Court: Court of Appeals of Virginia

515 S.E.2d 789

30 Va. App. 113

Albert L. KELLN v. Amanda F.B. KELLN.

Record No. 0871-98-1.

Court of Appeals of Virginia, Norfolk.

June 29, 1999.

McClanahan Ingles, Gloucester; Michael L. Wood, Grafton (Martin, Ingles & Ingles, Gloucester, on brief), for appellant.

Kenneth R. Yoffy (Cope, Olson & Yoffy, on brief), Newport News, for appellee.

Present: BENTON and ANNUNZIATA, JJ., and OVERTON,¹ Senior Judge.

ANNUNZIATA, Judge.

Albert Kelln ("husband") challenges the circuit court's classification of certain assets transferred in trust during the marriage of Husband and Amanda Kelln ("wife"). Husband contends the court erred in holding that the assets at issue, which had been divided into separate shares pursuant to the terms of a revocable inter vivos trust agreement, constituted separate property and, accordingly, were not subject to equitable distribution under Code § 20-107.3. For reasons set forth below, we agree and reverse.

Husband and wife married on September 1, 1990. On June 26, 1991, the parties entered jointly into a Revocable Living Trust Agreement ("the Agreement"). The Agreement was executed at the same time as the parties' wills and formed a part of their estate plan. The relevant provisions of the Agreement follow.

The Agreement created two separate and distinct trusts, one for each spouse.² The Agreement designated husband and wife as both "Grantors" and "Trustees" and stated as its purpose to "provide for the management of the Grantors' assets during the Grantors' lifetimes; to provide a preferred alternative to guardianship proceedings; and to provide a simplified means of accomplishing both lifetime and death transfers of the Grantor[s]' assets."

The trust property was defined in Article II of the Agreement. Under its terms, assets transferred by the Grantors into the trust were to be designated Schedule A, B, or C assets. All property not specifically designated as a Schedule B or C asset was deemed to be a Schedule A asset. According to the Agreement, "regardless of how [trust] property was acquired, or how titled ..., [the property transferred pursuant to the Trust Agreement] shall for all purposes of [the] Trust be divided into two separate shares, one for each Grantor...." Husband's share consisted of one-half of Schedule A assets and all of Schedule B assets. Wife's share consisted of one-half of Schedule A assets and all of Schedule C assets. In describing Schedule A assets, the Agreement specifies: "To the extent that either [spouse's] share [of Schedule A assets] exceeds his or her contribution to the Trust, the amount of the difference or excess contribution shall constitute a completed gift from the other [spouse]."

Each party retained the right to revoke the trust during their joint lifetime, at which time the Trustee was required to "deliver to the Grantors, or as may be directed in the instrument of revocation, their respective shares of the trust property." The parties also had the right to receive during their lifetimes all of the net income and principal of their respective share.

Upon the death of one of the parties, Article III of the Agreement required the surviving Trustee to make a number of dispositions of the decedent's share in order to take advantage of certain tax provisions of the Internal Revenue Code. Among the stipulated dispositions was the transfer of that portion of the decedent's share which was "necessary to increase the estate of the [surviving] spouse under federal law to an amount which is equal to the total remaining unused unified credit" under 26 U.S.C. § 2010 to the share of the surviving spouse ("the Survivor's Trust"). Assets allocated to the Survivor's Trust were further specifically limited to those assets "which qualify for the marital deduction" under 26 U.S.C. § 2056. In the event the surviving spouse disclaimed the transferred property and to the extent that property remained in the decedent's share, the Agreement required that property be transferred into a credit shelter trust in "any portion necessary to make the [trust] equal to the largest amount" that could "pass free of federal estate tax ... by reason of the [decedent's] available unified credit."

In contemplation of the tax saving purposes of the Agreement, the following anticipated estate tax goals are set forth in Article III:

For preservation of the marital tax deduction, [the Survivor's Trust] may be paid or transferred outright to the [surviving] spouse if, in Trustee's judgment, such payment would be necessary to prevent the loss of the marital deduction....

The Grantors, by funding the share of the [surviving] spouse [in this manner], are fully aware that the share passing to the [surviving] spouse will be taxed in the estate of the [surviving] spouse if thereafter owned at death. The Grantors prefer to allow [the surviving] spouse the fullest share that will not knowingly incur estate taxation upon the death of the surviving [spouse], as determined at the time of the death of the Grantor, in order to minimize the likelihood of funding a credit shelter trust and thereby incurring the added expenses of such trust, as well as having to dealing [sic] with the inflexibility thereof....

Husband revoked the trust before the parties separated on January 19, 1997. On January 28, 1997, husband filed a bill of complaint for divorce. On February 2, 1998, the trial court held a hearing to determine the classification of the trust property, all of which was transferred into the trust as Schedule A assets. At the hearing, the parties jointly filed the Agreement with the court. Husband's counsel conceded the trust's activation by a transfer of property. No other evidence was introduced by either party.

The court, looking to the four corners of the Agreement, found that the Agreement was clear and unequivocal. Further, the court found that the Agreement created two separate and equal trusts and that assets transferred to a spouse's share pursuant to the Agreement constituted a completed gift from the other spouse. Accordingly, by order of March 19, 1998, the court ruled that all Schedule A assets were separate property to be divided equally among the parties. In doing so, the court did not reference any particular provision of Code § 20-107.3, declined to consider the factors set forth in Code § 20-107.3(E) pertaining to the division of marital property, and referred the case to a special master to determine the precise assets encompassed within Schedule A.

Husband contends the court erred in finding that the transfer of property to the parties' separate trusts pursuant to the Agreement constituted a completed gift from the donor spouse, the nature of which transformed the assets into separate property. Husband cites as particular grounds, the absence of sufficient proof of donative intent to create separate property. See Theismann v. Theismann, 22 Va.App. 557, 566, 471 S.E.2d 809, 813,

aff'd on reh'g en banc, 23 Va.App. 697, 479 S.E.2d 534 (1996) (stating that one of the elements of a valid gift is the donor's intent to make a gift). See also Dean v. Dean, 8 Va.App. 143, 146, 379 S.E.2d 742, 744 (1989) (stating that a person who claims ownership of property by gift must prove the donative intent of the donor by clear and convincing evidence). We agree.

The equitable division of property that the parties have transferred to a revocable inter vivos trust for estate planning purposes presents a matter of first impression under Virginia divorce law, and one which few of our sister states have had an opportunity to address directly. However, our analysis is not without well-founded roots in settled law, specifically, the law governing the classification of property under Code § 20-107.3 and of property acquired by interspousal transfers.

Other than a document attached to the Agreement that assigned the parties' furniture, furnishings, and personal effects to the trust, no evidence was presented to establish that the property transferred under the Agreement was separate property. Thus, we treat the assets as marital at the time of the transfer because property acquired during the marriage is presumed to be marital in the absence of satisfactory evidence to the contrary. See Code § 20-107.3(A)(2); Hart v. Hart, 27 Va.App. 46, 61, 497 S.E.2d 496, 503 (1998).³

The query before us, therefore, is whether marital property can be transformed into separate property under the terms of a revocable trust agreement executed during a marriage. In McDavid v. McDavid, 19 Va. App. 406, 451 S.E.2d 713 (1994), we determined that "property which is marital may become separate ... through `a valid, express agreement by the parties.'" Id. at 411, 451 S.E.2d at 717 (quoting Wagner v. Wagner, 4 Va.App. 397, 404, 358 S.E.2d 407, 410 (1987)). In that case, we affirmed the trial court's ruling that real property acquired during the marriage was properly classified as husband's separate property based on the terms of a deed of gift executed by wife, transferring her interest in the property to husband. See id. at 408, 411, 451 S.E.2d at 715, 717. The McDavid deed provided that the property was to be held by husband "in his own right as his separate and equitable estate as if he were an unmarried man ... free from the control and marital rights of this present ... spouse" and "with full and complete power ... [to] dispose of the ... property ... during his lifetime ... [or by devise]." Id. at 411, 451 S.E.2d at 717. We found that under the provisions of Code § 20-155, which accords post-marital contracts the same dignity under law as pre-marital contracts,⁴ the terms of the McDavid deed rebutted the presumption that "property acquired during marriage with marital funds is marital property." Id. at 411, 451 S.E.2d at 717.

Prior to our decision in McDavid, we dealt with an earlier line of cases which held that property transferred by interspousal gift was marital property because the property was...