Vanderlugt v. Vanderlugt

• Decision Date: 05 September 2018
• Docket Number: No. A-1-CA-35260,A-1-CA-35260
• Citation: 429 P.3d 1269
• Parties: Pete VANDERLUGT, Petitioner-Appellant, v. Kristina VANDERLUGT, n/k/a Kristina Cervantes, Respondent-Appellee.
• Court: Court of Appeals of New Mexico

429 P.3d 1269

Pete VANDERLUGT, Petitioner-Appellant,

v.Kristina VANDERLUGT, n/k/a Kristina Cervantes, Respondent-Appellee.

No. A-1-CA-35260

Court of Appeals of New Mexico.

Filing Date: September 5, 2018

Caren I. Friedman, Santa Fe, NM, for Appellant.

Kerry Kiernan, P.C., Kerry Kiernan, Albuquerque, NM, for Appellee.

KIEHNE, Judge.

{1} Pete VanderLugt (Husband) appeals the district court's order following a bench trial on property division issues in connection with his divorce from Kristina VanderLugt, n/k/a Kristina Cervantes (Wife). Husband raises four issues: (1) whether the district court erred in determining that Wife had a community lien interest in the assets of an irrevocable trust; (2) whether the district court abused its discretion in limiting Husband's discovery into Wife's various business enterprises; (3) whether the district court abused its discretion in allowing Wife's expert witness on trusts and estate planning to testify about the irrevocable trust at trial; and (4) whether the district court erred in concluding that Wife had separate and community lien interests in proceeds from the sale of Husband's separate property.

{2} This is the second time this case has come before this Court. On the first appeal, we remanded this case to the district court because there was no final, appealable judgment on the irrevocable trust issue. See VanderLugt v. VanderLugt , No. 32,950, mem. op. ¶¶ 10-11, 2015 WL 1143078 (N.M. Ct. App. Feb. 25, 2015) (non-precedential).

{3} We now reverse the district court's decision that there was a community lien interest in the irrevocable trust and that Wife was entitled to a share of it. This ruling makes it unnecessary to decide Husband's claim that Wife's expert witness should not have been allowed to testify about the irrevocable trust. We affirm the district court on all other issues.

BACKGROUND

{4} The parties were married in May 1998 and separated in May 2010. They had two children during the course of their marriage. The district court held a bench trial in March 2013 to decide property division issues that the parties were unable to agree on. Additional facts are developed below as needed to discuss the issues raised by Husband on appeal.

DISCUSSION

I. Wife had no interest in the VanderLugt Irrevocable Trust

{5} We first address Husband's claim that the district court improperly granted Wife a community lien interest in the corpus of an irrevocable life insurance trust set up by Husband before the couple married.

A. Background of the VanderLugt Irrevocable Trust

{6} Husband created the VanderLugt Irrevocable Trust (the Trust) in 1992, funding it in 1994 with a life insurance policy on Husband's life, which is the Trust's only asset. The Trust is the owner of the life insurance policy. Husband's father is the trustee, and the beneficiaries as stated in the Trust instrument are Husband's spouse if he is married at the time of his death, and if he is not married at the time of his death, then the Trust assets are to be held in a separate trust for his children. Fifteen percent of the Trust assets are to be distributed to various charitable organizations. At the time the Trust was set up, Husband was not married, not about to get married, and had no children. The Trust instrument stated that it "is and shall be irrevocable and shall not be altered, amended, revoked, or terminated by the [s]ettlor, or any other person." The parties stipulated that as of February 2012, the net death benefit of the policy was $5,017,376, and the net cash value of the policy was $726,759.91.

{7} For several years after they married, the parties paid premiums on the policy using community funds until the policy became "self-funding," meaning that the premiums were paid using a combination of dividends earned on the policy and loans against its cash value. From 2000-2003, the premium payments made by the community were treated as a gift to the parties' children for tax purposes. At the time of trial, the parties' children were the only beneficiaries of the Trust because Wife lost her status as a beneficiary upon divorcing Husband and Husband had not remarried.

{8} After trial, the district court found that Husband set up the Trust for estate planning purposes and found that the only significant asset in Husband's estate was the life insurance policy. It further found that the community paid $289,128.68 in premiums on the policy before it became self-funding. Further, the district court found that the dividends were partially earned by the community premium payments. Relying on figures provided by Wife's expert witness in accounting, the district court determined that the community had a community lien interest in the Trust of $519,520.12. The district court ordered that Wife receive one-half of the community lien interest, i.e., $259,760.06. After the first appeal, the district court noted that because neither party had joined the trustee or trust beneficiaries to the dissolution of marriage proceeding, it did not have jurisdiction over them, and concluded that Wife would have to bring a separate action to enforce and collect her lien against the Sun Life Policy. The district court also found that "[i]t is inequitable for [Wife] not to receive her interest in the Sun Life Policy particularly when [Husband]'s father is the Trustee and [Husband] can benefit during his lifetime from distributions and loans to a subsequent spouse, future children and/or the parties children the Trustee determines to be in the beneficiary's interest."

{9} Wife argues that we should uphold the decision of the district court that the community acquired a community lien interest in the Sun Life Policy and that she is entitled to one-half of that interest. She urges this Court to hold that it would be inequitable not to allow her to receive this interest. Husband, on the other hand, argues that the Sun Life Policy, as the sole asset of an irrevocable trust, is neither a community asset nor a separate asset of either party and therefore was not subject to property division.

B. The law governing property division and trusts

{10} Under New Mexico community property law, "property ... takes its status as community or separate at the time it is acquired, and by manner of acquisition." Bayer v. Bayer , 1990-NMCA-106, ¶ 12, 110 N.M. 782, 800 P.2d 216. "Community property consists of all property acquired by either or both spouses during marriage, which is not separate property, and its rents, issues and profits." Portillo v. Shappie , 1981-NMSC-119, ¶ 12, 97 N.M. 59, 636 P.2d 878 (internal quotation marks and citation omitted). In divorce proceedings, trial courts are to divide the community property equally. Irwin v. Irwin , 1996-NMCA-007, ¶ 10, 121 N.M. 266, 910 P.2d 342. Separate property is not subject to division, but the community may obtain a lien interest in the increased value of separate property of a spouse if community funds or labor are expended which increase the value of the separate property. See Trego v. Scott , 1998-NMCA-080, ¶ 8, 125 N.M. 323, 961 P.2d 168 ; Jurado v. Jurado , 1995-NMCA-014, ¶ 19, 119 N.M. 522, 892 P.2d 969 ; Brett R. Turner, Division of Third-Party Property in Divorce Cases , 18 J. Am. Acad. Matrim. Law 375, 377 (2003) [hereinafter Third-Party Property ] ("[S]eparate property is awarded to the spouse who holds legal title."). A community lien is an interest that the community obtains in the separate property of one of the spouses to a marriage. See Jurado , 1995-NMCA-014, ¶ 10, 892 P.2d 969 ("The community is entitled to a lien against the separate property of a spouse for the enhanced value of such property attributable to community labor during the marriage."). Wife has the burden of proof of establishing the community interest in the sale of the proceeds. See Bayer , 1990-NMCA-106, ¶ 12, 800 P.2d 216.

{11} Generally, however, if property does not belong to either spouse, then it is not subject to division in a divorce case. See Third-Party Property , supra , at 377 ("The general rule is that third-party property is not subject to division [in a divorce proceeding]."). Third-party property is not separate property of either spouse. Id. at 379 ("[P]roperty owned by a third party is neither marital nor separate property, but rather a distinct category of property in itself.").

{12} The question before us is a matter of first impression—whether an irrevocable life insurance trust is divisible as community property where neither spouse is a trustee or beneficiary. "A trust may be defined as a fiduciary relationship in which one person holds a property interest, subject to an equitable obligation to keep or use that interest for the benefit of another." Amy Morris Hess, George Gleason Bogert, & George Taylor Bogert, Bogert's The Law of Trusts & Trustees , § 1 (June 2018) [hereinafter Bogert's ] (emphasis omitted). Trusts have been increasingly recognized as legal entities, which consist of the trust estate and the fiduciary relation between the trustee and beneficiaries. Restatement (Third) of Trusts § 2 cmt. a (2018). The trustee holds property for the benefit of the beneficiary. Id. Generally, the trustee is considered to hold legal title to the trust property, while the beneficiary holds equitable title to the trust property. See Bogert's , supra § 1 ("A trustee's title usually is legal, but it may be equitable if the settlor expresses the intent to give such an interest and has the capacity to do so."); Restatement (Third) of Trusts § 2 cmt. d ("Although trust beneficiaries have equitable title, a trustee's title to trust property may be either legal or equitable."). In divorce cases, a court generally may only divide the spouses' equitable interest in the property. Third-Party Property , supra , at 389.

{13} An irrevocable trust is a trust which cannot be revoked by the settlor—the settlor being the person who creates or contributes property to the trust. See Bogert's , supra §§ 1, 998; see...