JUNE 29, 1999

Record No. 0871-98-1





Prentis Smiley, Jr., Judge

Present: Judges Benton, Annunziata and Senior
Judge Overton

Argued at Norfolk, Virginia


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

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

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 Sect.
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.
[1] 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. Sect. 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. Sect. 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 Sect. 20-107.3,
declined to consider the factors set forth in Code Sect.
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
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 Sect. 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 Sect. 20-107.3(A)(2); Hart v.
, 27 Va. App. 46, 61, 497 S.E.2d 496, 503 (1998).

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 Sect. 20-155, which accords post-marital contracts the same
dignity under law as pre-marital contracts,
[3] 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 acquired during the marriage and the evidence was
insufficient to support the classification of the transferred
property as separate under Code Sect. 20-107.3. See Garland
v. Garland
, 12 Va. App. 192, 196, 403 S.E.2d 4, 7 (1991). In Garland,
husband conveyed his entire interest in the marital residence to
wife in anticipation of a pending divorce action. See id.
at 193, 403 S.E.2d at 5. Subsequently, the parties reconciled,
but legal title to the residence remained in wife’s name. See
id. In conjunction with husband’s later suit for divorce,
the trial court found that the marital residence was wife’s
separate property. See id. at 194, 403 S.E.2d at 6.
We reversed, stating, "[e]ven though the wife may retain
legal title to the property as a result of the separation
agreement, whether the property is separate or marital is
determined by the statutory definition and is not determined by
legal title." Id. at 195, 403 S.E.2d at 6. We further
noted that wife’s interest was governed by Code Sect.
20-107.3(A)(1), which limits the acquisition of separate property
by gift to property received from a source other than the donee’s
spouse. See id. at 196, 403 S.E.2d at 7. See
Kauffman v. Kauffman, 7 Va. App. 488, 496, 375
S.E.2d 374, 377 (1988) (finding insufficient evidence to overcome
presumption that jewelry given to wife during the marriage was
marital property, not her separate property). Neither Garland
nor Kauffman involves a transfer of property or an
agreement from which the intent to convey an asset as a spouse’s
separate property under Code Sect. 20-107.3 is proven by
express and specific language, as was the situation in McDavid.

Kauffman, Garland, and McDavid
each considered the question of interspousal transfer of marital
property by gift. In Theismann v. Theismann, we addressed
the same question in the context of an interspousal gift of
separate property. The husband in that case retitled his separate
real property and two separate financial accounts jointly in his
and his wife’s name. See Theismann, 22 Va. App. at
565, 471 S.E.2d at 813. We affirmed the trial court’s finding
that the transfer constituted a gift to the wife, which provided
a ground for distribution of a portion of the property’s value to
her as part of an award of marital property. See id.
at 566-68, 471 S.E.2d at 813-14. In essence, we held that a gift
of separate property during the marriage becomes marital property
subject to division pursuant to the factors listed under Code
Sect. 20-107.3(E). See id. at 567-69, 471 S.E.2d at
813-14. See also J. Thomas Oldham, Divorce, Separation
and the Distribution of Property
Sect. 6.02[3][b] (1998).

The principles that emerge from the cases
addressing the classification of property which has been the
subject of interspousal gift do not depend upon the
classification of the source of the property but rather upon
whether one party by clear and express language intended to give
the asset as the other spouse’s separate property or merely
intended to make a gift during the marriage, which becomes
marital property. Where the facts clearly and unambiguously
support the conclusion that one of the parties has relinquished
all right and interest in marital property and has transferred
those rights unconditionally to the other, to the exclusion of
the donor’s continuing claim upon the property as a marital asset
pursuant to Code Sect. 20-107.3, a separate property right
will be found to exist. See Code Sect. 20-107.3(A)(2)
(stating that property acquired during the marriage by either
spouse and before the last separation of the parties "is
presumed to be marital property in the absence of satisfactory
evidence that it is separate property."
) (emphasis
added)); McDavid, 19 Va. App. at 411-12, 451 S.E.2d at
717; Kauffman, 7 Va. App. at 496, 375 S.E.2d at 377.
However, it is not enough to merely change legal title. See
Garland, 12 Va. App. at 195, 403 S.E.2d at 6. As noted by
one commentator:

"An interspousal gift
could be construed as evidence of an implied
agreement that the transferred asset should not
be marital property, but such an agreement is not
automatically present merely because an
interspousal gift was made. Indeed many
interspousal gifts are made without any intent of
removing the asset from the marital estate in the
event of divorce."

Brett R. Turner, Equitable Distribution of
217 (2nd ed. 1994) (citing Hemily v. Hemily,
403 A.2d 1139, 1143 (D.C. 1979)). See In re Marriage of
, 215 Ill. App. 3d 763, 771, 576 N.E.2d 44, 50 (Ill.
App. Ct. 1991) (holding that under Illinois law the presumption
that property acquired by either spouse during the marriage is
marital property can be overcome only "by clear, convincing,
and unmistakable evidence" that the property was acquired by
gift from the other spouse).

It follows that equivocal evidence of intent,
including evidence of a purpose unrelated to the making of a
gift, may defeat a claim of separate property before the divorce
court. See, e.g., Hoagland v. Hoagland, 852 P.2d
1025, 1028 (Utah Ct. App. 1993) (holding the trial court acted
within its discretion in concluding that real property, conveyed
by husband to wife by quitclaim deed in order to protect it from
creditors of husband’s failing business, was marital property); In
re Marriage of Parr
, 103 Ill. App. 3d 199, 206-07, 430 N.E.2d
656, 661-62 (Ill. App. Ct. 1981) (finding that the presumption in
favor of classifying property acquired during the marriage as
marital was not rebutted when husband quitclaimed his interest in
a condominium to wife for business and tax purposes); In re
Marriage of Leff
, 148 Ill. App. 3d 792, 807-08, 499 N.E.2d
1042, 1052-53 (Ill. App. Ct. 1986) (affirming the trial court’s
finding that the marital residence, acquired during the marriage,
was marital property when husband testified he placed title in
wife’s name to protect the residence from a possible malpractice
action and wife failed to rebut presumption that property was
marital by clear and convincing evidence); Davis, 215 Ill.
App. 3d at 771-73, 576 N.E.2d at 50-51 (determining that
husband’s transfer of his interest in the marital residence to
wife by quitclaim deed was not a gift that transformed the
property into wife’s separate property because transfer was made
as part of an estate tax planning scheme); In re Marriage of
, 109 Ill. App. 3d 569, 572-75, 440 N.E.2d 1028,
1030-31 (Ill. App. Ct. 1982) (finding that husband’s transfer of
his separate real property to joint tenancy with his wife for the
purpose of avoiding probate was not a gift of the property to the
marital estate); Weberg v. Weberg, 158 Wis.2d 540, 550-52,
463 N.W.2d 382, 386-87 (Wis. Ct. App. 1990) (rejecting wife’s
argument that husband’s separate funds became marital property
when placed in a joint account based on the absence of evidence
showing donative intent and on husband’s testimony that he placed
the funds in the joint account to protect wife in the event of
his death); Berry v. Breslain, 352 N.W.2d 516, 518 (Minn.
Ct. App. 1984) (finding that wife’s home, although transferred to
joint tenancy with husband upon marriage, remained her separate
property because the joint tenancy was created primarily to
ensure security on the mortgage).

In short, when evidence of intent to relinquish
all present and future dominion over the property so as to remove
it from the marital estate is lacking, the presumption of Code
Sect. 20-107.3(A)(2) that property acquired by either spouse
during a marriage is marital remains unrebutted. See McDavid,
19 Va. App. at 411-12, 451 S.E.2d at 717; Kauffman, 7 Va.
App. at 496, 375 S.E.2d at 377. See e.g., Davis,
215 Ill. App. 3d at 771, 576 N.E.2d at 50.

In determining whether the Agreement contains
sufficient evidence of donative intent to create separate
estates, principles governing the construction of contracts are
applicable. The "fundamental rule" when construing a
contract is "to ascertain the intent of the parties . . .
." Monterey Corp. v. Hart, 216 Va. 843, 850, 224
S.E.2d 142, 147 (1976). In order to determine intent, courts may
look to the "language employed, the subject matter, and the
surrounding circumstances." Id. The construing court
"must give effect to all of the language of [the instrument] if its parts can be read together without conflict." Berry
v. Klinger
, 225 Va. 201, 208, 300 S.E.2d 792, 796 (1983).
Further, the instrument must be read as a single document, with
meaning given to every clause. See id.; Winn v.
Aleda Constr. Co.
, 227 Va. 304, 307, 315 S.E.2d 193, 195
(1984) ("No word or clause will be treated as meaningless if
a reasonable meaning can be given to it, and there is a
presumption that the parties have not used words
aimlessly."). "The facts and circumstances surrounding
the parties when they made the contract, and the purposes for
which it was made, may be taken into consideration as an aid to
the interpretation of the words used, but not to put a
construction on the words the parties have used which they do not
properly bear." Seaboard Air Line R.R. Co. v.
Richmond-Petersburg Turnpike Authority
, 202 Va. 1029, 1033,
121 S.E.2d 499, 503 (1961). See Monterey, 216 Va.
850-51, 224 S.E.2d at 147 ("'[Courts] are never shut out
from the same light which the parties enjoyed when the contract
was executed, and in that view they are entitled to place
themselves in the same situation which the parties who made the
contract occupied, so as to view the circumstances as they viewed
them, and so to judge of the meaning of the words and of the
correct application of the language to the things
described.’" (quoting Bank of Old Dominion v. McVeigh,
32 Gratt. (73 Va.) 530 (1879))).

Applying these principles here, we find that
the record does not contain clear and unambiguous evidence that
either party intended to relinquish his or her interest in
marital property and to create separate estates upon the division
and transfer of the property into equal shares under the
Agreement. The Agreement reflects a clear purpose to establish a
mechanism, using a revocable trust as the vehicle, that would
enable the parties to take advantage of provisions in the
Internal Revenue Code allowing married persons to minimize
federal estate tax liability. Accordingly, the parties’ agreement
to divide and place their assets into equal shares must be viewed
in light of the contemplated tax purposes that the Agreement was
intended to serve. Wife’s contention that the equal division of
Schedule A assets into two separate shares evidences the
husband’s intent to make a completed gift to her of the property
transferred to Schedule A fails to consider that under the estate
tax laws, which underlay the parties’ Agreement, the equal
division of the marital estate was critical to assuring the
avoidance of tax liability upon death. See 26 U.S.C.
Sects. 2001(a), 2010(a), 2056(a), 2523(a); see also
James F. Farr & Jackson W. Wright, An Estate Planner’s
Sect. 50, at 335 (1979) ("Because of the
progressive rates, the impact of federal estate taxes on
the combined estate of husband and wife must be least when
their taxable estates are approximately equal
. . . . The
opportunity to split the taxable estates of husband and wife by
means of the estate tax marital deduction is entirely lost if the
wife, [for example,] having little or no property of her own, is
the first to die. This situation can be guarded against by gifts
to the wife during her life, insuring that she can at least use
most of the unified credit which will be available to her
estate.") (emphasis added)). The trust provision that
directs, to the extent a spouse’s share of trust assets exceeds
his or her contributions to the trust, the difference in the
contributions "shall constitute a completed gift from the
other [spouse]," must be similarly understood, as this
provision is likewise critical to the estate planning and tax
liability reduction purposes of the instrument. See Farr
& Wright, supra, Sect. 50, at 181-82 (Supp. 1995)
("If the [one spouse] does not have sufficient property to
utilize [his or her] full credit, [the other spouse] should
consider making gifts to her so that she will be able to use her
full credit if she should die first.").

Furthermore, the evidence fails to support the
obverse proposition espoused by wife. The Agreement, by its
terms, affords no evidence that, at the time of the trust’s
formation, the parties contemplated it would govern the
classification of property in the event of divorce. Indeed, the
provisions of Article III regarding disposition of the trust’s
assets upon the death of either spouse, when coupled with the
contemporaneous execution of the parties’ wills, make plain that
the parties’ underlying expectation was the survival of their
marriage, not its demise.

Unlike the deed of gift in McDavid,
which explicitly stated that husband was to hold the transferred
property "in his own right as his separate and equitable
estate" as if unmarried, free from the control and marital
rights of his spouse, such language of clear donative intent to
create separate property pursuant to Code Sect. 20-107.3 is
absent here. Indeed, it is clear that both husband and wife
intended to retain their interest in the trusts’ assets, each
being named the beneficiary of the share held by the other, with
the remainder passing to their children and other named
beneficiaries upon the death of both parties.

Finally, we note that the retention of the
right to revoke the trust by each spouse supports the conclusion
that neither had the requisite donative intent to transform
marital property into separate, as was the case in McDavid.
Retaining the right to revoke a trust is inconsistent with the
notion that a grantor has relinquished all right and interest in
the trust property. See Burnet v. Guggenheim, 288
U.S. 280, 284, 53 S. Ct. 369, 390 (1933) (finding that property
transferred to revocable trusts did not constitute a completed,
taxable gift to the beneficiaries until the grantor’s power to
revoke was eliminated); Newman v. Commissioner of Internal
, 222 F.2d 131, 136 (9th Cir. 1955) (finding that
settlor’s transfer of property under a revocable trust was not a
completed gift for purposes of taxation so long as the right to
revoke existed); In re Estate of Knickerbocker, 912
P.2d 969, 977 (Utah 1996) ("To make an equitable division of
the marital assets, the court needs flexibility to decide upon
the evidence whether . . . property transferred by one spouse
into a revocable trust[] should be included within the marital
estate."); Lynch v. Lynch, 522 A.2d 234, 235 (Vt.
1987) (finding that property in trust, because the grantor spouse
expressly reserved the power to revoke the trust, was owned by
the grantor and thus subject to equitable distribution as marital
property); Friedrich v. Bancohio National Bank, 470 N.E.2d
467, 471 (Ohio Ct. App. 1984) (stating that the grantor of
property held in trust "retains the right to reinvest
himself with legal title at some point in the future" by
reserving a power of revocation); Salvio v. Salvio, 441
A.2d 190, 197-98 (Conn. 1982) (finding that, in the absence of
any unequivocal act rendering savings account trusts irrevocable
or otherwise transferring ownership rights to the beneficiaries,
trusts established by wife were the property of the marriage and
subject to the trial court’s power to distribute marital assets);
Brett R. Turner, Equitable Distribution of Property Sect.
6.28, at 447 (2nd ed. 1994) (stating that courts treat the power
to revoke a trust as "tantamount to the power of
ownership" and that assets transferred into a revocable
spousal trust are generally treated as if owned by the settlor
spouse individually). Viewed in this light, the power of
revocation possessed by the parties under the Agreement supports
the conclusion that husband had no intent to divest himself of
all of his right and interest in the marital assets transferred
into the trust.

Under Virginia law, in the absence of clear and
unambiguous evidence of intent to create a separate estate in the
other party, an interspousal gift is ineffective as a device to
transform an asset into the separate property of the donee
spouse. See, e.g., McDavid, 19 Va. App. at 411-12,
451 S.E.2d at 717; Theismann, 22 Va. App. at 566, 471
S.E.2d at 813. Accordingly, we reverse the trial court and remand
for further consideration of the division of the parties’ marital
assets in accordance with Code Sect. 20-107.3.

Reversed and remanded.

Judge Overton participated in the hearing and decision of
this case prior to the effective date of his retirement on
January 31, 1999 and thereafter by his designation as a senior
judge pursuant to Code Sect. 17.1-401, recodifying Code
Sect. 17-116.01:1.



[1] Article II

Grantors have chosen to maintain their two
separate trusts together in this one trust
document for reasons personal to themselves. The
two trusts held herein shall be viewed as having
separate and distinct existence, and shall be
construed (in the light of this overriding
pronouncement of Grantor’s intent), so as to
arrive at that construction which will result in
a non-revocable credit shelter trust (THE FAMILY
TRUST, as hereinafter defined) not being included
in the share of the surviving Grantor, while
allowing the full marital deduction with respect
to any portion of the trust of the first Grantor
to die which passes to the Survivor’s Trust (as
hereinafter defined). The provisions in this
document shall apply to the administration of
both Grantors’ trust shares.

[2] We note,
however, that whether the property was marital or separate before
it was transferred into the trust, the resolution of the issue
remains the same under the facts of this case, as the
determinative analysis is premised on the issue of donative
intent to create separate property, not the source or nature of
the 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); McDavid v. McDavid,
19 Va. App. 406, 411-12, 451 S.E.2d 713, 717 (1994) (turning on
evidence of donative intent, not the nature of the property that
was the subject of the interspousal gift).

[3] Code Sect.
20-155 provides:

Married persons may enter into
agreements with each other for the purpose of
settling the rights and obligations of either or
both of them, to the same extent, with the same
effect, and subject to the same conditions, as
provided in Sects. 20-147 through 20-154 for
agreements between prospective spouses, except
that such marital agreements shall become
effective immediately upon their execution.