Opinion issued May 27, 2010
In The
Court of Appeals
For The
First District of Texas
NO. 01-09-00063-CV
MATTHEW A. MATTHEWS, Appellant
V.
ELIZABETH MCCALL NORTHRUP, Appellee
On Appeal from the 245th District Court
Harris County, Texas
Trial Court Cause No. 2007-74804
MEMORANDUM OPINION ON REHEARHING
Appellant, Michael A. Matthews, has filed a motion for rehearing. We requested a response from appellee, Elizabeth McCall Northrup, but received none. Tex. R. App. P. 49.2. We now grant Matthews’s motion for rehearing. Tex. R. App. P. 49.3. We vacate our January 14, 2010 judgment, withdraw our January 14, 2010 opinion, and substitute this opinion in its place.
Matthews challenges the trial court’s October 1, 2008 “Final Order in Suit Affecting the Parent-Child Relationship,” in which the trial court ordered child support in favor of Northrup. In one issue, Matthews contends that the “trial court erred in including as income for the purposes of child support funds of the KLM Family Limited Partnership Revocable Management Trust.”
We modify the judgment of the trial court and affirm as modified.
Factual and Procedural Background
Matthews, in his Original Petition in Suit Affecting the Parent-Child Relationship, sought joint managing conservatorship of his minor child and a determination of his child support obligation. The parties stipulated to all facts but disagreed as to whether or not the trial court, in determining the amount of child support, could consider “phantom” income, i.e., income from the KLM Family Partnership, Ltd. (the “Partnership”) allocated to Matthews as a limited partner for federal income tax purposes, but not actually received by him. Matthews’s mother, Leann Matthews (“Mother”), created the Partnership as a way to preserve family assets. The Partnership, whose initial contributions were gifted by Mother, named two limited partners: (1) Matthews, with a 48.33 percent interest, and (2) his sister Kaci Ann Matthews, with a 49.67 percent interest. Both Matthews and his sister were minors when the Partnership was created. Mother held Matthews’s interest in the Partnership as custodian per the Texas Uniform Transfers to Minors Act (“UTMA”)[1] until he turned twenty-one years of age.
Mother also created the KLM Family Partnership, Ltd. Revocable Management Trust (the “Trust”), naming herself as Trustee and lifetime beneficiary and the limited partners in the Partnership as beneficiaries at her death. She funded the Trust with ten dollars and the general partner interest in the Partnership, i.e., the remaining two percent interest. She named the Trust as the general partner for the Partnership. Mother controlled both the Trust and the Partnership in her capacity as Trustee, and any distributions were within her “express and total power” and her “sole discretion.” The Trust provided that “[i]f any [T]rust property becomes distributable to a beneficiary when the beneficiary is under 21 years of age,” the “Trustee shall distribute the [T]rust property to a beneficiary when he or she attains 21 years of age.” Matthews’s 2005 and 2006 federal tax returns reflect that he was allocated and paid taxes on income from the Partnership in the amounts of approximately $28,000 and $41,000, respectively. However, neither the Trust nor the Partnership had made any actual distributions of money to Matthews as of the date of trial.
The trial court held a trial on the merits only on the issue of the “phantom” income. A court reporter recorded the parties’ arguments, during which they referred to the Trust document, the Partnership Agreement, and stipulated facts, including as to income actually received and assets that did not produce income.[2] No exhibits, however, were marked and handed to the court reporter for receipt into evidence.
After hearing the arguments of counsel, the trial court ordered the parties to provide further briefing on the issue of Matthews’s income from the Partnership. Matthew attached to his trial brief the affidavit of Mother, who testified:
I have never declared a distribution, and I never will as long as I am the General Partner. A distribution would be nothing more than contrary to my expressed intentions in creating the KLM Family Partnership, Ltd. My son and daughter have never received any monies whatsoever from the KLM Family Partnership Ltd. and I do not intend to declare a distribution of any monies therefrom as long as I am alive.
In her trial brief, Northrup asserted that a court has the power to order the trustee of a trust to make disbursements for the support of a child to the extent that the trustee is required to make payments to a beneficiary who is required to make child support payments. She noted that if disbursements are discretionary, the court may order child support payments from the income of the Trust.[3] Northrup further asserted that the Trust terminated by its terms when Matthews turned twenty-one years of age, which triggered the clause that “all [T]rust property, including both income and principal was to be distributed to him when he became twenty-one years of age.”
After the parties waived the making of a reporter’s record for entry of a final order, the trial court entered its order, in which it found that “the amount of net resources available to [Matthews] per month from his employment is $4,433” and “the amount of net resources available to [Matthews] from the [Trust] is an amount of at least $2,500.” Accordingly, the court ordered Matthews to pay child support in the amount of twenty percent of $6,933, equaling $1,386.66 per month.[4]
In his motion for new trial, Matthews asserted that the trial court “erroneously assumed that because income taxes were paid on [P]artnership income, that there was a distribution to [Matthews] that complied with income received pursuant to the Family Code” and the evidence is factually insufficient to support the child support award because he has “never received a distribution from the family [P]artnership, and that as far as he is aware, he never will.” The trial court denied the motion.
Net Resources for Calculating Child Support
In his sole issue, Matthews argues that the trial court erred in including income from the Trust in the net resources it used to calculate child support because, under the Trust provisions, Mother is the lifetime beneficiary of the Trust and Matthews “is not now and as long as his Mother is alive will not become a beneficiary of the [T]rust.” He also argues that because “the erroneous inclusion of non-existent funds in the calculation of child support caused the award of support . . . to depart substantially from the guidelines,” the trial court abused its discretion in not “making the findings required by Texas Family Code sections [154.130(a)(3) and 154.130(b)].”[5] He further argues that if this Court determines that the trial court made a mistake in identifying the entity from which the “phantom” funds were allocated as the Trust instead of the Partnership, the trial court abused its discretion in deeming “one hundred percent value on the [P]artnership profits” because there is no evidence that his Partnership interest has any value while his mother is alive.
The purpose of child support is to help a custodial parent maintain an adequate standard of living for a child. Farish v. Farish, 982 S.W.2d 623, 627 (Tex. App.—Houston [1st Dist.] 1998, no pet.). Generally, a complaining party must show that a trial court’s support order constitutes a clear abuse of discretion in order for it to be disturbed on appeal. Worford v. Stamper, 801 S.W.2d 108, 109 (Tex. 1990); Newberry v. Bohn-Newberry, 146 S.W.3d 233, 235 (Tex. App.—Houston [14th Dist.] 2004, no pet.). A trial court abuses its discretion when it acts without reference to any guiding rules and principles. Worford, 801 S.W.2d at 109; Holley v. Holley, 864 S.W.2d 703, 706 (Tex. App.—Houston [1st Dist.] 1993, writ denied). In the child-support context, sufficiency challenges are not independent points of error, but are “incorporated into an abuse of discretion determination.” McGuire v. McGuire, 4 S.W.3d 382, 387 n.2 (Tex. App.—Houston [1st Dist.] 1999, no pet.); see Burney v. Burney, 225 S.W.3d 208, 214 (Tex. App.—El Paso 2006, no pet.). Our analysis employs a two-pronged inquiry: (1) did the trial court have sufficient information upon which to exercise its discretion; and (2) did the trial court err in its application of discretion. McGuire, 4 S.W.3d at 387 n.2. A trial court does not abuse its discretion when there is some evidence of a substantive and probative character to support the trial court’s order. Newberry, 146 S.W.3d at 235.
In determining the amount of child support, the trial court must first determine the parties’ gross income, net income, and monthly net resources. Tex. Fam. Code Ann. § 154.062 (Vernon Supp. 2009). Each party must furnish information sufficient to identify the party’s net resources and ability to pay support, such as production of copies of income tax returns, financial statements, and pay stubs. Id. § 154.063 (Vernon 2008). After determining the amount of net resources, the trial court must decide whether to apply the child support guidelines or whether application of the guidelines would be unjust or inappropriate. Id. § 154.122(b) (Vernon 2008). Importantly, a parent’s child support obligation is not limited to that parent’s ability to pay from current earnings; rather it extends to his or her financial ability to pay from any and all available sources. McLane v. McLane, 263 S.W.3d 358 (Tex. App.—Houston [1st Dist.] 2008, pet. denied).
In determining net resources, income includes “all wage and salary income and other compensation for personal services” and “all other income actually being received . . . including gifts and prizes.” Tex. Fam. Code Ann. § 154.062. Additionally, a court may, when appropriate, “assign a reasonable amount of deemed income attributable to assets that do not currently produce income.” Id. § 154.067(a) (Vernon 2008). In doing so, the court shall also consider whether such assets “can be liquidated without an unreasonable financial sacrifice” and “if there is no effective market for the property, the carrying costs . . . including property taxes and note payments, shall be offset against the income.” Id.
The issue presented is whether the gift of an interest in the Partnership, which had not and will not distribute any profits to its partners, including Matthews, until after the death of the general partner or the year 2052, is an “asset that [does] not currently produce income such that the trial court could “assign a reasonable amount of deemed income” to the asset. The trial court apparently found that Matthews had deemed income of $2,500 per month based on the stipulations of income from his federal income tax returns. In its Final Order, the trial court indicated that this deemed income came from the Trust.
Matthews argues that the trial court erred in including this deemed income from the Trust in its child support calculation because he cannot be a beneficiary of the Trust until after Mother’s death. However, it appears that the trial court merely mislabeled the source of the deemed income. The Trust provides that the beneficiaries of the Trust include “not only the beneficiaries of the General Partnership Interest but all of the Limited Partners of the [Partnership].” Thus, Matthews, as a limited partner in the Partnership, was indeed a beneficiary of the Trust. The Trust does provide that upon Mother’s disability “[Mother’s] Trustee shall distribute all income to [her] at least annually” and “[her] Trustee may distribute principal as necessary for [her] health, education, maintenance, and support.” And, if the Partnership still exists at Mother’s death, “[a]ll distributions of income [and principal] are to be distributed at least annually among the beneficiaries of the [Partnership], pro rata, according to their respective interest.” Also, if the Partnership is dissolved and the Trust terminates while Mother is still alive, “the [T]rust property shall be distributed to [Mother].” Moreover, if the Trust is terminated early due to the high cost of administration, the “[T]rust property, including any accrued but undistributed income” is distributed “to [Mother, if she is] then living.” These Trust provisions, when read together, implicitly identify Mother as the sole beneficiary of the Trust during her lifetime, with the partners in the Partnership, if still in existence, as beneficiaries after her death. Accordingly, Matthews is correct that he is not a beneficiary of the Trust while Mother is alive. He is only a remainder beneficiary by virtue of being a limited partner in the Partnership.
Northrup asserted to the trial court that the Trust terminated by its terms when Matthews turned twenty-one years of age. She argued, thus, that the Trustee was required to distribute all Trust property to the beneficiaries, making Matthews’s interest in the Trust currently accessible to him and available income for the calculation of child support. However, the Trust was only required to distribute Trust property to Matthews when he reached the age of twenty-one “if any [T]rust property [had become] distributable to a beneficiary when the beneficiary [was] under 21 years of age.” Here, no Trust property had become distributable to Matthews while he was under twenty-one years of age because Mother, the sole life beneficiary of the Trust, was still alive when he reached twenty-one years. Only if Mother had died while Matthews was a minor would Trust property have become distributable to him.
Nevertheless, although there is no evidence in the record of the value of Matthews’s interest in the Trust, there is evidence of the value of his interest in the Partnership. Accordingly, the proper source of the deemed income identified by the trial court was the Partnership, and the trial court made a non-substantive error in identifying the source of the income as the Trust. Matthews’s limited partner interest in the Partnership is an asset. Under the UTMA, Mother had gifted to Matthews the limited partner interest in the Partnership while he was a minor, naming herself as custodian. See Tex. Prop. Code Ann. § 141.004 (Vernon Supp. 2009). When Matthews reached twenty-one years of age, Mother, as custodian of the gift, transferred ownership of the Partnership interest to him. See Id. § 141.021 (Vernon 2007). It is true that the Partnership had not distributed any profits to the partners as of the date of trial and, according to the affidavit testimony of Mother, it would not distribute any profits until at least the year 2052 or upon her death. However, Matthews’s Partnership interest has value.
The Partnership Agreement provides that “[a]llocations to the Partner of Partnership income and gain” increase a partner’s capital account. Upon dissolution of the Partnership, distribution of the reserves and property of the Partnership are to be made to partners according to the percentage of their Partnership interest, after payment of expenses of the general partner and creditors. Therefore, the allocations of income to Matthews’s Partnership interest beginning in 2005 increased the value in his capital account. According to the Partnership Agreement, revocation of the Trust, which would dissolve the general partner, could be an event that triggers termination of the Partnership and a distribution of all Trust assets to Mother, if then living. This would not, however, eliminate the value of Matthews’s interest in the Partnership because the Trust’s assets do not include this interest or any Partnership property, but only the general partner Partnership interest. If the Partnership dissolves, Matthews will receive the value of his capital account and his share of Partnership property, if any. In a sense, Matthews’s Partnership interest is like a retirement account which has value but that value is not accessible to the recipient until retirement. Matthews owns the Partnership interest, and that interest has value, but it is not accessible to Matthews until the Partnership dissolves, at the earliest of when Mother passes or the year 2052, provided the partners do not agree to continue the Partnership upon either of these events triggering dissolution.
“Once it is established that an obligor owns property he must entirely negate its value in order to preclude the court from considering it for purposes of his support obligation.” Anderson v. Anderson, 767 S.W.2d 163, 165 (Tex. App.—Houston [14th Dist.] 1988, no writ). Matthews did not negate the value of his Partnership interest; he merely asserts that it has no value because he has no current income from the Partnership. The fact that the Partnership has not made distributions of profits to the partners does not mean that the Partnership interest is not an asset of Matthews. Rather, it is an asset that does not currently produce income. Accordingly, we hold that the trial court acted within its discretion in assigning a reasonable amount of deemed income to Matthews’s Partnership interest.
Matthews asserts that the trial court unreasonably deemed “one hundred percent [of the] value on the [P]artnership profits and included those in the Net Resources of Appellant.” The stipulations entered below show that Matthews had approximately $28,000 of allocated income from the Partnership in 2005 and $41,000 in 2006. Thus, the trial court did not deem “one hundred percent” of the yearly allocated income from the Partnership. Rather, it selected an amount closer to the 2005 amount—$30,000, or $2,500 per month. The trial court, as required by Family Code section 154.067(a), considered whether the Partnership interest could be “liquidated without an unreasonable financial sacrifice” in determining the reasonable amount of deemed income from the Partnership. Accordingly, we hold that the trial court did not err in calculating the amount of child support.
We overrule Matthews’s sole issue.
Conclusion
We modify the trial court’s judgment as to its finding number three under the section entitled “Statement on Guidelines” to read “Further, the amount of net resources available to MATTHEW AUSTIN MATTHEWS per month from the KLM Family Partnership, Ltd. is an amount of at least $2,500” and, as modified, affirm the judgment of the trial court.
Terry Jennings
Justice
Panel consists of Justices Jennings, Higley, and Sharp.
[1] See Tex. Prop. Code Ann. § 141.004 (Vernon Supp. 2009).
[2] See Tex. Fam. Code Ann. § 154.062 (Vernon Supp. 2009), § 154.067 (Vernon 2008) (stating that trial court must consider “income actually being received” and “may assign a reasonable amount of deemed income attributable to assets that do not currently produce income” in calculating obligor’s net resources).
[3] See Tex. Fam. Code Ann. § 154.005 (Vernon 2008).
[4] See Tex. Fam. Code Ann. § 154.125 (Vernon Supp. 2009) (for one child, trial court shall presumptively set child support at twenty percent of obligor’s net monthly resources, if net monthly resources do not exceed $7,500).
[5] See Tex. Fam. Code Ann. § 154.130(a)(3) (Vernon Supp. 2009) (“. . . in rendering an order of child support, the court shall make the findings required by Subsection (b) if . . . the amount of child support ordered by the court varies from the amount computed by applying the percentage guidelines.”).