Trusts in Divorce

Many people who have significant means create trusts to protect their wealth for future generations. Not only do trusts help people avoid tax liabilities, but they also can shelter assets from division in the event a settlor or beneficiary of a trust ends his or her marriage. Trusts do not always protect assets in the event of a divorce, however, and it is prudent for anyone considering a divorce to speak with legal counsel regarding the impact a divorce may have on any trust involving the person or his or her spouse. If you intend to end your marriage, the knowledgeable Dallas divorce lawyers of McClure Law Group can advise you of your options for protecting your assets or seeking an equitable distribution of property that is rightfully yours. Dividing property subject to a trust in a divorce can be complex, and our experienced legal team can advocate for your interests.

Texas is a community property state, which means that all community property is subject to division in a divorce. Community property is generally defined as any property either spouse obtains during a marriage, with some exceptions for things such as money awarded in a personal injury lawsuit (as long as it was not meant to compensate for lost income), gifts and inheritances, and money precluded from becoming community property via a contractual marital agreement. Community property is jointly owned by spouses. Separate property, on the other hand, is the sole property of one spouse. Separate property is oftentimes property owned by either spouse prior to the marriage, and in many instances, trusts fall under the umbrella of separate property. In some cases, however, some or all of the income of a trust may be considered community property, and therefore may be subject to division between the spouses in a manner that the court deems fair and just.

Generally, whether the property in a trust or the proceeds of a trust are considered community property depends on the creation date of the trust, the nature of the property placed into the trust, and the terms of the trust. For example, if the settlor of an irrevocable trust created prior to a marriage names a spouse as a beneficiary, the assets in the trust are likely considered separate property, as long as the spouse does not have a present right to possess the assets within the trust. If an irrevocable trust was created after a marriage began, whether the assets in the trust are community or separate property depends in part on whether the trust names one spouse or both spouses as beneficiaries.

Regardless of whether the assets in a trust are considered community property in a divorce, under the current state of the law in Texas, if a spouse receives income from an irrevocable trust, the income may be considered community property, even if the trust was created prior to the marriage. Factors weighed in considering whether income from a trust is considered community property include whether the beneficiary has a current or future possessory right to the corpus of the trust and whether the beneficiary has exercised that right. A seasoned divorce lawyer can help you establish whether or not the trust income at issue should be deemed community property.

An issue can also arise in dividing trust property in a divorce where one spouse created a trust for the benefit of a third party during the course of the marriage. If the trust is revocable and the settlor used marital assets to fund the trust, any assets in the trust will most likely be deemed community property, because the settlor maintains the right to cancel or amend the trust.

When people with substantial wealth end their marriages, the process of dividing their property can be complicated. If you or your spouse seek to obtain a divorce and either of you created or benefit from a trust, it is wise to consult an attorney to discuss the potential financial consequences of ending your marriage. At the McClure Law Group, we will work tirelessly to help you seek a favorable division of assets. We also frequently represent people in family law cases throughout Dallas, Denton, Grayson, Rockwall, Collin, and Tarrant Counties. We can be reached via our form online or by calling 214.692.8200 to schedule a meeting.