High-net-worth individuals will often create trusts to ensure either their future selves or future generations will be comfortable financially. Trusts are an effective way to plan for yourself and your loved ones.
With trusts, assets currently owned by the trust creator or “settlor” are set aside and put in the temporary legal care of a third party, or “trustee.”
This third party will retain legal ownership until certain conditions are met, such as the death of the settlor, or some benchmark is reached. Typically, this will be the beneficiary reaching a certain age.
However, in a divorce, the ownership of a trust becomes complicated, and there are not always straightforward answers about to whom the money or property in the trust belongs.
One important thing to know is that Texas is a community property state. This means that all wealth and debt accumulated during the time of a marriage is shared property, no matter which spouse acquired it.
During the divorce, all assets that are deemed to be marital property are, in theory, supposed to be split equally between spouses. Debts are treated the same.
However, there is no requirement that the court has to abide by when dividing assets and debt. The only requirement is that the court make a “just and right” decision. For example, if you and your spouse agree on a division on your own that is not a 50/50 split, the court will likely still approve it as “just and right.”
Assets that will fall under separate property in the state of Texas are things like income made prior to the marriage or gifts received during the marriage that were meant for one spouse.
There is also something called mixed property that needs to be evaluated further for fair distribution. Things like 401(k)s or other retirement savings that were started prior to the marriage and whose value increased during its course will fall under this heading.
Mixed property will likely need to be evaluated through a process called “tracing” to determine exactly how much is separate and how much is marital property.
With that in mind, here are a few other things to know about how your trust will be affected in a divorce.
Revocable Vs Irrevocable Trusts
Whether a trust is revocable or irrevocable is essentially saying whether it is fluid or fixed. Revocable trusts are trusts where the settlor can cancel, amend, or withdraw assets from the trust at any time during their lifetime.
Irrevocable trusts are just the opposite. Terms and assets of the trust cannot be amended without the permission of the beneficiaries, and this process will usually involve the courts before anything is released or changed.
In the cases of divorce, irrevocable trusts that were created before the marriage will almost always be viewed as non-marital or separate property. This makes it tough, but not impossible, for a spouse to make any claim on the assets within it.
Revocable trusts created before the marriage will likely be seen as separate property, but if any changes were made during the course of the marriage, those changes will come under scrutiny and may qualify as marital property.
For all trusts created during the marriage, no matter the type, the division will depend largely on who is named as the beneficiary of the trust and whether the assets within it are marital or separate property.
In any instance, if one or both of the parties withdrew any amount from the trust during the marriage, according to Texas law, that income will be classified as marital property.
In general, trusts created before the marriage will likely be considered separate property. Trusts created during the marriage will likely be considered community property.
If there is a claim that the trust created during the marriage belongs solely to one party, the burden of proof will fall on the one making that claim.
Prenuptial and Postnuptial Agreements for Trusts
Sometimes, in the throes of a romance, you may think prenups are an undignified affront to the relationship. In a lot of instances, people will forego the prenup in hopes that their relationship will last and that they’ll never have to worry about these things.
But even the strongest marriages can still end in divorce for a number of reasons outside of either person’s control, so it is always wise to reach a premarital agreement in the event that something does happen, especially if you are a high-net-worth individual.
Prenups are often the safest way to ensure your property remains yours at every stage in the marriage. For the best outcome, they must be established before the marriage and contain definitive language about what your spouse is and is not entitled to.
With a postnuptial agreement, the parties are already legally bound to each other, and the higher-earning spouse has lost a considerable amount of leverage to get their preferred terms agreed to.
A postnuptial agreement is almost identical in structure to a prenuptial agreement. However, postnuptial agreements will be closely scrutinized by the courts and may not be deemed enforceable.
Generally speaking, a postnuptial agreement is far less helpful than a prenuptial agreement but far better than none at all. So, just because you missed out on the opportunity to create a prenup, it does not mean you are completely doomed if you still want written documentation to protect your trust.
Neither of these are bulletproof solutions. If there are considerable assets within your trust, a disgruntled spouse will likely come for it no matter the agreement, but using one of these methods will give your attorney the tools they need to fight for you in court.
Contact Our Texas Divorce Attorney for Advice Today
JulianJohnson, P.C. offers personal attention to people in need of family law attorneys in Flower Mound, TX and the surrounding cities.
Our firm works to help address even the most complex family cases including high net worth divorces and similar cases with complex assets.
Our team of experienced family law attorneys are available for a consult. Contact us today.
When faced with a heated situation such as the dissolution of a marriage, call a lawyer with compassion, knowledge, and experience with the legal system.
