If you created a trust during your lifetime and designated your children as beneficiaries, you may wonder about the effect of divorce on that trust. Unfortunately, the answer is not simple. It depends on several key considerations, including the type of trust created, the age of the beneficiaries, and the nature of the property held in trust.
This article aims to provide a starting point for your analysis. It does not explore the nuances and various features of trusts. You should work with a divorce lawyer who has a solid understanding of Texas trust law to examine the specific details of your situation and help you develop effective solutions.
Is the Trust Revocable or Irrevocable?
The first question is whether the trust is revocable or irrevocable. A revocable trust is one that the trust creator can change or revoke at any time. An irrevocable trust is one that generally cannot be changed or revoked without the consent of all beneficiaries. There are other circumstances where an irrevocable trust may be changed or revoked. However, those exceptions are complicated and should be discussed with your divorce lawyer.
In Texas, trusts established during one’s lifetime are presumed to be revocable unless the trust instrument explicitly states that the trust is irrevocable.
If the trust is revocable, the trust property reverts back to the trust creator if he or she decides to terminate it. This reversion occurs regardless of the beneficiaries’ rights. Therefore, the trust creator can terminate the trust and reclaim those assets, provided that doing so does not violate a court order.
However, the trust creator’s ability to transfer the property to the children depends on the characterization of the property as community or separate. We will address characterization in the following section.
If the trust is irrevocable, the rights of the beneficiaries generally cannot be impaired unless they all consent. Issues regarding consent can arise when a beneficiary is a minor or unborn. In this case, the court may appoint a guardian ad litem to represent the interests of the minor or unborn beneficiary.
There are various types of irrevocable trusts and different approaches to handling them upon divorce. For example, the trust could be divided into multiple trusts. Alternatively, the trust assets could be transferred into a new trust. The approach one chooses will likely have tax consequences.
Regardless of whether your trust is revocable or irrevocable, you should enlist the help of a divorce lawyer and a tax specialist. These professionals can help you devise a plan that ensures your children are cared for and your tax burden is minimized.
What Is the Nature of Your Child’s Interest in the Trust?
There are two types of beneficial interests your child can have in the trust:
(1) An interest in the assets held in trust (also known as the trust “corpus” or “body”); and
(2) An interest in the income earned by the trust assets (also known as “trust income”).
Both the corpus and income are characterized as either separate or community property. We will explain below what these characterizations mean and their significance.
Generally speaking, community property refers to assets acquired by spouses during their marriage. So, if the corpus contains assets acquired during marriage, those assets are community property.
The community-property character of the corpus is significant because community property is subject to division in a divorce case. So, the court may award your spouse half of the corpus in the divorce, thereby reducing the assets available for the children.
On the other hand, separate property refers to assets that a spouse owned before marriage or acquired during marriage by gift or inheritance. For example, perhaps you funded the trust with assets you inherited from your parents. If you can prove by clear and convincing evidence that you inherited those assets, they would be considered your separate property. Indeed, all property is considered community property unless a spouse can prove, by clear and convincing evidence, that an asset is separate property.
Because separate property is not subject to division in a divorce case, you can preserve the intended benefits for your child if you prove that the corpus is separate property.
Characterizing trust income is trickier than characterizing trust corpus. One must consider several factors, such as whether the income was distributed to the child, whether the child can compel a distribution, and whether the child also has an interest in the corpus. This article will not explore these factors. However, you should explore them with your divorce lawyer to determine what assets will be available to your children upon divorce.
Explore Your Options With a Skilled Divorce Lawyer at Goranson Bain Ausley
The divorce lawyers at Goranson Bain Ausley are well-versed in the various types of trusts and the impact of divorce on them. We can help you create solutions that further your goal of ensuring your children are cared for. Contact us today to schedule your consultation.
