Many families use express trusts as part of estate planning. When a person involved with a trust goes through a divorce, complications can arise.
Under Texas law, a trust is not an entity in the vein of a corporation or a partnership. Instead, it is a special relationship between the trustee and the beneficiary or beneficiaries. When a trust is created, the person creating the trust (the settlor) conveys legal title in property to one person (the trustee), who must hold that property for the benefit of another person (the beneficiary).
Trusts come up in divorces in three ways:
- When there is a dispute about funding a trust with community property
- When one of the spouses has an income interest under the trust document
- When one of the spouses has a remainder interest under the trust document
When a married settlor creates a trust for the benefit of a third party and transfers community property into the trust, the other spouse sometimes claims that the conveyance into trust was fraudulent or constructively fraudulent. A claim is sometimes brought in a divorce to retrieve some or all of the property conveyed in the trust, or to recover a money judgment against the spouse who made the conveyance.
When a spouse is an income beneficiary of a trust (with the right to receive income for a period of time or for life), an issue can arise whether distributions from the trust to the spouse during marriage are separate property or community property. If the trust was created under a will or as a gift, an argument can be made that the inheritance or gift was the distributions themselves. In answer to that, the other spouse sometimes claims that distributions of trust income are community property under the general rule that income arising from separate property is community property. There are a number of Texas Court of Appeals cases dealing with trust distributions during marriage, some conflicting with each other, and no decision has been handed down from the Texas Supreme Court to clarify the law.
When a spouse is a remainder beneficiary of a trust created in a will or by gift (and is thus entitled to receive property after the income interest terminates or the income beneficiary dies), the property held in trust is out of reach of the divorce judge, under the law that says that undistributed trust property is not property of the beneficiary. But where the trust provides that the property held in trust will be distributed to the remainder beneficiary free of trust, there is no guidance in the Texas law as to whether such distributions are received as separate or community property. An argument can be made that the assets distributed were the bequest or the gift. A counter-argument can be made that accumulated trust income, distributed to the remainder beneficiary, is income received during marriage and thus community property.
Trust issues arising in divorce can create some very difficult problems that require the assistance of a knowledgeable and experienced family lawyer like the ones at Orsinger, Nelson, Downing & Anderson. If you are going through a divorce involving trusts, contact us today.