Trust Considerations in Divorce

Trust Considerations in Divorce

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In many states, including California, trusts are sometimes created with separate property by one spouse in contemplation of marriage, to protect assets, small businesses, and other property. In other cases, divorcing parties sometimes have accumulated real property and other forms of wealth in a trust during a marriage of long duration. These circumstances can raise issues in a divorce that arise from the existence of a trust. Is the trust revocable or irrevocable? What is the character of the assets in the trust? Has there been a transmutation of one or more assets for purposes of community property characterization? Can the trust be modified prior to final judgment?

 

An irrevocable trust is when all the trust assets, and control of those assets, has been transferred to a trustee for the benefit of named beneficiaries. This type of trust typically cannot be changed during a divorce, because the interests created by the trust instrument have already been created irrevocably. If the trust instrument no longer reflects the parties’ intentions, then the instrument will have to be modified with the Court’s approval, and with notice to all affected parties. This may be done, for example, if one of the parties to the divorce has access to trust assets, and there is evidence that the party is likely to abuse this access.

 

If the trust is revocable, the divorcing parties still have access to the trust assets, and they generally may revoke or modify any of the interests created by the original trust instrument. Generally, the parties may amend the trust instrument with new or different terms, to reflect their changed circumstances and their changed intentions. If the trust is dissolved, then the assets must be characterized and listed in each party’s declaration of disclosure.

 

Issues of transmutation of property may also arise in these cases. Under California law, in the absence of fraud, spouses generally may agree in writing to the transmutation of separate property into community property, or from community property into separate property. No consideration is required, only an “express declaration” of intent by the spouse whose interest is adversely affected, regarding the intended transmutation. In some cases, the transfer of property into a revocable trust may be effective as a transmutation of separate property into community property, so long as the trust instrument contains a satisfactory “express declaration” of intent.

 

This is not an exhaustive list of issues and answers. It is a list of considerations for the divorcing parties and their counsel to address. Other considerations may arise in a particular case. These issues all should be dealt with by the parties and their counsel, in consultation with tax and estate planning professionals chosen by the parties.