Characterizing property owned by a couple is an important part of any divorce and the existence of a trust can complicate the process, especially if it’s an irrevocable trust established during the marriage. On the other hand, an irrevocable trust established prior to a marriage will help a spouse prove that funds in the irrevocable trust are separate property. However, an irrevocable trust established during the marriage often complicates the characterization and division of the couple’s assets, because the funds in an irrevocable trust established during the marriage are presumed to be community property divisible in the divorce. A spouse who claims the irrevocable trust funds are separate must show they are not part of the marital estate by clear and convincing evidence.
Revocable and Irrevocable Trusts
If a trust is revocable, it can be changed at any time; but if the trust is irrevocable, it can’t be changed except by a court order. If a trust is irrevocable, then the corpus or principal of the trust and any undistributed income retained in the trust are separate property if the trust was established prior to the marriage, or the funds were received by gift or inheritance and placed in the trust during the marriage. On the other hand, if the trust is revocable, income earned by the trust (but not necessarily principal) is considered community property and subject to division at the time of divorce. Therefore, it’s important to establish and fund an irrevocable trust with separate funds and not distribute the income from that trust if you want to keep both the principal and income of the property separate from the marital estate.
Trusts Created Prior to Marriage
No matter the source of the funds, if you or someone else creates an irrevocable trust for you before you are married, the assets in the trust are your separate property and not part of the marital estate because they were earned prior to marriage. However, if you establish a trust after you are married, the character of the assets depends on whether they were earned or received by gift or inheritance. If the assets were earned, they are considered community property, even if the assets are in an irrevocable trust because they were earned during the marriage and are presumed to be community property. On the other hand, if you receive assets during the marriage by gift or inheritance and place these funds in an irrevocable trust, the corpus of the trust is separate property. The income from that trust may be community or separate property, depending on whether it’s revocable (the income is community property) or an irrevocable trust (then the income is still separate property if it’s not distributed out of the trust). Thus, the income from a separate property trust can be community property if it’s distributed from an irrevocable trust or if the trust is revocable.
Marital Property
All assets you acquire during a marriage are presumed to be community property unless you can show by clear and convincing evidence that the property was inherited or received as a gift. If you establish a trust during the marriage and place assets earned during the marriage in that trust, the courts will dissolve the trust and declare the assets community property to be divided in the divorce. The judge will conclude that you committed a fraudulent transfer of assets to a trustee and will void the trust as a fraud on the community estate.
Spouse as Beneficiary of an Irrevocable Trust
If you established an irrevocable trust during your marriage using inherited separate property to fund the trust, but made your spouse a beneficiary of the trust, you can’t change the terms of the trust if he or she files for divorce. You can protect yourself against this contingency, however, by inserting a clause in the irrevocable trust that names an alternate beneficiary in the case of a divorce, such as your children.
Trust Income, Alimony, and Child Support
Even if the property in a trust is characterized as separate, the income from that trust may be considered by some courts as income and used in establishing the amount of spousal or child support due after the marriage. If you are going through a divorce, consider engaging a collaborative attorney who understands the complex legal rules of revocable and irrevocable trusts so your rights will be fully protected. If you have questions, contact Harry Munsinger at harry@harrymunsinger.com.
