What Happens to a Living Trust in Divorce?
Sept. 30, 2022
California is a community property state, meaning that married couples when divorcing are subject to a 50/50 split of assets and debts. However, the assets and debts must have been acquired by either spouse during the time of marriage. Anything acquired before marriage can often qualify as separate property.
If perhaps thoughts of a divorce set in, one or both spouses decide to set up a living trust to place their assets, it could be a joint trust or an individual trust. Suddenly, divorce does enter the scene whether both partners or only one is opting for a permanent break. So, what happens to the trust?
In a nutshell, leaving aside some considerations to be discussed further on, the assets in the trust will be subject to community property rules. If the assets were acquired during the marriage, they are community property. If they were acquired before marriage or during marriage as an inheritance or gift, they may fall into the separate property classification.
In other words, regardless of the existence of a living trust, so long as it is revocable, a divorce in California will proceed pretty much as any other divorce, but the trust may need to be dissolved and assets removed from it. In the case of an irrevocable trust, read on. That’s an entirely different issue.
If you are contemplating or already entering into divorce in Redlands, California, and you have a trust to be dealt with in the process of dividing assets, contact The Elder & Disability Law Firm, APC. The estate planning attorney will review your situation with you and advise you of your options going forward.
The Elder & Disability Law Firm, APC, proudly serves clients throughout Southern California, including Riverside, Rancho Cucamonga, and Palm Springs.
Types of Living Trusts
Probably the most common type of a living trust is called a revocable living trust. This means the trust can be modified or canceled at any time. Like a will, in a living trust, you name beneficiaries to receive your assets when you’re gone. There are some major differences, though. One is that there are no probate court proceedings for a living trust. Another is that the settlor, or grantor, who creates the trust becomes the trustee.
If you set up a revocable living trust, you remain the trustee, or you and your spouse do if it’s a joint trust and can oversee the assets you place in the trust until you either become incapacitated or pass away. In either situation, the successor trustee you name in your document then takes over control of your assets.
An irrevocable trust is similar. Generally speaking, irrevocable trusts are used by high-wealth individuals who are seeking an estate tax shelter, along with the protection of their assets against creditors and lawsuits. According to California law, an irrevocable trust can only be modified or terminated with the consent of all beneficiaries.
Treatment of Revocable and Irrevocable Trusts in Divorce
If a revocable living trust was created during marriage, then the assets within will be treated by the type of property they represent. In other words, a revocable living trust will be subject to California’s standards of community property and separate property. This will be the case whether the trust is individual or joint.
If the trust existed prior to marriage and is not combined by sharing it with one’s spouse, then the trust will be considered separate property and not be subject to division upon divorce. However, the value of your individual, separate property trust will still be factored into any child support or alimony payments.
An irrevocable trust is generally an instrument that names beneficiaries and shields them from tax liabilities by its legal nature. Therefore, an irrevocable trust will generally remain the property of the beneficiaries and not be subject to division during divorce.
What If You Inherited a Trust?
An inheritance during marriage is considered separate property unless it becomes combined. Say you inherit a large sum of money, but you use that money to improve your home or provide for living expenses for you and your spouse. In that case, the inherited property (cash) may be considered combined, and part or all of it could be considered community property.
How Skilled Legal Counsel Can Help
The attorney at The Elder & Disability Law Firm, APC, is well versed and knowledgeable in all aspects of estate planning. If divorce looms in your future, they can help you decide on your best options when it comes to assets you’ve placed in a trust or that you’ve inherited from a trust.
Don’t leave anything to chance. Contact an attorney today if a division of assets is on the horizon and you’re unsure how to handle your estate planning moving forward. The Elder & Disability Law Firm, APC, proudly serves clients throughout Southern California, including Redlands, Riverside, Rancho Cucamonga, and Palm Springs.