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How trusts are handled in divorce property settlement agreements

The word Trust

Our family law lawyers in Fort Worth TX recently handled a complex divorce where a multi-million dollar trust was at stake. That got us to thinking about how many people come to us, unsure how a certain trust will be affected by their divorce.

One of the biggest misconceptions is that all trusts are ironclad, which isn’t always true. Here’s what your attorney (and you) needs to know out of the gate if you’re contemplating divorce and a trust is involved.

Before we dive in, let’s be clear: There’s no question that trusts can be complex, and they do come in many shapes and forms. During divorce, if either party has an interest in any trust, those trusts will need to be analyzed.

If you live in Texas and any property or income related to those trusts is ruled to be community property, those assets will need to be traced and will be subject to fair and equitable division upon divorce as a part of your property settlement agreement.

That’s where a Fort Worth divorce lawyer experienced in navigating trusts comes in handy. Depending on the complexity of the trust, a reputable attorney may also bring in a trust attorney to help with your case.

Not sure how to choose a divorce attorney? Find out here.

How to get the attorney-client trust conversation started

If your divorce attorney is well versed in trusts, he or she will have a lot of questions for you. However, you can expect that attorney to ask three critical questions first.

Do your homework prior to the consultation so you’re prepared. (This will save you time and money.) The three questions include:

  1. When was the trust created? As noted above, since Texas is a community property state, any property acquired DURING the marriage is subject to fair and equitable division upon divorce. If you created the trust prior to marriage, it may be considered separate property. In Texas, the person who acquired the separate property typically walks away with it upon divorce.

    However, we have seen cases where one spouse, say the husband, creates a trust in an effort to shield community property. Sorry husband, what you actually did was set up a community trust. If your wife is our client and she didn’t give you consent to move those community assets into the trust, we’re going to help her bust that trust.

    Now, if the wife is somebody who blindly signs any document her spouse shoves in her face, perhaps she signed loan documents inside of that trust, busting the trust may not be an option. The important lesson here is: ALWAYS make sure you understand what you’re signing and whether it subjects you to personal or financial risk because it could have a significant impact on your property settlement agreement.

  2. What type of trust is it? Is it a revocable trust? Is it an irrevocable trust? The type of trust is important if you’re trying to protect assets, bust through a trust instrument or prove fraud (like somebody transferred community assets into a trust unbeknownst to you).

    If it is a revocable trust, the court typically will have more authorities than it would if the trust in question is irrevocable. With a revocable trust, third parties can come in, creditors can come in, etc., so determining what type of trust you’re dealing with is key.

    When negotiating the divorce property settlement agreement, your attorney will also want to know whether the trust involves income or corpus (principal or property) because Texas courts treat different natures of trusts differently. We see these issues a lot in oil and gas trusts and with trusts involving personal injury settlements. You may think your “ironclad” trust can’t be busted but it all depends on how it was set up.

  3. Who has control over the trust, what does the trust own and how is it categorized?

    The person who controls the trust—the trustee—may have the power to control the disposition of assets from that trust (and other powers). That’s why it’s important for your attorney to understand how the trust was set up and what powers the trustee holds.

    For example, say the trust is scheduled to be disposed of by operation of the trust instrument on a certain date. Then, the party who doesn’t control the trust unknowingly files for divorce a few days prior to the disposition of the trust.

    The other party could kick in their power as the trustee, and say, “We’re not giving you a damn thing. We’re not turning over any money. All the money that’s held in the trust is not being dispersed.”

    The Texas family court maintains very clear provisions as to what happens when such situations arise. If you and your attorney don’t understand how those provisions apply to your trust scenario, you could unwittingly sacrifice a whole lot of money. The lesson here? Hire an attorney who has experience handling divorces when trusts are involved.

Need a Tarrant County family law attorney who knows how to handle divorces involving trusts?

The experienced divorce attorneys at the Sisemore Law Firm in Fort Worth are here to help. To schedule a confidential case review with our founder Fort Worth divorce lawyer Justin Sisemore, contact our firm by phone at (817) 336-4444 or connect with us online.