Trust Assets in Texas Divorces

Trust Distributions and Divorce

In Texas, the categorization of property as separate or community is critical in divorce proceedings. Separate property belongs to one spouse, while community property is jointly owned by both spouses and subject to division. Therefore, the court must examine the character of all assets possessed by both parties, including distributions from trusts.

According to the Texas Family Code, community property comprises any assets obtained during the marriage by either spouse. There are exceptions to this rule, such as property received as a gift, inheritance, or damages from personal injuries, as long as they do not compensate for loss of earning capacity during the marriage, and property owned before the marriage.

Assets held in trust are usually neither separate nor community property. In most cases, only trust distributions and income require characterization in a divorce. The court determines whether trust distributions are separate or community property based on factors such as the trust's creation date, funding source, settlor's intention, and nature of assets contributed to the trust. If trust distributions are considered both separate and community property, the court must decide what portion constitutes community property and, therefore, subject to division.

Other Factors Used to Evaluate Trust Distributions and Divorce

When evaluating trust distributions in divorce cases, the court also considers other factors such as a party's involvement in the trust and the trust's terms. If a spouse is a named beneficiary of a trust and receives income from it, the court will determine whether the income is separate or community property, regardless of when the trust was established. It is worth noting that if a party creates an irrevocable trust before or during the marriage and names their spouse as a beneficiary, they cannot change the trust's terms or remove their spouse as a beneficiary. In contrast, if the trust is revocable, the party creating the trust can most likely modify it and remove their spouse as a beneficiary.

The settlor's role in a trust also affects whether trust distributions are community or separate property. Generally, distributions from an irrevocable trust are more likely to be classified as separate property than those from a revocable trust.

Types of Trusts for Consideration in Divorce

There are several different types of trusts; some of the most common include:

- Revocable trusts
- Irrevocable trusts
- Spendthrift trusts
- Special needs trusts
- Charitable trusts