Helping Texas Families Navigate Divorce Since 1986

What happens to a trust created by spouses if they divorce?

On Behalf of | Jul 3, 2024 | Divorce

Spouses with significant personal property to protect often use innovative legal tools to achieve their financial goals. Couples decide to move resources into a trust as part of a broader estate planning or tax minimization effort.

Trusts are useful for those planning an estate for a variety of different reasons. They can also provide those running small businesses with additional protection in the event of litigation or company failure. Trusts are separate legal entities that provide a degree of separation between the party starting the trust and certain assets.

A trust created during the marriage could be a complicating factor during a high-asset Texas divorce. What generally happens with a trust during divorce proceedings?

The type of trust determines the best solution

Typically, spouses use marital resources to create and fund a trust. There are numerous different types of trusts that people can start. Many professionals group them into two main categories. Revocable trusts are trusts that spouses can adjust throughout their lifetimes as their financial circumstances change. Irrevocable trusts offer a better degree of protection in many cases but also eliminate the adjustment of trust terms after the creation of the trust.

Spouses with revocable living trusts can potentially modify the terms of the trust, possibly by dissolving the trust. That can be the simplest solution in many cases. Dissolving the trust with the intention of creating separate trusts or distributing the assets between the spouses can help each spouse make their own plans for those resources going forward.

Spouses may not be able to modify an irrevocable trust and may need to address that inability in their divorce negotiations. The type of trust created and also the overall value of the resources used to fund the trust can influence the best and most appropriate solution. Given that Texas is a community property state, the assets used to fund the trust are likely marital property that the spouses may need to divide.

Learning more about what to anticipate during financially complex divorce negotiations can be beneficial for those with trusts and other unique resources in their marital estates. Spouses with unusual assets and holdings have more to lose and more chances to make major mistakes during a divorce if they don’t seek knowledgeable guidance.