What Happens to a Living Trust If You Divorce?

For many couples, the hardest part of the divorce process is figuring out how to fairly divide their assets. Since California is a community property state, spouses must divide their marital assets equally unless they both agree to another plan. Deciding how to split your marital property 50/50 is never easy, but it can become even more complicated if you have a living trust in place.

Living trusts are valuable financial tools that can help couples plan for the future and organize their finances while married. However, if you’ve decided to split up, you’ll need to take extra care with your living trust to ensure you handle it correctly. Here’s how living trusts work and what to expect if you’re dividing trusts during your divorce.

What Is a Living Trust?

A living trust is a legal construct you can use to manage your property while you’re still alive. Many living trusts are created by people who want to pass their property to an heir after their death without needing to go through probate court.

When you set up a living trust, you need to determine four things:

• What property and assets are included within it
• Who is responsible for managing the assets (the trustee)
• Who will benefit from it (the beneficiaries)
• How the assets will be transferred to the beneficiaries

The type you choose will impose some limits on these decisions. With living trusts, you can typically still access and use the assets it includes, but legally you may no longer be their owner. That makes it significantly easier to transfer property to others upon your death. Since the trust technically owns the property and continues to exist, there’s no need for assets or beneficiaries of the trust to be debated by the probate court.

Types of Living Trusts

There are two main types of living trusts: revocable and irrevocable. The main difference between the two is simple. Revocable trusts can be dissolved before your death, while irrevocable trusts cannot.

Because revocable trusts can be dissolved, they can function similarly to wills. Typically, these trusts are structured to name the person or people opening the trust as the trustees. That leaves you in charge of the property within the trust.

Most revocable living trusts are used to name beneficiaries to inherit specific property after you die. You and your spouse may have chosen to use a revocable living trust to pass on assets to your children without going through probate court. However, if you’re the trustee for your own trust, it remains part of your estate and therefore is still vulnerable to estate taxes.

Irrevocable trusts, on the other hand, protect your assets from estate taxes. You may not be named a trustee of your irrevocable trust, and you give up certain rights to the assets it includes. However, while the trustee effectively becomes the legal owner, they are obligated to manage the assets now under their control for your benefit and the good of the other beneficiaries. Choosing a reliable trustee is vital because you cannot dissolve or change it after it’s formed.

Revocable Trusts in Divorce

So how are these trusts managed during a divorce? That’s an excellent question. The simpler situation involves a revocable living trust. Since these trusts can be dissolved, the most common solution is that the judge will order you to close it entirely and return the property within it to your marital estate.

Once a revocable trust has been dissolved, it’s like it never existed. Think of it like shredding a will. The property within it is no longer the responsibility of the trustee, and the beneficiaries are no longer guaranteed the property. Everything within it returns to the people who owned it initially unless other agreements are in place.

This allows your assets to be divided like normal. In California, the judge will include the assets formerly within the trust alongside the rest of your property and divide it as equally as possible. Bank accounts will often be split down the middle, while real estate, retirement accounts, and other more complex assets will be handled on a case-by-case basis.

Irrevocable Trusts in Divorce

Irrevocable trusts put you in a more complicated position. The property within an irrevocable trust is officially owned by the trust, not you or your spouse. That means it’s no longer part of your marital assets and won’t be considered by the judge.

So, where does it leave the assets? They won’t be split between you. Instead, they will remain under the control of the trustee until its conditions are met. In most cases, the property will sit there until you pass away, when the beneficiaries will receive it. You cannot alter the beneficiaries, regardless of your divorce. This means that neither you nor your spouse can change who benefits from it outside of specific legal circumstances.

If you do want to make changes to an irrevocable trust, there are a few ways you can amend the terms it includes:

• If you and your spouse (the settlors), as well as all beneficiaries, provide written consent to alter the trust, it can be changed without court approval
• If the settlors agree, but the beneficiaries do not, you can petition in probate court to make adjustments. The court will only approve these changes if they don’t “substantially impair” the interests of non-consenting beneficiaries

Essentially, you can only change the terms if everyone involved agrees or the court determines that it won’t hurt the beneficiaries.

Manage Living Trusts in Divorce with Kaspar & Lugay, LLP

Whether you have a revocable or irrevocable trust involved in your divorce, you need to work with an experienced attorney to handle it. The experts at Kaspar & Lugay, LLP, have decades of experience handling high-asset divorces like yours. Call (858) 295-3146 or schedule your Consultation online today to learn more about how the right attorney can help you streamline your divorce and keep trusts from slowing down your split.