What Happens to a Trust Fund in a Divorce in Texas?

For couples going through a divorce in Texas, the division of assets can quickly become one of the most complex and contentious issues they face. This is especially true when trust funds are involved. Trusts are vital tools for estate planning and wealth management, assisting not only in asset protection and tax planning but also in ensuring that financial legacies are passed down as intended.

However, the fate of a trust can become complicated in the event of a divorce. In Texas, how a trust and its assets are divided depends largely on the origin of the assets and how they were maintained during the marriage. Let’s dig into the intricacies of how trust funds are handled in Texas divorces, providing clarity on this critical issue and exploring why trust funds can become a battleground in settlement negotiations. Whether you’re safeguarding your financial future or navigating the choppy waters of a marital split, it’s important that you know what to expect so that you can safeguard your interests.

How Does a Trust Work in Texas?

A trust is a legal arrangement in which one party, known as the trustee, holds and manages assets on behalf of another party, called the beneficiary. Trusts are established by a grantor (also called a settlor), who transfers property into the trust. The trust is governed by a document called the trust deed, which outlines the trustee’s responsibilities and the terms for managing and distributing the assets to the beneficiaries. Trusts are used for various purposes, including estate planning, tax avoidance, and asset protection.

Trusts come in many different types. Among the most common are as follows:

• • A revocable trust allows the grantor to modify or terminate the trust. 
  • An irrevocable trust cannot be changed once established by the grantor.
  • A living trust is created during the grantor’s lifetime, while a person creates a testamentary trust through a will.
• A family trust is a broad term encompassing various trusts created for family members.

Trusts offer a range of benefits, such as control over one’s financial legacy, protection of assets from creditors, and potentially reduced estate taxes. Revocable and irrevocable factors refer to whether the grantor can change the trust. Living and testamentary trusts are distinct based on when they take effect. 

Therefore, a living trust could be either revocable or irrevocable. Depending on the terms and appointment of trustees, a family trust could also be flexible. Another type of trust is a testamentary trust, created through the will of the grantor.

Trusts and Community Property

Texas is a community property state, which means that assets acquired during a marriage are presumed to be owned jointly by both spouses and are, therefore, subject to division upon divorce. This principle directly impacts how trusts are treated in divorce proceedings. If a trust is funded with assets accumulated during the marriage, those assets are typically considered community property, even if the trust is in the name of one spouse. This means that the assets within the trust could be divided between both spouses in a divorce. 

However, if the trust was established before the marriage or funded with separate property—such as an inheritance or a gift specifically given to one spouse—it generally remains the separate property of the spouse who owns it and is not subject to division.

What Happens to a Revocable Trust in a Texas Divorce?

Because the grantor retains control over the trust assets, they can be modified or distributed as desired. In addition, many married couples create revocable trusts with both spouses as grantors and trustees.

By the nature of a revocable trust, there is no distinction in ownership separate from the trust. However, if the trust was funded with community property, the court may consider the trust assets as part of the marital estate. Here are some factors the court might consider while doing so:

• The creation date of the trust
• Funding for the trust
• The grantor’s intent

What Happens to an Irrevocable Trust in a Texas Divorce?

Generally, assets in an irrevocable trust are considered separate property and not subject to division in a divorce. What happens to an irrevocable trust in a Texas divorce is dictated by the trust agreement and Texas law, and the grantor cannot touch it. 

However, there are exceptions. If the trust funding came from community property, the income generated by the trust during the marriage could be considered community property. Additionally, if the grantor has the power to revoke the trust or control trust distributions, the court may treat the trust as if it were revocable.

What Happens to a Living Trust in a Texas Divorce?

How a living trust is divided boils down to its terms as a revocable or irrevocable trust. Trust assets held in a revocable may be considered community property if funded with marital assets. If it’s irrevocable, the trust assets are generally separate property, but income generated during the marriage can be community property.

What Happens to a Family Trust in a Texas Divorce?

The treatment of a family trust in a divorce depends on its specific terms, with revocable and irrevocable again being central concepts. If the trust is revocable and funded with marital assets, it may be subject to division. If it’s irrevocable, the assets are typically separate property. Trust income could still be considered community property.

With family trusts, numerous individuals and entities are in the position of grantors, trustees, and beneficiaries. The trust agreement is highly technical, and it may even encompass corporate entities. Divorce further complicates these roles and responsibilities.

Consult with a Knowledgeable Divorce Attorney About Asset Division

For many couples, trusts are a cornerstone of an effective estate plan—one that can become hotly contested in the event of a divorce. Safeguarding these assets requires a sophisticated legal strategy. At Balekian Hayes, PLLC, our team of family law attorneys focuses on clients going through a high-net-worth divorce, and our goal is to protect your interests. We will advocate for you through settlement negotiations and mediation, but we are ready to fight for your rights in court.

Please contact our firm to schedule a confidential consultation with an experienced divorce attorney. We can discuss options for resolving divorce disputes and how to protect your interests in a trust fund.