[Living Trust] What is a revocable living trust?
A revocable living trust is a valuable financial tool that helps couples plan for the future and organize their finances and assets during their marriage. However, if you or your spouse decide to separate or divorce, extra care must be taken regarding the trust. Below are some important considerations when dealing with a revocable living trust during a divorce:
Trust Termination and Modification: In the case of a revocable trust, the trustor (the creator of the trust) can modify or revoke the trust during their lifetime. If a couple decides to divorce, the trust’s terms will need to be reviewed and possibly revised. This could involve creating a new trust, appointing new trustees, or redistributing assets.
Asset Ownership: Although a living trust technically holds ownership of assets, divorce can lead to disputes over the trust’s assets. It's important to clarify ownership and distribution of these assets during the divorce. A clear understanding of the trust’s terms must be reached to prevent conflicts.
Trustee Designation: If both spouses are co-trustees of the trust, they will need to decide who will maintain control or whether a third-party trustee should be appointed to manage the trust going forward. The trustee is responsible for managing the trust’s assets according to the trust's terms.
Beneficiary Review: If the trust was set up to benefit you and your children, divorce may prompt a reassessment of the designated beneficiaries. Ensuring that the assets are distributed as intended after the divorce is critical.
Legal Assistance: Given the complexities of divorce and its impact on a living trust, it is highly advisable to seek legal counsel. An estate planning attorney can guide you through the process of modifying or dissolving the trust as part of the divorce.
In summary, a revocable living trust offers flexibility, but in the event of a divorce, proactive measures must be taken to ensure the trust aligns with the grantor's intentions and complies with legal requirements.
Revocable Trust in Divorce
One of the most challenging aspects of divorce is finding a way to divide assets fairly. In community property states like California, Texas, Nevada, Arizona, Idaho, Washington, and Wisconsin, marital property accumulated during the marriage is divided equally unless the couple agrees otherwise. If you have established a revocable living trust, it can be dissolved at any time. The most common outcome is that a judge orders the trust to be completely dissolved, and the assets within it are returned to the marital estate.
Once a revocable living trust is dissolved, it essentially ceases to exist. The assets held within the trust are no longer the trustee’s responsibility, and beneficiaries will no longer have guaranteed claims to those assets. Unless otherwise agreed, everything reverts to its original owner, and the judge will attempt to divide the previously trust-held assets equally between the spouses. However, real estate, retirement accounts, and other more complex assets may require a step-by-step approach to be handled appropriately.
Irrevocable Trusts in Divorce
An irrevocable trust presents a more complex situation. Unlike revocable trusts, an irrevocable trust is no longer part of the marital estate and is not subject to division in the divorce. The trust formally owns the assets, not you or your spouse, meaning those assets cannot be split by a judge during the divorce.
The trust’s trustee will continue to manage the assets until the conditions of the trust are met, such as the death of the trustor or the distribution of the assets to the beneficiaries. Regardless of the divorce, you or your spouse cannot change the beneficiaries. The terms of the irrevocable trust are binding, and the assets are protected from division unless there are special legal circumstances.
