What are Spouses' Rights in Divorce Regarding Beneficiary Revocable Trust?

By Wayne Thomas

The property division aspect of every divorce is governed by state law. In cases where parties cannot come to agreement, the court will distribute all of the assets deemed marital property. Determining whether a spouse has a claim to a revocable trust depends on when it was established and what property was used to fund the trust.

Overview of Property Division

When a couple cannot come to agreement on how property should be distributed in divorce, the court will decide. Some states divide the property equally while others do so on the basis of fairness, taking into account individual contributions to the marriage. However, as a preliminary matter, all property owned by the couple must be classified as marital or separate. Property considered marital property is subject to division, and generally includes all assets acquired during the marriage that were not obtained by gift or inheritance. All other property is deemed separate and not subject to division.

Revocable Trust

A revocable trust is a trust that may be withdrawn or changed by the person who created it, often referred to as a grantor or settlor. This differs from an irrevocable trust in which the grantor cannot change or withdraw the trust after its creation. The revocable trust is funded by property deposited by the grantor, who also appoints a trustee to administer the funds and distribute assets to beneficiaries according to the terms of the trust. It is not uncommon in the marriage context for the grantor and his spouse to be beneficiaries under the trust.

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Timing

While a revocable trust unquestionably qualifies as marital property, the timing of its creation becomes pivotal in determining whether it is subject to division. If the trust is created during the marriage, most states will treat it as marital property, unless you can prove that you and your spouse intended it to be separate. This might be established by evidence that you and your spouse kept all of your assets in separate accounts, or if you executed a prenuptial agreement covering the property used to fund the trust.

Additional Considerations

It may be the case that your spouse was listed as a beneficiary when the trust was created. Some states have addressed this issue by enacting specific legislation that automatically rewrites the trust instrument removing this designation after divorce. However, if you are also named as a beneficiary, money you receive as interest on the trust funds may be considered income for the purposes of child support and alimony, depending on the state. This means that although your spouse is no longer a beneficiary, a judge could award a portion of your trust income to her after considering the needs of everyone involved and the standard of living enjoyed during the marriage, among other factors.

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The Oklahoma Trust Assets in Divorce
 

References

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Revocable Trusts & Divorce

Revocable trusts are arrangements in which the maker of the trust, called the settlor, transfers property to another person to hold for the benefit of a beneficiary, but retains the right to revoke the trust and pull the property back into his own estate. While advantageous in terms of avoiding probate--and keeping irresponsible beneficiaries from wasting trust property--revocable trusts can create complications in divorce cases for settlors and beneficiaries.

How to Form a Revocable Trust

A revocable trust is an agreement that dictates how your assets will be distributed, both during your lifetime and after your death. The trust is called “revocable” because you retain the right to revoke the trust, or amend it, during your lifetime. A revocable trust may appeal to you if you want to avoid the expense and public nature of probate proceedings. However, revocable trusts can be costly to establish and administer, mainly because you — or your trustee — must be sure that assets are properly transferred to the trust.

Are Assets in Revocable Trust Part of Community Property?

The classification of property owned by a married couple can be important for determining taxes after death and dividing assets as part of divorce. In community property states, joint ownership is presumed on most property acquired during the marriage. This treatment covers revocable trusts created by the parties while married, as well as assets transferred into the trust during the marriage.

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