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When Prenups And Trusts Collide Divorce Gets Messy

Divorces are mostly a matter of legal decisions. By the time two people decide to split, their relationship has already ended. The actual separation process is about resolving all the contractual and legal obligations the couple has to each other.

Sometimes, that’s a simple process. A single, clear prenuptial agreement can give the court a clear path to splitting a couple’s assets and obligations. However, it doesn’t take much to make a divorce impressively complicated. For example, if one partner has a trust in their name, the assets it contains can be contentious. When prenuptial agreements and trusts are in play, it’s even worse.

That’s because trusts and prenuptial agreements can directly contradict each other. Many trusts are set up by a third party, so any confusion can make your divorce a three-person battle. Here’s what you need to know about how trusts and prenuptial agreements interact in California and what to expect in your divorce.

How Trusts Work

There are many types of trusts, but at their core, they function similarly. A trust is a legal vehicle that contains assets, known as a trust fund. These assets are supposed to be used for the trust’s beneficiary. Decisions about the fund are made by a trustee, who has full permission to pay out funds. Some trusts allow beneficiaries to also be trustees, but this isn’t common.

Many of these funds, like California’s “spendthrift trusts,” are designed to protect assets for people who have a rough history with money. For example, a parent may set up a trust fund to support a child who tends to be reckless with their spending. They can also be set up to protect family assets from divorce by keeping them separate from marital assets.

This works because the beneficiary doesn’t actually own any of the funds. The trust owns itself. The impulsive child or the married person receives the benefits, but they have no control over the assets as a whole. Debtors can’t go after the funds until they’re dispersed to the beneficiary. The trust usually can’t be split in case of a divorce.

Of course, plenty of people attempt to win funds from trusts anyway. In some circumstances, they even succeed.

Divorce Orders and Prenuptial Agreements: Do They Supersede Trusts?

The answer to whether prenuptial agreements and divorce orders come before trusts is complicated. The problem stems from Section 2030 of California’s Family Code. This law lets courts order a financially well-off party to pay the legal fees for the other person in a divorce. This includes third parties who have become entangled in the separation process.

Most of the time, Section 2030 leads to the primary earner in an ending marriage covering all the legal fees. However, when a trust is involved, that can change. Suppose one partner is a beneficiary of a fund. In that case, they can petition the trustee to help them cover legal fees, embroiling the fund in the dissolution process.

A recent California case shows how that can go wrong. The beneficiary of a spendthrift trust petitioned the trustee to release additional funds to pay spousal and child support. The trustee refused. As a result, the non-beneficiary former spouse petitioned the court to add both the trust and the trustee to the dissolution proceedings. This was granted despite the best efforts of the trustee.

When the trustee and trust were officially included in the divorce, the non-beneficiary spouse requested that they cover his legal expenses. After a legal battle, the Third District Court of Appeal found that this was permitted under Section 2030. The fund was required to pay out more than $76,000 in legal fees.

That’s not the only time when a trust may become embroiled in a separation. Certain types of trusts are considered “revokable,” which means they can be changed or dissolved after being created.

If you’ve created a revocable trust, it can be dissolved or changed during your divorce. This is more likely to happen if it includes commingled assets. Your soon-to-be-ex partner will likely fight for funds they see as theirs by right, and the court can dissolve the trust or remove assets from it to satisfy their claim.

Prenuptial agreements can complicate this further. These contracts can specifically require one party to pay legal fees or declare a revokable trust as separate property. However, in divorces with complex finances, courts may look at a premarital contract more closely and dismiss some or all of it.

How Courts Take Trusts into Consideration During Divorces

Every divorce is different. California courts follow standard laws and guidelines regarding asset division and separations, but decisions can still vary. In general, there are three rules you can expect the judge to follow during your separation.

  1. 50/50 Marital Property Division: Any assets you and your spouse acquired during the marriage are considered community property and subject to a 50/50 split unless another robust contract states otherwise.
  2. California’s Child Support Equation: California’s child support calculator is one of the most thorough in the nation. It’s not a suggestion, either. Judges are required to award the amount determined by the equation with very few exceptions. Income from these funds may or may not be included in this equation, depending on the type.
  3. Mediation and Uncontested Divorce Rules: If a couple has an uncontested separation and uses a mediator to divide their assets, then California courts will abide by their decision. This is true whether or not there is a prenuptial agreement or fund is involved.

Protect Your Assets

When you’re in the middle of a divorce, the last thing you want to worry about is additional legal complications. You shouldn’t have to spend time and energy fighting to keep the assets that should be yours by right. That’s why you should reach out to an experienced estate and divorce attorney before you go any further.

The right attorney will help you navigate the legal system with less stress. They understand how to work with the terms of your prenuptial agreement and trusts to keep the money that you’re due. Reach out today to make sure your divorce goes as smoothly as possible.