Why You Shouldn’t Trust Your Ironclad Trust

Instead, Reinforce Your Trust with a Prenup

If you’re planning to marry one day and count a sizeable trust or two among your assets, congratulations! You’re on your way to a bright future – unless of course your marriage doesn’t work out. At least your trust income and distributions will be safe, right? After all, you were told that the trust was ironclad, and it must be, since it was established to take care of YOUR needs, not those of a soon-to-be ex-spouse. Not. So. Fast.

According to Connatser Family Law Attorney Aubrey Connatser, “You should still get a premarital agreement if you are a trust beneficiary. With a prenup, you can ensure, that no matter what the trust agreement says or how it was managed, all distributions and any interest from the trusts, now and in the future, are the sole and separate property of the beneficiary and not the community property of both spouses. Prenups can also save the beneficiary time, money and stress, while preserving family privacy.”

While most people don’t enter into marriage expecting to divorce, the reality is that many marriages do fail. In addition, some trust beneficiaries incorrectly assume that the courts will view any income and distributions from their trusts as separate property and not community property, which is subject to division during a divorce. Unfortunately, this isn’t necessarily the case. Your ironclad trust may not be bullet proof, which is why Aubrey recommends clients protect their trust income and distributions with premarital agreements.

Get Up Close and Personal with Your Trust

Meet with your wealth manager and Texas family law attorney to review the fine print of any trusts you are party to, before you sign a prenup and tie the knot. “While there are a number of commonalities where trusts are concerned, every trust agreement is different, which means there are a multitude of details to be concerned with, so it’s important to consult with financial and legal experts,” Aubrey says.

Some of the key details trust beneficiaries should clarify include:

  • Who settled the trust, also referred to as the settlors or donors (essentially, the person or people who fund the trust), and whether the trust is self-settled (you would be the settlor) or settled (an independent third party set up the trust, such as a parent, grandparent, uncle, aunt, etc.).
  • Who is responsible for managing the distribution and/or reinvestment of trust funds, AKA the trustee. (Are you your own trustee – so the trustee and beneficiary are one and the same – or is a third party the designated trustee?).
  • Whether you have any right to a mandatory distribution (typically a designated percent of income or principal at regular intervals) or do the distributions occur within the sole discretion of the trustee.
  • Whether any distributions will be reinvested instead of distributed and under what circumstances.
  • If there are multiple beneficiaries and what discretion the trustee has to distribute more funds to one beneficiary over others and under what circumstances.

“Usually, trust agreements give the trustee guidelines that clarify that distributions may be made for health, education, maintenance and support of the beneficiaries. Such distributions are typically within the sole discretion of the trustee and usually considered separate property. However, some trusts include a mandatory right of distribution (as noted above), and that can create a scenario where community property may come into play,” Aubrey explains.

When it comes to trusts, the source of, how, when and why the funds are distributed will determine whether such distributions are considered separate or community property. According to Aubrey, “In the case of divorce, the court can find that certain distributions would be classified as income, and consequently subject to division as community property. The court will also consider who the trustee is, whether the beneficiary is his or her own trustee or if an independent, third-party trustee is involved. A premarital agreement can help you avoid this lengthy process, because the spouse has agreed in writing not to go after your trust distributions or income.”

Even More Reasons Trust Beneficiaries Need a Prenup

“Beneficiaries can include a waiver of the spouse’s rights to inspect or review any trust records in the premarital agreement, which precludes the spouse’s right to review such documents during discovery. Consequently, beneficiaries can avoid potential time delays that might occur should the spouse’s legal team ask to review trust accounting documentation.

Also, a premarital agreement is especially important if the beneficiary is party to any trusts with multiple beneficiaries. Not only are trust accountings more complex, information that family members would prefer to keep under wraps (such as their trust income) could be revealed. With a prenup, the only dirty laundry subject to being aired would be yours, if at all,” Aubrey says.

She also finds that “prenups generally just make the divorce process smoother and more streamlined. You’re also in a position to negotiate an agreement when you’re on good terms with your fiancé vs. bad, which can alleviate a lot of stress and ill will during the negotiating process. This can limit the cost of divorce exponentially and also preserve your assets, because you have a contract that dictates what the terms would be in case of divorce.”

Seek Professional Financial and Legal Guidance

So if you’re currently a beneficiary of any trusts, and planning to get married, speak with your wealth manager and a divorce attorney in Texas who has experience handling complex property settlements and premarital agreements. With a premarital agreement in place to reinforce your ironclad trust, you can rest assured your assets will be protected today and in the future.

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