Dallas Attorney for Trusts in Divorce & Family Litigation

Trusts can create some of the most complicated property questions in a Texas divorce. A spouse may be a beneficiary of a trust created by parents or grandparents, serve as trustee of family wealth, have the right to receive mandatory or discretionary distributions, or have transferred property into a trust as part of an estate or asset-planning strategy.

The existence of a trust does not, by itself, answer how that wealth should be treated in a divorce.

The trust instrument, source of the property, identity of the settlor, beneficiary’s rights, trustee’s discretion, history of distributions, and degree of control can all affect the analysis. In substantial estates, those issues often intersect with complex divorce and financial litigation involving separate property, business interests, inherited wealth, and other significant assets.

Brad M. LaMorgese represents clients in Dallas-Fort Worth and throughout Texas in sophisticated family law matters involving trusts and substantial family wealth. These cases require careful attention to the distinction between property owned by a trust, property owned by a spouse, and financial rights or benefits a spouse may have because of a trust.

A Trust Is Not Simply Another Marital Asset

One of the first questions in a divorce involving a trust is deceptively basic: what does the spouse actually own?

Under Texas law, a trust generally represents a fiduciary relationship in which a trustee holds and administers property for beneficiaries according to the terms of the trust. Property held in trust therefore should not automatically be treated as though it were directly owned by a beneficiary.

The analysis may require distinguishing among several different interests:

• The assets held within the trust
• A spouse’s beneficial interest in the trust
• A spouse’s rights to mandatory distributions
• A spouse’s eligibility for discretionary distributions
• Income or other distributions already received
• A spouse’s authority as trustee
• Powers to withdraw, appoint, direct, or otherwise control trust property

Those distinctions matter because two trusts containing assets of similar value can present entirely different issues in divorce depending on their terms and structure.

Who Created the Trust Matters

Trust disputes in family law frequently begin with the identity of the person who established and funded the trust.

A third-party trust created by a parent or grandparent for a spouse can present different marital-property questions from a trust created by one or both spouses during the marriage.

For example, a spouse may be the beneficiary of a multigenerational family trust established long before the marriage. Another case may involve a revocable trust established by a spouse and funded with property accumulated during the marriage.

The word “trust” describes both arrangements, but their treatment in divorce cannot be assumed to be the same.

The analysis generally requires examining who contributed the property, when it was contributed, what rights were retained, who controls distributions, and what rights the spouse has under the governing instrument.

Trust Assets and a Beneficiary’s Interest Are Different

A beneficiary’s connection to a trust does not necessarily mean the beneficiary owns each asset held by the trust.

This distinction can be particularly important when a trust owns:

• Closely held business interests
• Investment portfolios
• Real estate
• Family partnerships
• Private equity or other alternative investments
• Mineral interests
• Significant cash or securities
• Other family-held assets

The legal analysis should begin with the actual trust instrument rather than the value appearing on a financial statement or estate-planning summary.

The terms may establish whether distributions are mandatory or discretionary, whether the beneficiary has withdrawal rights, whether distributions are limited by an ascertainable standard, whether there are multiple beneficiaries, and whether another person or institution controls the trustee’s decisions.

Inherited Wealth and Separate Property

Texas Family Code Section 3.001 generally classifies property acquired during marriage by gift, devise, or descent as separate property.

That principle frequently matters when family wealth moves through trusts, but the analysis does not necessarily end there.

A distribution received from a family trust may need to be evaluated based on the source of the property, the terms of the trust, the nature of the distribution, and what subsequently happened to the funds.

Once money leaves a trust and enters a spouse’s financial accounts, documentation can become critical. If those funds are transferred repeatedly, invested, used to acquire other assets, or deposited into accounts containing community funds, proving their continuing separate character may require reconstructing the financial path of claimed separate property.

The existence of a trust may establish important facts about the source of wealth, but it does not eliminate the need to prove the character of property involved in the divorce.

Trust Distributions Require Their Own Analysis

Not every trust distribution should automatically be treated the same way.

The nature of the distribution and the rights created by the trust instrument can matter. Among the questions that may require analysis are:

• Whether the distribution came from trust principal or income
• Whether distributions are mandatory or discretionary
• Whether the beneficiary has an enforceable right to receive funds
• Whether distributions are made regularly or only occasionally
• Whether the beneficiary can compel a distribution
• Whether the beneficiary has withdrawal or appointment powers
• Whether distributions already received can be traced
• How distributed funds were used after receipt

These distinctions may affect property characterization and other financial issues in the family law case.

A recurring history of trust distributions may also be financially significant even when the underlying trust corpus is not part of the marital estate. The particular legal significance depends on the issue before the court and the terms governing the trust.

Control Can Be as Important as Beneficiary Status

In sophisticated trust structures, simply identifying someone as a “beneficiary” may provide an incomplete picture.

A beneficiary with no authority to direct investments, compel distributions, replace a trustee, withdraw principal, or alter beneficial interests occupies a substantially different position from a spouse who possesses significant powers over the trust.

Similarly, serving as trustee does not necessarily mean the trustee personally owns the trust assets. A trustee generally holds and administers trust property subject to fiduciary duties and the governing instrument.

The relevant inquiry is therefore not merely whose name appears on the trust.

Counsel may need to examine the practical and legal authority the spouse possesses, including whether that authority arises as beneficiary, trustee, settlor, trust protector, holder of a power of appointment, or in another capacity.

Revocable Trusts Can Present Different Issues

Revocable trusts deserve particular attention because the person who created the trust may retain substantial authority over the property.

A revocable living trust is often used as an estate-planning or property-management vehicle. Placing property into such a trust does not necessarily change the underlying marital-property rights associated with that property.

Texas courts have long recognized that the substance of a trust arrangement and the rights retained by the person creating it can matter when determining its legal effect.

Accordingly, a divorce involving a revocable trust may require examination of:

• The character of the property when it entered the trust
• Whether community or separate property funded the trust
• Who created the trust
• Who may revoke or amend it
• Who serves as trustee
• Who receives income and principal
• What rights the settlor retained over trust property

A trust document should not be viewed in isolation from the history of the assets placed into it.

Trusts Created During Marriage

A trust established during marriage can raise particularly significant questions when marital property was transferred into it.

The analysis may involve whether one or both spouses participated in the transfer, what property was contributed, the character of that property before the transfer, and what rights were retained afterward.

Texas marital-property rights generally cannot be resolved merely by moving an asset into a different legal structure.

Depending on the circumstances, transfers involving community property can raise issues concerning management rights, fraudulent transfers, fraud on the community, reimbursement, or the ultimate characterization of property.

The relevant legal theory will depend on the facts. The important point is that a trust should not be assumed either to remove property from a divorce or to make all trust property part of the marital estate.

Trust-Owned Businesses Can Create Multiple Layers of Analysis

Trusts frequently own interests in family businesses, partnerships, investment entities, and closely held companies.

That can create several distinct questions in the same case.

First, the court may need to determine the nature of a spouse’s interest in the trust. Separately, it may be necessary to understand the value and financial performance of the underlying business. The fact that a business is valuable does not necessarily establish that the beneficiary spouse personally owns that value.

At the same time, business distributions, trust distributions, compensation, and other financial benefits may need to be examined independently.

When an ownership interest itself becomes relevant to the marital estate, business valuation in a complex divorce can involve questions of cash flow, goodwill, marketability, ownership restrictions, and valuation methodology that are distinct from the trust analysis.

Keeping these layers separate helps avoid treating a complicated wealth structure as though it were a single asset.

Discovery Involving Trusts Can Be Complicated

Trust litigation within a divorce often raises discovery issues that do not exist in an ordinary property case.

Relevant documents may be held by trustees, financial institutions, accountants, investment advisers, family offices, or other third parties rather than by either spouse.

Depending on the issues, important materials may include:

• The trust instrument and amendments
• Schedules identifying property transferred into the trust
• Trustee accountings
• Distribution records
• Bank and investment statements
• Tax returns and tax reporting documents
• Correspondence concerning distributions
• Documents concerning trustee decisions
• Business records for trust-owned entities
• Records of powers exercised by a beneficiary or settlor

The appropriate scope of discovery depends on what is actually disputed.

Trust records can also implicate privacy concerns, confidential family information, and the interests of beneficiaries who are not parties to the divorce. Discovery strategy may therefore require balancing the need for relevant financial evidence against legitimate confidentiality and third-party concerns.

Valuing a Trust Interest Is Not Always Straightforward

Even when a beneficiary’s interest is relevant to the financial issues in a divorce, assigning a present value to that interest may be difficult or inappropriate without understanding its terms.

A beneficiary’s economic position may depend on factors such as:

• The trustee’s discretion
• The beneficiary’s age
• The existence of other beneficiaries
• Distribution standards
• Termination provisions
• Contingencies imposed by the trust
• Powers of appointment
• Restrictions on transfer
• The nature and liquidity of underlying assets

An interest that gives a beneficiary an immediate, enforceable right to receive property is fundamentally different from a contingent interest that may never result in a distribution.

The legal rights created by the trust must therefore be understood before financial conclusions are drawn from its apparent value.

Trusts and High-Net-Worth Property Division

Trust issues rarely exist in a vacuum.

A spouse with substantial trust interests may also own businesses, investment accounts, real estate, retirement assets, or inherited property outside the trust. The interaction among those assets can influence the overall financial strategy of the divorce.

In a high-net-worth division of property, counsel may need to distinguish among property subject to division, separate property that must be established through evidence, trust assets that are not directly owned by either spouse, and other financial interests that may nevertheless be relevant to the case.

Those distinctions can materially affect both litigation and settlement.

An inaccurate assumption about a trust can distort the perceived size of the marital estate, while failing to investigate legitimate trust-related financial issues can leave significant questions unanswered.

Trust Planning and Marital Agreements Can Intersect

Families with significant inherited wealth often use trusts and marital agreements together.

A premarital or post-marital agreement may address existing trust interests, future inheritances, distributions, income, property acquired with distributed funds, or rights arising from family wealth.

The interaction between the trust instrument and the marital agreement can become important if the marriage later ends.

For individuals entering marriage with substantial family wealth, these issues can also form part of a broader marital agreement and asset-protection strategy designed to define property rights before a dispute arises.

When an agreement already exists, its enforceability and interpretation must be considered separately from the legal rights created by the trust itself.

When Trust Issues Should Be Addressed

Trust-related questions should generally be identified early in a complex divorce.

Waiting until mediation or trial to determine the nature of a significant trust interest can make it difficult to obtain records, evaluate the governing instrument, trace distributions, or address third-party discovery.

Early analysis can help determine:

• Whether the trust itself needs to be investigated
• What rights the spouse actually possesses
• Whether distributions have already entered the marital estate
• Whether separate-property tracing is required
• Whether trust-owned entities create valuation issues
• What documents should be requested
• Whether third-party discovery will be necessary
• Whether the trust affects settlement structure or financial planning

In cases involving multigenerational wealth, the trust analysis may also need to be coordinated with accountants, financial professionals, trustees, estate-planning counsel, or other attorneys familiar with the structure.

Trial and Appellate Considerations

Trust-related family law disputes can involve complicated questions of property characterization, evidence, interpretation, and procedure.

If a significant ruling concerning a trust affects the property division, the record developed in the trial court becomes particularly important. Trust instruments, financial records, testimony, and the legal basis for the parties’ competing positions need to be properly presented and preserved.

Brad’s appellate background informs his approach to significant family law disputes at the trial level. In cases involving substantial trusts or family wealth, the possibility of later review can make careful issue development and preservation especially important.

That trial-level preparation complements Brad’s broader work in complex family law and appellate proceedings.

Sophisticated Representation for Trust Issues in Texas Divorce

Trusts can complicate a divorce because the economic reality of family wealth does not always correspond neatly with legal ownership. Resolving those issues requires careful attention to the trust instrument, Texas marital-property law, financial history, and the rights actually held by the spouses.

Brad M. LaMorgese is Board Certified in Family Law by the Texas Board of Legal Specialization and has decades of experience handling complex divorce and property matters involving substantial assets, inherited wealth, businesses, and sophisticated financial structures.

If your divorce or family law matter involves a significant trust, inherited wealth, trust distributions, or disputes concerning the ownership and characterization of trust-related property, contact LaMorgese Family Law at 214-295-7200.

Board Certified. Respected. Results-Driven.