Dividing assets in a California divorce can be complicated, especially when a living trust is involved without a prenuptial agreement (a.k.a. a prenup). California courts typically include trusts in the marital estate for divorce unless a prenup says otherwise. However, whether a trust is considered community property (shared) or separate property (owned by one spouse) depends on factors like when it was created, how it was funded, and the creator’s intent. Let’s explore how California courts approach dividing living trusts in divorces without prenups.
Community property vs. Separate property
What is community property, what is separate property, and why does it matter? Well, these are the categorizations a CA court makes in determining “who gets what” in a divorce. If something is “community,” it gets divided up, and if something is “separate,” it does not get divided up.
- What is community property?: California is a community property state. This means assets acquired during the marriage are usually considered community property and split equally (50/50) in a divorce.
- What is separate property?: Assets owned before marriage, obtained after separation, or received as gifts or inheritances are generally separate property in CA. These may remain with the original owner.
- Caveats: If separate and community property are mixed (“commingling”), or an asset significantly changes in nature ( “recharacterization”), the court may need to adjust the division.
Categorizing trust assets as community or separate
Now, for the purpose of explaining how living trusts are divided in a divorce in CA, it’s important to understand that the trust assets must be categorized into community property or separate property in a divorce. How assets within a living trust are treated depends on several key factors:
- Trust Creation: If the trust was established before marriage and separate property was used to fund it, those assets are more likely to remain separate in divorce.
- Asset Source: Assets added to the trust during marriage, especially if community funds are used, may be considered community property and subject to division.
- Commingling: If assets are mixed within the trust, this complicates the process and may require court intervention and/or be considered community property.
Why the provisions in a trust matter
The terms of the living trust itself can also impact the division of assets in a divorce. For example, some trusts may include provisions specifying how assets are to be distributed in the event of divorce or dissolution of marriage. Generally, when a living trust is created, the assets are marked and labeled as separate property of one spouse (e.g., in a separate property schedule and/or titled as separate property and/or marital agreements drafted simultaneously); when this occurs the property generally remains the separate property of that spouse.
For instance, in Glade v. Glade, the court notes that the trust’s language dictates the distribution of property. This suggests that a California court will look to the trust document itself to determine how it should be divided in a divorce and will generally enforce such provisions, provided they are legally valid and not contrary to public policy.
Key takeaway: If you put a clause in a trust that says the assets within should remain separate property, it’s likely that a California court will enforce this provision and mark it separate property in a divorce.
What is transmutation, and why does it matter?
Sometimes, a couple can purposely or “accidentally” “transmute” assets into community property by putting certain assets into the trust.
- Transmutation Defined: Transmutation is changing an asset’s status from separate property to community property or vice versa.
- Why Does It Matter?: If an asset’s status is changed from separate property to community property, that means it will be divided in a divorce.
- Transmutation in the Trust Context: If separate property is intentionally added to a trust during marriage to benefit both spouses, it may become community property. Using community funds to improve separate property within the trust could also trigger transmutation.
- California Law: California courts closely analyze intent when deciding if transmutation occurred. Did the actions imply a desire to change asset ownership?
Sometimes it’s not always 50/50
Even though California follows community property laws, the court has the authority and jurisdiction to inquire into and divide assets in a manner that it deems fair and equitable under the circumstances. This is known as “equitable distribution,” which is the framework of dividing up assets in a divorce according to equitable standards, not necessarily 50/50 standards. This may involve considering factors such as the length of the marriage, each spouse’s financial contributions, their respective earning capacities, and any agreements or arrangements made between the parties during the marriage.
Takeaway: Sometimes, a CA court can take matters into it’s own hands by considering the circumstances as a whole and not just automatically splitting a trust 50/50.
Challenges of dividing trusts without a prenup
Dividing trust assets in a divorce without a prenuptial agreement can be extremely complex. Key challenges include:
- Disputes over Asset Characterization: Was property truly separate, or did it become community property within the trust? This can be hotly contested.
- Allegations of Fraudulent Transfers: If assets were moved into the trust to avoid division in divorce, this creates additional legal difficulties.
- Importance of Legal Counsel: Each spouse needs experienced attorneys to advocate for them during the divorce process and provide evidence to support their position.
How a prenup can help
Prenuptial agreements are powerful tools for avoiding disputes over living trusts in California divorces. Here’s how they help:
- Prevents Disputes: A valid prenup explicitly states how trust assets will be treated in divorce, specifically designating them as one spouse’s separate property.
- Clear Ownership: Prenups may outline which assets belong to which spouse and whether they are community or separate property.
- Reduces Conflict: By pre-determining asset division, prenups minimize future arguments and legal battles over the division of a living trust in a divorce.
Key takeaways: Living trusts and divorce in California
Let’s wrap up the key takeaways you should have from this article:
- Dividing Living Trusts in Divorce (Without a Prenup): California courts navigate complex legal principles and specific details to determine a fair division of assets in a living trust during a divorce (absent a prenuptial agreement).
- Community Property vs. Equitable Distribution: While California is a community property state, courts do have the authority to distribute assets equitably (meaning not necessarily 50/50), considering factors such as the length of the marriage.
- Including a Separate Property Provision in the Trust: Many attorneys will suggest you include a provision within the trust itself to declare it as separate property, not divisible in a divorce, and CA courts are likely to uphold that wish.
Prenuptial Agreements: A prenup is a recommended tool to avoid uncertainties and potential disputes, and if you are considering marriage, you should also consider a prenup to outline asset division, including how living trusts will be handled in a potential divorce.
Sara is a bilingual Spanish-speaking attorney and legal advisor from Orange County, CA. Sara is the co-founder of Ovando Bowen LLP, along with her husband Chumahan Bowen, Esq. As a legal advisor, Sara helps her clients navigate the complexities of both business and personal affairs. Sara has been assisting individuals and families since 2009 when she worked at the Long Beach Courthouse, Self-Help Center. Book a Q&A or Full Representation with Sara here
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