Divorce can be a profound turning point in your life, reshaping your future in ways you might never have anticipated. It’s not just the emotional upheaval; divorce can impact nearly every aspect of your life, including your financial future. As you navigate the changes, it’s crucial to consider how your estate plan, specifically your trust, might be affected.
At Hermance Law, we understand the intricacies of estate planning, especially in life-altering events like divorce. In this article, we’ll guide you through the essentials of changing and setting up a trust after your divorce, ensuring your financial security and peace of mind.
How Does Divorce Affect Your Trust?
California operates under community property laws, which means that during a divorce, marital assets and debts are typically divided equally between spouses. However, there’s a crucial caveat: these assets and debts must have been acquired during the marriage. Anything obtained before the marriage is generally considered separate property.
If you have an existing revocable living trust and are headed toward divorce, assets placed within that trust will be subject to community property regulations. Assets acquired while married are classified as community property, whereas those acquired before marriage or received as an inheritance or gift often retain their separate property status. This classification applies whether the trust is individual or joint.
In essence, even with a living trust in place, as long as it remains revocable, a California divorce generally follows the standard procedure. However, it might necessitate the dissolution of the trust and the removal of assets from it.
In contrast, assets held within an irrevocable trust typically remain the property of the beneficiaries and are generally not subject to division during divorce proceedings.
What Happens to the Trust If You Pass Away During the Divorce?
In accordance with California law, a surviving spouse automatically inherits all community property when there is no Last Will and Testament or Living Trust in place specifying otherwise.
For separate property, the distribution is determined by California’s “intestate law,” which considers the surviving spouse and other surviving family members of the deceased. In this scenario, the surviving spouse typically receives a portion ranging from one-third to the entirety of their deceased spouse’s separate property.
The same rules will apply when it comes to the assets placed within the living revocable trust.
Establishing a Trust After Divorce: What You Can and Cannot Do
As divorce proceedings can be a lengthy process (requiring at least six months in California from the date of filing and often extending longer), you don’t need to wait until the divorce is fully completed to start modifying or setting up a trust. However, there are some limitations on estate planning actions during the period from when the divorce is initiated to when it’s finalized.
Here’s what you can consider:
- Create a New Trust: Establishing a new trust allows you to specify how your assets are managed and distributed after your divorce. This is especially important if you want to exclude your former spouse from your estate plans.
During this time you can create a new trust, but you cannot fund it. This is because, to safeguard against one spouse making significant financial decisions that could impact the other party, automatic temporary restraining orders (ATROS) are issued at the commencement of divorce proceedings. These ATROS forbid either spouse from selling, transferring, or altering property without obtaining written consent from the other spouse.
ATROS don’t exclusively pertain to community property; they also encompass separate property. This restriction prevents the transfer of funds that should be considered when determining spousal and child support. However, it’s essential to note that this restriction doesn’t apply to funds necessary for business operations or basic living expenses.
ATROS remain in effect throughout the entirety of the divorce process until the final judgment is issued.
- Amend Existing Trust: If you already have a trust, you can amend its terms to reflect your new circumstances. You can change beneficiaries, trustees, or provisions to align with your post-divorce intentions.
Estate Planning Steps After Divorce
If divorce is on the horizon, you need to take steps to ensure your estate plans created when you were still married will be revised and updated to suit your new circumstances.
- Review Your Assets: Take stock of your assets and consider what should go into your trust. This may include real estate, investments, life insurance, and more.
- Update Beneficiaries: Ensure that the beneficiaries named in your trust align with your current wishes. This is particularly important regarding life insurance policies and retirement accounts.
- Appoint New Trustees: If your ex-spouse was designated as the trustee or executor, it’s time to appoint a new, trusted individual.
- Guardianship for Minor Children: Revisit your trust to confirm guardianship arrangements for your minor children in case something happens to you.
Why You Need to Update Your Estate Plan at the Onset of Divorce
Divorce can be a turbulent period, but it’s precisely during times of change that your estate plan requires careful attention. Failing to update your trust and other estate planning documents can lead to unintended consequences, such as your assets ending up in the wrong hands or disputes among your heirs
We recently assisted a newly divorced mother with two young children. She owned a house, held life insurance, and maintained several bank accounts. Her primary concern was the potential scenario where, in the event of her absence, her ex-husband would gain control over these assets due to her children’s minor status. This could result in her assets being distributed against her wishes.
Seeking a solution, we established a revocable living trust on her behalf. This trust ensures that, if anything were to happen to her, her assets would be passed on to her children according to her specific wishes. Additionally, she appointed an executor to oversee the management of these assets for her children, thus preventing her ex-husband from gaining control.
At Hermance Law, we specialize in helping individuals navigate complex life transitions, including divorce, to secure their financial future and peace of mind. Our experienced team can assist you in creating a trust tailored to your post-divorce needs or modifying an existing trust to align with your new circumstances.
Don’t wait to address these crucial matters. Contact us today for a FREE consultation, and let’s work together to ensure your estate plan reflects your new life after divorce. Your and your children’s financial security and peace of mind are too important to leave to chance.