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Trust Law/Level III · Family trusts/3.3 Couples and blended families/Lesson 5

Divorce and existing trusts

How divorce can change revocable trusts, and what happens when an irrevocable trust still names a former spouse.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Change beneficiary forms and amend revocable trusts yourself as soon as the law allows; the forms are free. Catch: ERISA plans pay whoever the plan names (Egelhoff v. Egelhoff, 2001), whatever state revocation law says.
  2. Divide employer retirement plans by a qualified domestic relations order (29 U.S.C. §1056(d)(3)) rather than cashing out, which keeps the benefit inside the plan. Catch: the plan administrator must accept the order as qualified.
  3. Treat UPC §2-804 revocation-on-divorce only as a backstop, not the plan. Catch: not every state has it or applies it to trusts, and documents, court orders or property agreements can override it.
  4. For new irrevocable trusts, a ‘floating spouse’ definition costs nothing extra and drops a former spouse automatically. Catch: it must be in the document from the start; an existing trust naming a spouse usually keeps them.

MaterialsA copy of your trust instrument, specifically the sections defining ‘spouse’ or beneficiariesYour state’s version of Uniform Probate Code §2-804, if your state has one (free on the state legislature’s website)A list of all assets currently titled in the name of the trust versus individual accounts

Wonder

  1. Does my revocable trust automatically change if we get divorced, or do I have to sign new documents?
  2. If my ex-spouse is a beneficiary in an irrevocable trust, can they still receive money after we split?
  3. Do the assets sitting inside our family trust count as marital property that gets divided 50/50?

Explore

  1. In many US states, divorce changes a revocable trust automatically. Uniform Probate Code §2-804 (the UPC dates from 1969; this section comes from its 1990 revision) says that divorce or annulment revokes revocable gifts to a former spouse and the former spouse’s relatives, along with powers of appointment and nominations as trustee or other fiduciary, unless the documents, a court order or a property agreement say otherwise. The trust is then read as if the former spouse had disclaimed those gifts; some states say ‘as if the former spouse had died’. Not every state has this rule, so check yours.
  2. Irrevocable trusts are harder, because the settlor usually cannot change them alone, and §2-804 covers only revocable gifts. If an irrevocable trust names a spouse as beneficiary by name, the former spouse may keep that interest after divorce. Some trusts instead use a ‘floating spouse’ clause, which defines the beneficiary as whoever is married to the settlor at the time, so a former spouse drops out. Without such wording, the former spouse often keeps their rights under the original terms, unless the divorce settlement or a court changes them.
  3. Whether trust assets or trust income count in property division or support varies by state. In the nine community-property states, such as California and Texas, property acquired during marriage is generally community property, and moving it into a revocable trust does not usually change that. Other states divide marital property ‘equitably’, and each sets its own rules on whether a spouse’s interest in a trust, for example one created by a parent, counts as property or as a source of income for support. The answer often depends on how much control the spouse has over the trust.
  4. Employer retirement plans and life insurance governed by the federal Employee Retirement Income Security Act (ERISA) follow their own rules. In Egelhoff v. Egelhoff (2001), Washington State law automatically revoked a former spouse’s beneficiary designation on divorce. The US Supreme Court held that ERISA preempts this law for ERISA plans, so the plan administrator pays the beneficiary named in the plan documents. A divorce alone therefore may not remove a former spouse from such a plan; the beneficiary form usually has to be changed, or the divorce must include a court order the plan accepts.
  5. A revocable trust gives no protection from the settlor’s own creditors, and in a divorce it usually gives none from the other spouse’s claims either. Because the settlor can revoke it at any time, its assets are treated much like the settlor’s own: they stay in the settlor’s taxable estate, and courts can generally reach them when dividing property. Placing assets in a revocable trust does not change whether they are marital, community or separate property; that depends on state law and how the assets were acquired.
  6. During a separation or divorce, families often list every trust in which either spouse is a settlor, trustee or beneficiary, and note whether each is revocable or irrevocable. For revocable trusts, the question is whether the state has a revocation-on-divorce rule and whether it applies to trusts. For irrevocable trusts, the question is how the document defines ‘spouse’ and whether it has a spendthrift clause. Rules differ between community-property states, such as Arizona, and other states, and between trusts, retirement plans and insurance.

Key facts

  • Under Uniform Probate Code §2-804, in states that have enacted it, divorce or annulment revokes revocable gifts to a former spouse and the former spouse’s relatives, unless the documents, a court order or a property agreement say otherwise.
  • An irrevocable trust generally cannot be changed by the settlor alone, so a former spouse may keep a beneficial interest unless the trust uses wording such as a ‘floating spouse’ clause.
  • In Egelhoff v. Egelhoff (2001), the US Supreme Court held that ERISA preempts a state revocation-on-divorce law for ERISA employer plans, so the plan’s beneficiary designation controls.
  • Assets in a revocable trust stay in the settlor’s taxable estate and are generally reachable in a divorce; placing them in the trust does not change whether they are marital, community or separate property.
  • The Uniform Probate Code was first approved by the Uniform Law Commission in 1969; §2-804 in its current form comes from the 1990 revision, and states have adopted it with local changes.
  • Nine US states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin) are community-property states, where property acquired during marriage is generally owned by both spouses.

Exercise nine, six, three, one

9CollectList up to 9 documents that could be affected by a divorce (most families have fewer), such as each revocable or irrevocable trust, retirement-plan and life-insurance beneficiary forms, deeds, and any prenuptial or postnuptial agreement.
6ClusterSort the documents into 6 categories: revocable trusts, irrevocable trusts, ERISA employer plans, other retirement accounts, life insurance, and marital agreements or deeds.
3DistillReduce the 6 categories to 3 groups: documents a state divorce statute may change automatically, documents that need a new form or signature to change, and documents whose effect depends on how a court divides property.
1CrystallizeWrite 1 sentence naming the document you are least sure about after a divorce, and the question you would ask about it.

Fact check

Dates, figures and claims checked against the published sources listed below.

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