How Divorce Impacts a Marital Trust
Something that has come up recently is the impact of divorce on a marital trust. In the trusts that we do at Morris Law Center, there is a section within the trust that lays out in general what happens in a divorce situation. This section is compliant with Nevada law, both the case law and the statute that currently exists. In a nutshell, when you get a divorce and you have a marital trust, everything in that is split up equally.
It’s divided equally between both spouses and when you set up a trust with your spouse, that’s something we always discuss because inevitably I have couples that come in and either one of the spouses or both of the spouses have separate property. Nevada is a community property state, so everything is deemed community property that you purchased during the marriage with community funds. However, you can come into the marriage with assets or inherit separate assets that are your own. They are not deemed to be community property unless you do certain things to them. One of which is if you’re going to put it in your marital trust, then you’re basically giving up the right to it being considered separate property. So a simple example would be husband and wife come in, wife has a rental home that she’s had for years prior to marriage that she keeps up and she deals with solely, they come in, they want to do a trust. I, of course when I’m asking about the estate plan, we have to talk about everybody’s assets. This asset comes up and I advised her that if they do a marital trust and she wants to keep that as separate property, then she needs to not put it in the trust. We need to do something else with it. As a side note, when you have rental properties, you never want to put them directly in living trusts. That doesn’t make any sense because it’s essentially keeping it in your own name, which is a problem if the tenant sues you. So you always want to put rentals in a business entity first as a layer of liability protection. And then for example, a very common thing to do is you would put that rental property in an LLC and the LLC would be owned by the trust. You’re insulating your personal liability because if you put a rental property directly into a living trust, if there’s a problem on the property, they sue the trust and you have everything you own in that trust.
We have the wife coming in with a rental property. I tell her you want to keep that out of that marital trust unless you want him to have half of it. That’s something that you have to consider. When you’re setting up a marital trust or you’re thinking about a marital trust with your spouse, what are you going to put in it? Make sure it’s mostly community property and if there’s any separate property, it’s property that you want your spouse to have a 50% interest in because in the event of a divorce, Nevada statute says everything in a living trust is presumed to be owned equally by both spouses.
When you’re talking about going through the divorce proceedings, most likely that is going to be split up 50/50 based on the statute. Just be aware when you’re doing this that you keep things that you want separate, separate. Now there is such a thing as a spousal waiver that sometimes you use with living trusts. That is something I prefer only to use when we’re talking about a living trust.
A wife and husband come in, I explained to them that everything that goes in the marital trust is deemed to be owned equally 50/50 and it’s community property essentially wife has the rental property and says I don’t want it to be community property. I don’t want him to have a 50% interest in it, but she has other assets let’s say that are separate. So maybe for estate planning purposes she wants to set up her own living trust as well as the marital trust. In that case we could set up a living trust for her and then ultimately that rental property would be in the living trust. Now again, if it’s my client, it’s going to be owned by an LLC that’s owned by the trust. But ultimately the trust will have a say in that rental property. So one of the things that I sometimes do to be extra, extra safe, because I am a lawyer, is when we set up the living trust, we might also have the husband sign a spousal waiver, which is basically a document that says I waive any right to this property. Even though this is already considered separate property, just to be extra, extra safe and clear, we do a spousal waiver and we add that to the living trust just so that everybody is aware of the situation.
We interviewed another attorney in another blog, Bonnie and we talked about prenup and postnup agreements and they absolutely play into estate planning (you can read that blog here). Just to mention, there’s plenty of people that come in here with prenups and postnups. If you do have a pre or a postnup and you are thinking of setting up an estate plan, you have to give your attorney those documents or at least tell them they exist. Then the attorney can request them because that’s going to impact how they structure the assets and how they structure the trust.
If you have any questions or you want to dig deeper or maybe you want to set up a trust of some sort or an LLC, please contact our office. Visit our Website for more information. To schedule a complimentary, 15-minute phone consultation with our attorneys call (702) 850-7798, or click here to schedule your complimentary consultation.