Marriage and Trust: A Primer on Trusts, Divorce, and Community Property

By Var Lordahl, Esq. and Melissa R. Douglas, Esq.

Marriages and trusts are generally created with a lifelong intent – but life, as we know, is intrinsically impermanent. As a result, family law practitioners and trust and estate attorneys are frequently called upon prior to, during, and after a marriage to arrange, and then re-arrange, personal and property interests. This article will summarize the intersection between marriage and divorce; trusts; and Nevada community property rights. The first portion of this article will review trust and community property concepts, and the latter portion will address how these concepts are impacted before, during, and after a marriage has ended.

Trusts

There exist countless permutations of trusts under Nevada common law and statutory law, but this article focuses on two broad categories: revocable and irrevocable trusts. Revocable trusts are generally created by a single person, or jointly by a married couple. They can be revoked or amended at any time prior to the grantor’s death or incapacity. For revocable joint trusts, either grantor can remove that grantor’s half of the community property and that grantor’s separate property contributed. With respect to irrevocable trusts, and subject to innumerable exceptions, the contribution is a permanent gift to the trust (for state law purposes), and the trust may not be revoked or amended. Revocable trusts are generally created as a lifetime probate avoidance and estate planning vehicle, and irrevocable trusts are generally created for tax, asset protection, and/or charitable purposes.

Community property

Nevada community property rights are created by marriage. NRS 123.010(1). Property earned prior to marriage is generally separate property, and property earned after marriage is generally community property. NRS 123.130. Inheritances, to the extent not commingled with community property, are generally separate property (as are gains thereon). Id. Businesses operated during the marriage may be some part, or entirely, community property. See Devries v. Gallio, 128 Nev. 706 (2012) (citations omitted). Community property rights are statutory and mandatory in nature, unless altered by a valid antenuptial, postnuptial, or transmutation agreement. NRS 123.010.

Community property transferred to a revocable trust during marriage retains its status as community property unless duly transmuted. And under recent Nevada law, community property transferred to an irrevocable trust during marriage also retains its status as community property unless altered by a valid transmutation agreement. See NRS 123.125; see also Klabacka v. Nelson, 133 Nev. 164 (2017).

Prior to marriage

When contemplating marriage, each future spouse owns their own respective separate property. Though separate property generally retains its character as separate property after marriage, great care must be taken to avoid comingling the property with community. As a result, a basic revocable separate property trust created prior to marriage that is kept separate after marriage is a powerful, if simple, tool to avoid comingling issues. A more aggressive strategy is for a future spouse to create a self-settled Nevada irrevocable asset protection trust under NRS Chapter 166 (a “NAPT”). Such trusts, if properly created and administered, are generally exempt from claims for support or maintenance from a future divorcing spouse, but may still distribute funds to the grantor spouse. See NRS 166.090(1); see also Klabacka, 133 Nev. at 176. The “gold standard,” however, is a valid prenuptial agreement (“Prenup”) that is executed with requisite formalities. For a client with financial means, the Prenup can and should list all trusts created by the client, the treatment of various types and classes of property in the trusts, the future treatment of gains from those properties, current and future income, and the effect of a divorce upon those interests.

During marriage

Most people first create a revocable trust during marriage, often after having children. In Nevada, these trusts are generally structured as joint trusts, with each spouse contributing their half of the community property, and sometimes their separate property as well. Because of the inherent nature of a joint trust, it is imperative that a joint revocable trust contain a schedule delineating community property and each spouse’s separate property to ward off future claims of commingling. As stated, however, the best practice for a grantor with significant separate property is simply to create a separate property trust apart from the joint revocable trust. NAPTs may also be created with separate property during marriage, but they may be harder to defend upon divorce, and family court judges may look very skeptically at a NAPT created by a spouse on the eve of divorce. Moreover, NAPTs created in anticipation of marital claims may run afoul of NRS 166.170.

Clients who are worried about impending divorce often worry that the other spouse, who is often in control of the marital finances, may secretly transfer community property to a NAPT. Critically, however, Nevada law requires that a spouse consent to any gratuitous transfers of community property. NRS 123.230(2). NRS 123.125 also provides that community property transferred to an irrevocable trust still constitutes community property of the couple. That said, it is imperative to impress upon clients to seek legal review of any consents that the other spouse requests that they sign, particularly with respect to the creation of trusts and transfers of community property.

At divorce

At dissolution of marriage, assets in any revocable trust are divided up just like any other property of the spouses: the community is generally split, and the separate property is generally retained by the owner. However, a former spouse who has sloppily commingled separate and community trust assets may risk having formerly separate property treated as community property.

Irrevocable trusts are far less straightforward. In the simplest scenario, where the property in the irrevocable trust was and is still deemed community property, the divorce decree may simply split the trust along property ownership lines (which can lead to adverse tax consequences in certain scenarios, but that is outside the scope of this article). Alternatively, a non-pro-rata property arrangement may be obtained offsetting the community property in the trust against non-trust community property outside the trust.

NAPTs that are created with one spouse’s separate property may be impenetrable by a divorcing spouse, particularly if they are created long before the divorce. As stated, Nevada law even exempts these trusts from support and maintenance claims. See NRS 123.125; see also Klabacka v. Nelson, 133 Nev. 164 (2017). In between these two extremes, however, lies a vast gray area of property rights and claims that are often settled via expensive litigation.

Some spouses, not content with Nevada’s NAPT laws, will unilaterally (in violation of Nevada law) transfer community assets to an offshore irrevocable trust in a locale such as the Cook Islands that does not generally respect orders from a Nevada court. Though a Nevada court may not be able to directly compel a Cook Islands Trustee to comply with a divorce decree, the Nevada court may be able to exercise in rem jurisdiction over the Trust assets, and the judge may elect (in certain circumstances) to throw the grantor of such a trust in jail for contempt of court until such time as the assets can be repatriated. See, e.g., FTC v. Affordable Media, LLC, 179 F.3d 1228 (9th Cir. 1999).
Ultimately, a properly drafted and executed Prenup or postnuptial agreement can side-step most or all of these issues. Despite the reams of paper and mountains of digital copy devoted to marketing asset protection and separate property trusts, oftentimes the best protection against marital claims is a good Prenup. Just be absolutely sure, however, that if a future spouse has significant separate property and/or significant trust arrangements, that the attorney drafting the Prenup has the knowledge to understand and properly incorporate them into the Prenup. As in all aspects of life, even the most well-intentioned lifelong plans should always incorporate contingency arrangements.

About the authors:

Var Lordahl, Esq.

Var Lordahl, Esq. is a member of Dawson & Lordahl, PLLC, whose practice includes estate planning, taxation, nonprofit, and probate law. Mr. Lordahl obtained his J.D. from the University of Illinois and his LL.M. in taxation from New York University.

Melissa R. Douglas, Esq. is of counsel to Dawson & Lordahl, PLLC. Her practice areas include family law, guardianship, probate, and estate planning — including the preparation of prenuptial and postnuptial agreements. Ms. Douglas obtained her J.D. from the William S. Boyd School of Law.

This article was originally published in the “Family Law” issue of Communiqué, the official publication of the Clark County Bar Association, (August 2020).

© 2020 Clark County Bar Association (CCBA). All rights reserved. No reproduction of any portion of this issue is allowed without written permission from the publisher. Editorial policy available upon request.

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