Distributions From A Texas Trust Deemed Separate Property

Conventional wisdom is that a spouse’s earnings from separate property are community property. But it’s not that simple. In Benavides v. Mathis a Texas court denied wife Leticia’s claim to one-half of the income derived from minerals held in a trust in which incapacitated husband Carlos was a beneficiary.

Years before Carlos and Leticia began their nuptial journey, Carlos’ family created the Benavides Family Mineral Trust for the preservation and management of 126,000 mineral acres. Carlos was one of several participating beneficiaries who received monthly payments of revenues from the trust estate. A temporary guardian was appointed for Carlos’ person and estate in 2011. In 2012 Leticia asked the guardian to deliver to Leticia one-half of all distributions owed to Carlos because they were community property. The guardian refused and Letitica sued.

Leticia’s Arguments

• Under Texas law, income from the separate estate of one spouse is community property and therefore, the revenues from Carlos’ trust estate were community property.

• The trust was revocable because it could be amended by a decision of 3/4ths of the beneficiaries.

• Carlos had a present, possessory right because he had the right (a) to transfer his interest; (b) to receive a portion of the corpus, and (c) to receive all of his share of the corpus on termination of the trust.

The Court’s Ruling – Leticia Scorned

Income distributions to Carlos were his separate property. The court relied on precedent holding that distributions from an irrevocable trust are community property only if the recipient has a present possessory right to part of the corpus.

In rejecting Leticia’s position that the trust was revocable because it could be amended by a decision of 3/4ths of the beneficiaries the court relied on the express terms of the trust, which provided that it was “expressly irrevocable.” The court also rejected Leticia’s argument that Carlos had a present, possessory right:

• Right to transfer: Carlos’ right to transfer the property did not mean he had a present possessory interest because this right was expressly and strictly limited in the trust agreement, and any transferred interest would remain subject to the trust.

• Right to receive a portion of the corpus: Under the terms of the trust, royalties and bonuses would not become a part of the trust corpus and therefore, the fact that Carlos received royalties and bonuses as revenue did not mean he had a present possessory interest in the trust corpus.

• Right to receive all of his share of the corpus on termination of the trust: Even though Carlos’s interest will vest eventually, “this will not occur until the trust terminates, which is long after Carlos’s death.”

Takeaways

  • To its credit the court wrote a thorough and erudite opinion.  A soap opera would have made for a more entertaining reading experience. Was Leticia only in it for the money? Was the guardian a Scrooge?  What happened between the players for it to end up at the courthouse? What will happen if Carlos regains his faculties? Maybe the answer is in the briefs.
  • When in doubt about the legal effect of a trust, read the document itself and the answer will reveal itself.
  • Where a Texas trust is irrevocable, and the beneficiary does not have a present, possessory interest in the corpus, as a matter of law the distributions are separate property.

Topics:  Community Property, Divorce, Estate Planning, Separate Property, Trusts

Published In: Energy & Utilities Updates, Family Law Updates, Wills, Trusts, & Estate Planning Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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