Originally published by Rania Combs.
Texas defines separate property as property owned before marriage or acquired by gift or inheritance. For example, if you purchased a house before you were married, the house would be your separate property. Likewise, if you inherited a house, even while you are married, the house would be your separate property.
However, income earned from from separate property during a marriage is characterized as community property. So if you inherited a house and rented it out, the rental income would be characterized as community property.
But what if a spendthrift trust has been established for your benefit? Are distributions of income from a trust separate property or community property?
In general, principal distributions from a trust are a beneficiary’s separate property. That’s because the trust principal was acquired by gift or inheritance. The character of income distributions is more complicated, and the extent of control the beneficiary has over the trust assets may have bearing on how income distributions are characterized.
Undistributed trust income is neither community property nor separate property, until a beneficiary has a right to demand the income distribution. If a trust is drafted to require mandatory income distributions, some commentators believe the income could be considered community property once it is distributed (and perhaps even if the beneficiary does not take possession of the distribution); however, there are conflicting opinions on this point and case law to the contrary.
One option that would offer more protection is drafting the trust to make distributions discretionary with the Trustee. Because the beneficiary does not have a right to demand the distributions from the trust, distributions of income from the trust would be more likely to be characterized as separate property.
Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.
from Texas Bar Today https://ift.tt/2qE3obr
via Abogado Aly Website
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