(Editor's Note: The best divorce attorneys in Las Vegas often deal with complex financial matters. One of the most complicated situations arises when separate and community propertys are included in revocable family trusts. The act of including these assets in this form of trust is generally favorable for tax considerations yet can be detrimental to one party if the spouses divorce. Below is an in-depth analysis published by Las Vegas divorce lawyer Vincent Mayo. Mr. Mayo can be contacted at The Abrams Law Firm at 702.222.4021.)
Las Vegas Divorce Matters and Revocable Family Trusts
By Board Certified Las Vegas Divorce Lawyer Vincent Mayo
Revocable family trusts may give rise to an issue that could be of paramount importance in a divorce case: Whether the revocable family trust transmutes separate property into community property.
An analysis of the issue starts with an examination of a revocable family trust. A revocable family trust is an inter vivos living trust, or in other words, a trust created during the lives of the grantors. A family trust creates a legal contract that outlines the management and distribution of the trust's assets. Such a trust is effective once it is funded and permits the grantors to manage the trust estate during their lives. A revocable family trust can serve numerous purposes, the most common one being the avoidance of probate.
Having a will go through the probate process is often an expensive and time-consuming process. In contrast, a family trust allows for the immediate and inexpensive transfer of assets from one spouse to the other upon either spouse's death. Revocable family trusts can also avoid will contests and provide privacy since a will that is probated becomes a public document. Further, since the trust is revocable, the parties are not "locked in" long term and they can terminate the trust, often unilaterally, if either spouse believes it is no longer beneficial to have the trust.1
Another common benefit to revocable family trusts is that they can result in beneficial tax treatment to a married couple. Upon the death of either spouse, their businesses, real estate and stocks may receive a full step-up in basis if they are "deemed" community property. This means that when property is classified as community property and one spouse dies, the cost basis of both the deceased spouse's half and the surviving spouse's half are increased to the asset's fair market value at the time of the first spouse's death.2
The full step-up (also called a "double step-up") could potentially save a surviving spouse thousands of dollars in capital gains tax. In contrast, any property considered separate in nature receives a partial step-up in value representing only the deceased spouse's interest. Couples may therefore be counseled by their tax advisors to include separate property in a trust and designate it as community property in an effort to take advantage of the full step-up.
The issue that arises in a divorce is whether the classification of separate property as community property in a revocable family trust transmutes one spouse's separate property into community property.3
The matter is not settled in Nevada and is therefore open to two competing positions, one against transmutation through a revocable family trust and the other for.
The Arguments Against Transmutation
Lack of Intent:
An argument against transmutation is that spouses typically only treat separate property as community property in their trusts in order to take advantage of tax laws or to allow for an easy transference of their estate. It is not because they truly mean to make one spouse's separate assets community in nature.4
This is supported by the fact that most family trusts state that upon revocation, the assets in the trust retain their original separate or community character. In Sprenger v. Sprenger, the Nevada Supreme Court held that the transmutation of separate and community property must be shown by clear and convincing evidence.5
The obvious tax and estate planning motives behind characterizing separate property as community would seem to prevent the meeting of that burden. This is persuasive since under Cord v. Cord, 6
the intent of the parties as uncovered through evidence is a factor in determining whether property has been transmuted.7