June 27, 2022

Volume XII, Number 178

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June 27, 2022

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June 24, 2022

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Texas Court Held That Wife’s Trust Funds Were Her Separate Property And Was Not Converted To Community Property Despite Being Transferred To A New Trust

In LaPree v. LaPree, a wife had three trusts where she was the primary beneficiary. No. 03-20-00465-CV, 2022 Tex. App. LEXIS 1325 (Tex. App.—Austin February 24, 2022, no pet. history). Upon attaining the age of thirty two, the trusts terminated and the trustee transferred the assets to the wife. The husband and wife then created a revocable trust. They were both named trustors and co-trustees. They signed an accompanying revocable trust agreement, which included the following statement: “At the time this Agreement is signed, TRUSTORS contemplate that all of their assets that will be transferred to the Trust will be community property.” It also contained the following provision in paragraph 18.2: “[A]n individual TRUSTOR, without joinder of the other TRUSTOR, can modify or revoke this Agreement in writing during the TRUSTORS’ joint lifetimes while that individual TRUSTOR is not disabled with respect to any separate property of that individual TRUSTOR held as an asset of the Trust and such individual TRUSTOR may terminate this Agreement in whole or in part with respect to such separate property by written notice delivered to the TRUSTEE.” The wife then transferred all of the assets into the new trust. She then later filed for divorce, and she took the position that the assets were her separate property. The husband alleged that the new trust’s assets were community. The trial court ruled for the wife, and the husband appealed.

The court of appeals affirmed the trial court’s ruling for the wife, citing Texas Family Code Section 4.203:

Section 4.203 of the Family Code provides the exclusive method for conversion of separate property into community property. A conversion agreement must (1) be in writing, (2) be signed by both spouses, (3) identify the property being converted, and (4) specify that the property is being converted to the spouses’ community property. Tex. Fam. Code § 4.203. Justin contends that the Agreement meets each of these requirements, but we disagree as to the fourth requirement. The only provision in the Agreement on which Justin relies to support the fourth requirement is the statement that the parties “contemplate that all of their assets that will be transferred to the trust will be community property.” (Emphasis added.) However, this statement does not specify that the assets are being converted to separate property, despite Section 4.203’s express requirement—by use of the present tense—that a property conversion occur contemporaneously, as opposed to in the future. See id. At best, the statement signifies an aspiration about future unspecified property—that unspecified property transferred into the Revocable Trust will be community property. However, even if that statement signified the parties’ intention that future funding of the Revocable Trust “will be” community property, paragraph 18.2 of the Agreement expressly provides for the possibility that the Revocable Trust might also contain the parties’ respective separate property. The statement on which Justin relies cannot be read to irrevocably convert to community property all of the parties’ respective separate property that henceforth is transferred into the Revocable Trust because the provision in paragraph 18.2 directly contemplates that some of the property held in the Revocable Trust might instead be separate property. In light of the statute’s express requirement that a conversion agreement identify which property is presently being converted—which it does not do—and because Justin’s proposed construction of the Agreement is at odds with paragraph 18.2, we conclude that the Agreement does not constitute an enforceable agreement to convert Kelly’s separate property into community property. The trial court did not err in granting Kelly partial summary judgment on this issue.

Id. The court then reviewed the trial court’s ruling that the wife did not make a gift of her separate property:

To support the alleged gift, he relies on his affidavit statement that “[o]n or about June of 2017, Kelly . . . told me that she intended to give me one-half interest in the $2.3 million she was receiving from [the] Norris Trust[s] . . . by forming the” Revocable Trust. He also relies on Kelly’s transfer to the 9339 Account the $2.3 million in assets from the Norris Trusts. A gift is a voluntary transfer of property to another made gratuitously and without consideration. “Three elements are required to establish the existence of a gift: (1) the donor’s intent to make a gift; (2) delivery of the property; and (3) acceptance of the gift. Donative intent must exist at the time of the transfer, not at the time of a subsequent event.” Donative intent means that the donor “absolutely and irrevocably” intends to divest herself of the “title, dominion, and control of the subject of the gift in praesenti at the very time [s]he undertakes to make the gift,” and involves the “irrevocable transfer of the present title, dominion, and control of the thing given to the donee, so that the donor can exercise no further act of dominion or control over it.” …

Kelly’s alleged statement to Justin in June 2017 does not create a genuine issue of material fact on the “donative intent” element of a gift because there was no contemporaneous transfer of property. Furthermore, Kelly’s deposits to the 9339 Account of the Norris Trust assets cannot establish donative intent. Moreover, the Agreement’s express terms granted both Kelly and Justin equal control and title to the transferred Norris Trust assets as well as permitting Kelly, as the owner of separate property transferred into the Revocable Trust, to unilaterally revoke the trust as to her separate property held therein. This retention of control by Kelly over her separate property conclusively negates any donative intent on her part evidencing that she “absolutely and irrevocably” intended to divest herself of the “title, dominion, and control” of the Norris Trust assets and could exercise “no further act of dominion or control over” the property. Justin does not identify any evidence in the record that creates a material fact issue supporting his allegation that Kelly had donative intent when she transferred the Norris Trust assets into the 9339 Account. We therefore conclude that the trial court did not err in determining that, as a matter of law, Kelly did not make a gift of half of her separate property to Justin.

Id.

The court also reviewed the husband’s argument that the trust funds were not the wife’s separate property. The court noted that the husband admitted that the property came from the wife’s trusts and that they were her separate property before marriage. Moreover, the court stated:

[A]ny distributions of income from the Norris Trusts that Kelly received during the marriage (and which might have been reinvested into the Norris Trusts) constituted her separate property because she had no present possessory right to any of the corpus by virtue of the trusts’ express terms. While Justin acknowledges that Sharma states the correct rule, he contends that the Norris Trusts “raise the possibility that Kelly had a right to the trust corpus” before her thirty-second birthday due to the trusts’ provisions allowing the trustee, if he deemed it necessary, to distribute trust corpus to Kelly for her care, comfort, support, and education. Such language did not confer on Kelly a present, possessory interest in the Norris Trust corpus because it did not allow her to compel the trustee to distribute any of the trust corpus and provided merely for the trustee’s discretion in making principal distributions to her The trial court did not err in determining, as a matter of law, that the majority of assets in the 9339 Account is Kelly’s separate property.

Id. The court also held that the husband’s breach of contract claim was meritless as there was no consideration for the alleged oral agreement to convert the wife’s separate property to community property. Finally, the court affirmed the dismissal of the husband’s fraud claim on the basis that there was no evidence that the wife intended to make a misrepresentation or that the husband relied on that representation. The court affirmed the judgment for the wife.

© 2022 Winstead PC.National Law Review, Volume XII, Number 95
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About this Author

David Johnson Financial Institution lLtigation Winstead Law Firm Fort Worth Texas
Managing Shareholder - Fort Worth

David maintains an active trial and appellate practice and has consistently worked on financial institution litigation matters throughout his career. David is the primary author of the Texas Fiduciary Litigator blog, which reports on legal cases and issues impacting the fiduciary field in Texas. 

David's financial institution experience includes (but is not limited to): breach of contract, foreclosure litigation, lender liability, receivership and injunction remedies upon default, non-recourse and other real estate lending, class...

817.420.8223
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