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Divorce and Trust Assets

Assets, such as inheritances, a trust and significant property obtained by gift are usually highly debated issues in a divorce.  However, an irrevocable trust that is carefully worded and properly timed can be helpful in protecting some of your assets from being divided.  When thinking about divorce, some of the first thoughts are:  about how long will the process take; what will be the new living arrangements for the children; and what will happen the house, car and other assets.  Having to decide how the marital property will be divided is one of the main issues in divorce.  If no agreement can be made between the spouses, the divorce case will have to be heard by a judge in open court and decided by the court.  In summary, a judge will divide the marital assets in a way that the court feels is fair and equitable.  However, the court can still consider any income received from that trust when determining the amount alimony or child support that might need to be paid.

What is an irrevocable trust?

When an irrevocable trust is created, it cannot be changed and there can be no withdraws made from it, meaning that any assets that were placed into the trust are now property of the trust and the creator has no control of the assets because they are no longer in the creator’s possession. This is beneficial because that could have some tax benefits for the person that created the trust along with giving protection to the assets from creditors or someone seeking to gain those assets. In regards to divorce, the protection of those assets depends on whether the trust was created before or during the marriage.

How are assets in a trust categorized?

If the assets were placed in a trust before the marriage, they are generally categorized as separate property and are protected from being divided in a divorce, remaining the assets of the person that had them at the time of the marriage. If the assets were put into a trust during the marriage by one of the spouses, they could be considered marital property still and subject to division unless it can be proven that they were placed into the trust with the purpose of keeping those assets separate. Having to prove that the trust was intended to keep assets separate can be a very challenging task, even more so if marital money was used to create the trust or there is a mixture of marital and non-marital property in it. However, in most cases, the party in the divorce may merely be the beneficiary of a trust made by their parents. This kind of trust is almost never subject to equitable division in a divorce. So it is important to look at who created and funded the trust; its purpose for being created; and the source of the funds and assets the grantor put into the trust.

What if my spouse is the beneficiary?

If the trust was created during the marriage by one of the spouses, it is quite common for the other spouse to be named a beneficiary. Should you be able to prove that the trust was indeed created to keep certain assets separate, the creator still cannot change the beneficiary on the trust document, meaning that the other spouse can still receive some property from it. It is even possible for the divorced spouse to receive assets from the trust years after the divorce has been finalized. It is important to mention that some states will allow the creator to include some wording that can alter who will receive the assets in case of a divorce. Being able to do so will be a great relief in knowing your ex-spouse will not be able to receive any of those assets.

What if I create a trust to simply hide something?

Creating a trust after the point where you are having marital troubles can be a bit of an issue. To the court, it may seem like you are trying to hide an asset with the purpose of making sure the other souse does not their share of it, which is called fraudulent conveyance. Meaning that should one of the spouses be worried that most of their property will be given to the other spouse because of an act of infidelity and they create a trust and name a close relative the beneficiary with the purpose of keeping the other spouse from getting that property, the court has the right to void the transfer of property into the trust and to dissolve the trust. This will have the affect of making the formerly trust property eligible for division.

How does my trust affect any support I may have to pay?

No matter who made the trust, even if the spouse is successful in protecting their assets from being divided during the divorce due to a trust, any income that is obtained from that trust can be used to determine how much alimony or child support will be paid, if any. This means that if there the spouse is getting a nice size of income from the assets in the trust, the ex-spouse may be able to receive a portion of that from alimony or child support payments.

If you are facing divorce and estate planning / trust issues have become an issue, call us at 770-609-1247 to speak with an experienced divorce and trust attorney about your case.