Dividing marital assets is an important part of the divorce process. Though the standard procedure is to distribute assets equally between spouses, a trust may be able to protect your assets from division.
So, can a trust protect assets in divorce? Asset division according to divorce law can be complicated, but we’re here to shed some light on the role trusts play in divorce proceedings.
Irrevocable Trusts vs. Revocable Trust
A living trust is one that the grantor, the individual who creates and funds the trust, sets up while alive.
- Irrevocable: A trust that can’t be modified, amended or terminated without the permission of the beneficiary. After transferring assets into the trust, the written terms can’t be changed.
- Revocable: A trust that can be altered or cancelled at any time by the grantor. Income earned from the assets are distributed to the grantor and the assets won’t transfer to beneficiaries until after death.
In addition to these important differences, there are also some protections and drawbacks to each type of trust when it comes to the division of assets in divorce.
An irrevocable trust can’t be withdrawn or changed once established, which simply means that the assets transferred into the trust are no longer in possession or control of the grantor. This is an important distinction, since it provides tax advantages to the grantor and protects those assets from creditors.
In the case of divorce, the property in an irrevocable trust may still be subjected to division between spouses, but it depends on whether it was formed during or prior to the marriage.
Classification of Assets
If an irrevocable trust was established before marriage, the funds are usually considered separate property and aren’t subjected to asset division. This can vary by state, however.
If the trust was established during the marriage, many states will subject it to asset division, unless it can be proven that it was created with the sole purpose of keeping assets separated. Proving this can be challenging, however, especially in cases when other assets were joined during the marriage.
Spouse as Beneficiary
A spouse is often the beneficiary of a trust that was established during the marriage. Even if it can be proven that the trust was formed with the intention of keeping assets separate, the trust document can’t be changed to prevent a spouse from inheriting assets according to its terms. As a result, the spouse could receive assets distributed under the terms of the trust long after the divorce is complete.
Some states allow language in the trust that provides an alternate beneficiary in the case of divorce, however.
Establishing a trust after marriage problems occur can present a problem in court. Many courts see the attempt to reduce your assets with the intent of limiting your spouse’s entitled share as fraudulent conveyance.
For example, a grantor may try to place assets in a trust that would prevent them from being awarded to the spouse in the event of marital misconduct, like adultery, on the grantor’s part. In a case like this, the court may void the transfer and terminate the trust, ensuring that your spouse will get their fair share.
Impact on Support
Even if an irrevocable trust is successful in shielding assets from division during divorce, the income received from the trust is often used to calculate child support and alimony. So, if there are significant gains from trust assets, it’s likely that the spouse will be awarded part of the income as fair spousal support or child support.
Revocable trusts involve the transfer of property to another individual to “hold” on behalf of a beneficiary, but the grantor is still permitted to revoke the trust and remove the assets.
Revocable trusts are typically used to avoid probate or to keep beneficiaries from squandering trust assets, but they can create unique complications in divorce cases.
Classification of Assets in a Beneficiary Divorce
Each state has its own laws regarding asset division in divorce. Though most states won’t allow the court to divide property by gift or inheritance, some do allow it. Because a beneficiary has no legal rights to principal or income with an irrevocable trust, it’s not technically owned assets to be divided.
In this case, a revocable trust is helpful for grantors looking to keep a former spouse of a beneficiary from trust assets or income in states that allow gifts or inheritance.
Classification of Assets in a Grantor’s Divorce
A revocable trust allows the grantor to revoke the trust and recover the assets at any time, and the assets held within it can be divided by the court during a divorce. Legal title to the trust assets may reside the with trustee, or the individual holding the property for the benefit of the beneficiary, but the right to repossess the assets has real value in terms of dividing it between spouses.
If the grantor funds the trust with assets that would otherwise be considered separate in states that acknowledge separate property, the right of revocation is also separate. In states that allow the division of gifts or inheritance, however, placing assets in a revocable trust doesn’t protect them from division in a divorce.
Impact on Support
State child support guidelines take the parents’ income into account from all sources, which includes revocable trusts. This means that the assets held in the trust can be used in calculating child support under the state’s guidelines.
The income in revocable trusts can also be used to calculate the ability to pay spousal support or the need for spousal support.
Get Help From Tanko Law
Though trusts can impact divorce proceedings, it’s important to consider the difference between irrevocable and revocable trusts and how they affect the division of assets.
With so much at stake, it’s important to discuss your estate planning with a qualified attorney to ensure your loved ones and assets are protected. At Tanko Law, we’re proud to offer a range of estate planning services, including trusts, to our clients in Montana. Contact us today to find out how we can help you!