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The process of divorce is complicated and the laws are specific to each state regarding the division of assets, property and debt.  Most states prevent the courts from dividing assets like trusts (gifts or inheritance).  But, there are still many courts that do. 

We have included some common questions that are relevant to the divorce process, trusts and their effect on divorce settlements.  The answers are not provided as legal advice.  Rather, they are intended to provide basic information regarding trusts and the divorce process in order for our readers to become more informed legal consumers.

DISCLAIMER: Legal questions and advice should be requested by a licensed professional regarding your trust, settlement, finances, taxes or otherwise.  Our answers are general reference information, should not be considered legal and/or professional advice, nor are they a substitute for professional advice or based on a specific, factual situation.  They should not be relied upon as such. 

Trusts and Divorce

Q. What is the difference between revocable and irrevocable trusts?

A. The assets stay in the grantor's estate in a revocable trust but transfer out of the estate in an irrevocable trust.  Each are considered a living trust, in which the grantor is still alive when the trust is established.


Q. I live in a state that allows the division of gift or inheritance property.  Can I transfer my property into a revocable trust, becoming the settlor of the trust to prevent the court from dividing the assets allocated to the trust.

A. Based on the laws in a state that allows the division of gift or inheritance property, conveying assets to a revocable trust will not stop a court from ordering a division.


Q. I am a beneficiary of a revocable trust.  My wife says she wants half of my trust that was a gift from my grandfather.  She claims that since we live in a state that allows gift or inheritance property to be divided in divorce, she has entitlement to the trust assets.

A. The problem your wife fails to realize is, assuming she is correct and you do live in one of the minority states that allows the division of gift or inheritance property in divorce, that since you are a beneficiary of a revocable trust and you don't actually have legal rights or trust principal or income from said trust, you actually don't own anything for a family court to divide.  This is because a settlor has the right to revoke the trust and recover the assets at any time.


Q. Can income to a beneficiary of a revocable trust be considered by the court when determining support, such as alimony or child support?

A. Yes.  The court will likely consider all income and sources, to include a revocable trust when determining child support.  Also, the court will usually consider the beneficiary's income from a revocable trust in determining his/her ability to pay or receive alimony.


Q. My irrevocable trust was established before I was married.  Is my trust subject to division in my pending divorce?

A. In most states, the funds are considered separate property and are not subject to asset division.


Q. My wife and I decided to keep certain funds separated while we were married.  We set up an irrevocable trust whereas I was the creator.  The funds used to establish the trust were deposited into a joint bank account, but were from my income only.    I am not willing to divide my trust since it was established as separate property upon inception and for which she has never made any contribution.  Can a court force me to divide my irrevocable trust?

A. This is a complicated scenario and subjective to the jurisdiction of your family court and judge.  In most cases, since the trust was established while you were married, it is usually a part of the division of assets.  You would have to prove the trust was established for the sole purpose of maintaining separate property.  Since other assets were established and used to fund the trust during marriage it would be especially challenging to prove.  You should seek an attorney with successful experience with cases of a similar scenario.


Q. My husband and I have had marriage problems for years.  I am considering divorce but he claims to have proof of my adultery and will be in a good position to seek a better settlement if we divorce.  Can I place funds in a trust to prevent them from being awarded to him if we divorce?

A. The court would likely see this move as fraudulent conveyance.  The court could void the transfer and terminate the trust in an effort to ensure your spouse gets what the court deems a fair portion of any marital assets and property.  The court could alternatively order you to pay half the value of the trust to your spouse instead of dissolving the trust.


Q. Can I place money awarded in a previous divorce judgement into an irrevocable trust before I remarry to protect the assets in the case of my future divorce?

A. While a prenuptial agreement is more flexible and specific in design to prevent premarital assets from distribution in the case of divorce, an irrevocable trust can also be an alternative method to protect your property before marriage.  Placing assets into an irrevocable trust, as a grantor, prior to marriage, means the assets belong to the trust and not you.  They are never at risk in a divorce since they are not considered marital property.  However, the irrevocable trust is forever.  You can not get the assets back after you divorce or if you decide to share them with your spouse.


Q. The grantor of my trust has died.  The assets in my trust gained value and my spouse wants a portion of that gain.  Does she have rights to the gain as marital property?

A. Yes. She has rights to a portion of that gain as marital property unless the trust is discretionary.  In this case, the trustee has authority over when you receive disbursements, and how much.  It's no longer a separate or marital asset since you are not in control of it.

Cash distributions from the trust are usually still considered in calculations when determining support.  The income will usually be considered marital property and may be at risk for distribution in divorce if it is deposited into your joint bank account.  If it's continuously deposited into a separate bank account in your name only, it will usually be considered inheritance and your separate asset.


Q. My attorney has informed me that despite the fact that my trust will not be part of the asset division in my divorce, it could still negatively impact my settlement.  Is this correct?

A. While your trust may not be part of your marital assets and therefor, not subject to the division thereof, in some states it will still be considered in the division of marital property/debts and support if it goes to court and could be considered in the negotiations if you and your spouse settle outside of court.  If your interest in the trust provides a benefit that supersedes income and assets of your spouse, then the court will likely consider the benefits of the trust when determining spousal and child support, as well as, in the division of assets, property and debts.  This could negatively affect the terms of the divorce, dependent on factors related to income from the trust, your access to it, its present value and speculative nature.  

-OurDMK.com



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