When thinking of divorce, one of the first thoughts is about how long it will take, what will happen to the children, or what will happen the house, car, etc. Having to decide how will any property will be divided is one of the main concerns in a divorce. If no agreement can be made between the spouses, they will then have to go before a judge and and all the issues will be divided in what is a divorce trial with evidence presented by both sides. After the divorce trial, the court will divide the marital assets in a fair and equitable manner. However, an irrevocable trust that is carefully funded and properly timed can be helpful in protecting assets from being divided – and this is because the assets in an irrevocable trust may be deemed to not be marital property – subject to equitable division in a divorce. However, any income received from that trust can still be used to calculate any 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, the source of the trust assets and the intent or reason the trust was established in the first place.
How are assets in a trust categorized?
If the assets were placed in a trust before the marriage, or the source of the trust assets was non-marital assets (an inheritance for example) they are generally categorized as separate property and are protected from being divided in a divorce. If the assets were put into a trust during the marriage – and the assets were clearly marital property, they could still be considered marital property and subject to division unless it can be proven that they were placed into the trust with the joint purpose of the parties 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 and property was used to fund the trust – or there is a mixture of separate and marital property in the trust.
What if my spouse is the beneficiary?
If the trust was created during the marriage, 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?
While few people would ever admit it – creating a trust to hide assets after the point where you are having marital troubles can be a bit of an issue. To the court, it may be apparent you are trying to hide or shield assets with the purpose of making sure spouse does not their share of it, which is called a “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 “undo or void” the transfer of property, which will effectively dissolve the trust; making the property eligible for equitable division in a divorce.
How does my trust affect any support I may have to pay?
Even if the spouse is successful in protecting their assets from being divided during the divorce due to their 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 significant of income from the assets in the trust, the ex-spouse may be able to receive a portion of that income for alimony or child support payments. Of course, the discussion of child support and whether a spouse will receive alimony involves many factors not covered in this discussion – but is merely one of several factors.
If you are going through a divorce and have questions about a trust and/or other assets, call us at 770-609-1247 to speak with an experienced and caring attorney.