Division of property, including trust assets, is a chief concern among many parties going through a divorce. Couples with significant trust assets may have more complications that arise when trying to divide the marital property. Trusts are an estate planning tool that create a fiduciary arrangement in which a third party holds title to assets on behalf of a beneficiary appointed by the grantor of the trust. There are different types of trusts, created for a variety of reasons including: avoidance of probate, avoidance of taxable income, and to leave an inheritance for one’s heirs.
What is a revocable trust?
A revocable trust is also known as a living trust. These trusts are often created in lieu of leaving the assets in a will. The trust gives the grantor access to the assets but at the grantor’s death, the trust does not have to pass through probate and the remainder goes directly to the grantor’s named beneficiary. In a revocable trust, the grantor retains control of the assets. The grantor can name himself as the beneficiary or he may name someone else. Regardless of who is named as the beneficiary, the grantor is able to modify the trust as he sees fit.
Marital Property and the Revocable Trust
Whether or not a revocable trust is considered marital property depends on when it was created. If one 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. If the assets were put into a trust during the marriage by one of the spouses, the assets are likely to be considered marital property and subject to division. The exception is when it can be proven that the assets were placed into the trust for the purpose of keeping those assets separate. If any marital money at all was used to create the trust, the court will find the trust to be marital property.
Inheritance and gifts are almost never considered to be marital property even when one spouse receives the inherited assets during the marriage. If one spouse inherited a trust from parents or grandparents during the marriage, this trust is almost never subject to equitable division during a divorce.
What is an irrevocable trust?
An irrevocable trust cannot be modified or terminated without the consent of the beneficiary. Any assets placed in the trust are now property of the trust and no longer the property of the individual who created the trust. Irrevocable trusts are mainly used for estate planning purposes because there are advantageous tax benefits created by the trust. Since the assets within the trust technically no longer belong to the grantor, those assets, and any interest generated by the trust, are not taxable income.
Marital Property and the Irrevocable Trust
An irrevocable trust may protect assets during a divorce if the trust was created before the marriage. As with other assets acquired before the marriage, an irrevocable trust created before the marriage would be considered separate property in many states. If the trust was established during the marriage, it is likely to be considered marital property by the court. If the court orders an irrevocable trust to be divided, the grantor will have to obtain consent from the beneficiary of the trust before the trust can be terminated. Further complicating matters is the fact that the spouse is often the beneficiary for irrevocable trusts established during the marriage. It is very difficult to show that a trust created during marriage is actually separate property. Even if it can be proven that the assets put into the trust were undoubtedly separate, the court will consider other factors such as the duration of the marriage, the couple’s standard of living, and both parties’ relative earning capacity in deciding what is to be an equitable distribution of assets.
Can irrevocable trusts be used to keep assets from my spouse in a divorce?
It may seem as if creating an irrevocable trust would be a solution to retain assets through a divorce proceeding. Creating an irrevocable trust after marital difficulties arise, is a bad idea. A court will view this transaction as a fraudulent conveyance. This can be especially problematic for the spouse that granted the irrevocable trust because the court will declare the irrevocable trust assets marital property. The problem arises if the court does not void the irrevocable trust. Because the irrevocable trust, technically no longer belongs to the grantor, the grantor does not have access to these funds. However, the court is likely to still order the other spouse be paid a percentage of the funds in the trust. The result is the grantor cannot access the trust funds and has to pay the spouse the amount awarded by the court.
How does a trust affect my support payments in a divorce?
All forms of income are viewed in the aggregate and used to determine the amount of spousal and child support that a party must pay. If one spouse receives interest payments from a revocable trust, this is income that must be reported to the court to be used in the calculation of support payments trust. Support payments are based on several factors in addition to income but significant interest earned from a trust by one party is likely to affect the outcome of support payments.
Courts consider many factors when dividing property. Who created and funded the trust; the purpose of the trust; and the source of the funds and assets the grantor put into the trust are all factors to be analyzed. It is very difficult to show that a trust created during a marriage is actually separate property and even more difficult if a court thinks a spouse created the trust for the purpose of keeping assets from the spouse. If a couple has significant assets held in a trust, it can greatly complicate divorce proceedings. Consulting with an attorney is highly recommended to ensure proper categorization and distribution of assets in a trust.
If you are facing divorce and have questions about your estate, call us at 770-609-1247 to discuss your case with an experienced Georgia divorce and family law attorney.