A trust fund is a legal entity created by the grantor for the financial benefit of another person, the beneficiary. The grantor funds the trust by placing assets in the trust's name. He also names a trustee who is responsible for overseeing the trust and distributing trust assets to the beneficiary according to the trust's terms. Generally, a spouse cannot claim rights to your trust fund in a divorce, but courts in some states have awarded trust fund assets to the non-beneficiary spouse under certain circumstances.
Community Property vs. Equitable Distribution
Marital property typically includes assets acquired during the marriage and separate property belongs exclusively to one spouse. Assets owned prior to marriage, gifts and inheritances received during the marriage and personal injury settlements are common examples of separate property. If you can prove that an asset is yours alone, your spouse has no claim to it. Marital assets, on the other hand, are divided between spouses. The majority of states divide marital property based on the principle of equitable distribution, which awards property fairly, if not always equally. The rest of the states are community property states and apply an equal division of assets.
A handful of states are all-property states. In other words, they consider everything owned by either spouse, both before and after the marriage, divisible upon divorce. In other words, all-property states make no distinction between marital and separate property; all property is fair game for division between the spouses. In Connecticut, for example, it does not matter when you acquired an asset or how you got it, the court has broad authority to consider any property or asset owned by either spouse, including a trust fund, available for division.
If you live in an all-property state, you can protect your separate property trust fund by entering into a prenuptial agreement with your spouse. A prenuptial agreement is a legal contract that determines how property will be divided if the marriage ends in divorce. To be valid, the prenuptial agreement must be entered into voluntarily and signed by both parties before marriage. Both parties must also make full financial disclosures to each other and give the other person the opportunity to consult with an attorney before signing.
Trusts and Commingling
If you live in a state that acknowledges separate property claims, you will have the opportunity to prove your trust fund belongs solely to you. But if you commingle, or mix, marital assets with separate trust property assets, the court may order you to give a portion of that money to your spouse. Therefore, if you funded your trust with separate money, you must be able to trace your contribution through receipts or other documentation that shows the source of separate funds.
Trust Funds and Support Payments
Whether your trust fund is a marital asset or your separate property, the court will include any income you earn from the trust as part of your total assets when calculating child and spousal support. If you are ordered to pay spousal support, also known as alimony, or child support, this can affect the amount of support you are ordered to pay. The same applies to the spousal support recipient -- the court will include trust fund income in the calculation of your total assets to determine if you need spousal support and how much.
References & Resources
- International Divorce: Trust Assets and Divorce
- Forbes: Divorce: Trust Fund Feuds
- Connecticut Judicial Branch Law Libraries: Equitable Distribution of Property in Connecticut Marriages or Civil Unions
- John K. Grubb & Associates, P.C.: Prenup or No Prenup? That is the Question
- Bankrate: Everything you need to know about prenuptial agreements
- Echols, Echols & Smalley: Property Division in Divorce: Commingling and Tracing
- The Money Alert: What is a Trust Fund?
- Bedrock Divorce Advisors, LLC: Do You Live in a Community Property State or an Equitable Distribution State?
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