Can an Irrevocable Trust Protect Your Assets for a Divorce?

by Wayne Thomas, studioD
Income generated by an irrevocable trust may be used in support calculations.

Income generated by an irrevocable trust may be used in support calculations.

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Dividing marital property is an integral part of the divorce process. Although judges will typically distribute assets equally or based on the principle of fairness, a carefully timed and worded irrevocable trust may effectively shield your property from division. However, income received from the trust may still be used in calculating child support and alimony.

Overview of Irrevocable Trust

The creator of an irrevocable trust has no power to withdraw or change the trust once it is established. This means that any property deposited into the trust becomes the property of the trust and is no longer within the possession or control of the creator. This feature can provide certain tax advantages to the creator and protect those assets from future creditors. In the divorce context, whether irrevocable trust property will be subject to division between you and your spouse turns on whether it was established during or before the marriage.

Classification of Trust Property

If the irrevocable trust was established before your marriage, most states classify the funds as separate property and not subject to division. If the trust was created during the marriage, most states take the position that it is subject to division unless you can prove that it was created with the intention of keeping it separate. Proving that you and your spouse intended to keep the trust separate can be difficult, particularly if there was a commingling of assets during the marriage, such as using funds from a joint bank account to fund the trust.

Spouse as Beneficiary

It is not uncommon for your spouse to be a beneficiary of a trust established during the marriage. Even if you are successful in convincing the court the irrevocable trust was established with your separate property, you are not allowed to change the trust document to prevent your spouse from receiving property pursuant to its terms. Consequently, your spouse could receive property distributed under the trust terms long after the divorce is final. However, some states allow you to put language in the trust that names an alternative beneficiary in the event of divorce. Having the foresight to include this provision will protect against your spouse receiving distributions from the trust after the divorce is final.

Fraudulent Conveyance

Establishing a trust after you have started having marital difficulties can be more problematic. Most courts take the position that attempting to reduce your available assets for divorce with the intent to limit your spouse's fair share is a fraudulent conveyance. For example, say you are concerned that most of your assets will be awarded to your spouse based on your marital misconduct, such as adultery. To avoid this, you transfer everything into an irrevocable trust for the benefit of your parents. In this case, a court has the authority to void the transfer, thereby terminating the trust and making the property subject to division.

Effect on Support

Although you may succeed in shielding your assets from the property division aspect of divorce with an irrevocable trust, income received from that trust is used in some states for calculating alimony and child support. This means that if you have significant gains being generated and paid out from trust property, your spouse may be awarded a portion of that income after the needs of both parties and any children are considered.