Can an Irrevocable Trust Protect Your Assets for a Divorce?

By Wayne Thomas

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.

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.

Protect your loved ones by a legally binding will. Make a Will Online Now

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.

Protect your loved ones by a legally binding will. Make a Will Online Now
What are Spouses' Rights in Divorce Regarding Beneficiary Revocable Trust?

References

Related articles

Trust Money Divorce in Florida

Whether you receive income from a trust fund or placed assets into a trust during your marriage, how that trust will be handled upon your divorce depends largely on when the trust was created and how the funds are used. Florida distinguishes between property that is the separate property of one spouse and the joint property of both spouses. Depending on how the court treats your trust in the divorce, you may have to split proceeds from the trust with your spouse.

Tennessee Law on a Living Trust

A living trust can be used to safeguard your property during your lifetime and help avoid probate at death. In Tennessee, it is common for the creator of a living trust to oversee the distribution of the trust's funds and receive trust income during his lifetime. Knowing the requirements for creating a living trust and the circumstances in which it may be modified will ensure that your trust operates according to your wishes in Tennessee.

How Does a Living Trust Protect Assets?

Creating a trust to holds assets can help the grantor while he is alive and continue to serve him after his death. A living trust is created during the grantor's lifetime. It transfers title (ownership) of the grantor's property into the trust to be managed by a trustee for the benefit of a designated beneficiary. There are different types of living trusts and each can protect assets in a different way -- or not at all.

LegalZoom. Legal help is here. Start Here. Wills. Trusts. Attorney help.

Related articles

The Oklahoma Trust Assets in Divorce

Trusts are a useful way to safeguard assets and avoid probate. However, when a married couple divorces, Oklahoma law ...

Revocable Trusts & Divorce

Revocable trusts are arrangements in which the maker of the trust, called the settlor, transfers property to another ...

Are Assets in Revocable Trust Part of Community Property?

The classification of property owned by a married couple can be important for determining taxes after death and ...

How to Create a Valid Living Trust in Illinois

A living trust can allow the creator of the trust to use the trust property during his lifetime, and when the creator ...

Browse by category