Revocable Trusts & Divorce

By Rob Jennings J.D.

Revocable trusts are arrangements in which the maker of the trust, called the settlor, transfers property to another person to hold for the benefit of a beneficiary, but retains the right to revoke the trust and pull the property back into his own estate. While advantageous in terms of avoiding probate--and keeping irresponsible beneficiaries from wasting trust property--revocable trusts can create complications in divorce cases for settlors and beneficiaries.

Revocable trusts are arrangements in which the maker of the trust, called the settlor, transfers property to another person to hold for the benefit of a beneficiary, but retains the right to revoke the trust and pull the property back into his own estate. While advantageous in terms of avoiding probate--and keeping irresponsible beneficiaries from wasting trust property--revocable trusts can create complications in divorce cases for settlors and beneficiaries.

Revocable Trusts as Property in Beneficiary's Divorce

Each state has its own laws dealing with the division of a couple's property upon the breakup of their marriage. While most states don't allow their courts to divide property received by one party via gift or inheritance--the only two ways of becoming the beneficiary of a trust--a minority do allow the division of gift or inheritance property. Because the beneficiary in a revocable trust has no legal rights to trust principal or income because the settlor's ability to cancel it at any time, he actually owns nothing for a family court judge to divide. Because of this, a revocable trust constitutes a useful way for settlors to keep the potential ex-spouse of a beneficiary from entitlement to trust assets or income in states that allow the division of gift or inheritance property in divorce.

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Revocable Trusts as Property In Settlor's Divorce

Since a settlor retains the right to revoke the trust and recover the assets, those assets can be divided by the court in the settlor's divorce. While legal title to the trust property may rest with the trustee--the person or entity holding the property for the benefit of the beneficiary--the right to essentially re-possess all or part of the trust's assets has real value. If the settlor funded the trust with property that would be considered separate in jurisdictions that recognize separate property, the right of revocation would also be separate. In states that allow the division of inherited or gifted property, however, conveying those assets to a revocable trust won't prevent a court from ordering a division.

Revocable Trust Income in Divorce

Whatever income a beneficiary receives from a court can generally be used in calculations to establish child support under the guideline systems currently in use in each of the states. State child support guidelines typically take into account a parent's income from all sources, including a revocable trust. Courts can also use a beneficiary's revocable trust income in calculating his ability to pay or need to receive alimony.

Revocable Versus Irrevocable Trusts

In an irrevocable trust, the settlor retains no power over trust assets and the beneficiary actually has some kind of enforceable entitlement to the trust income and property. As such, assets conveyed into an irrevocable trust will generally no longer be considered as a settlor's property in his divorce--as long as the court does not set the conveyance aside as fraudulent. Due to the entitlement to receive something from the trust, the beneficiary of an irrevocable trust could face the loss of some or all of his entitlement in a divorce case that takes place in a state that does not recognize separate property.

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Can an Irrevocable Trust Protect Your Assets for a Divorce?

References

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