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.