“What happens to a family trust in a divorce?” If you have a family trust and are worried about an impending divorce, this post will go over the basics of who to speak with and what to ensure you understand. If you want to prevent issues with trusts during a divorce, this is important information.
Mike Rogers is the President and founder of Wayzata-based 360 Financial. As a fiduciary, he utilizes his 30+ years of experience to orchestrate and implement customized strategies tailored to address the issues and concerns of qualified retirement plan trustees, high-level professionals, and thriving business owners.
What Happens to a Family Trust in a Divorce?
Divorce can be emotionally taxing, and the added complexity of understanding how it impacts aspects like trusts only adds to the strain.
It can be helpful to have a guide when navigating through such a challenging period in your life. In this article, I’ll go over the important things you need to know about family trusts when embarking on a divorce.
This article isn’t a substitute for professional advice, so please make sure you speak with a financial advisor who will guide you through your estate planning as well as an estate planning attorney. It’s important to have all your ducks in a row, so that your financial life doesn’t get complicated as you start a new chapter in your life.
What happens to a family trust in a divorce?
During a divorce, family trusts can be complex depending on their nature and structure. Typically, a trust’s provisions and whether assets were mixed with marital assets play a significant role in how they’re addressed in a divorce.
Below are some scenarios that may play out when you’re getting divorced and a family trust is involved:
Assets May Remain Shielded From Division:
If a trust was established prior to the marriage and was kept separate from marital assets, it might remain untouched in the divorce. This means the trust continues to operate as it did before, and the assets remain shielded from division.
Classification as Marital Property:
If a family trust was established during the marriage or if marital assets were used to fund or augment the trust, it could be classified as marital property. This means that its assets could be subject to division during the divorce, depending on the laws of the jurisdiction.
If a spouse is a beneficiary of the trust, and the trust allows for changes in beneficiaries, it’s possible that after a divorce, the terms might be modified to remove that spouse. However, this largely depends on the terms of the trust itself.
Income Distribution May Be Considered Spousal or Child Support:
Even if the trust’s principal remains untouched, any income generated by the trust and distributed to a spouse may be considered when calculating spousal support or child support.
Hidden Assets May Be Discovered:
In some cases, a spouse may attempt to hide marital assets by transferring them into a trust. If discovered, courts can reclassify these assets as marital property and subject them to division. Such actions may also lead to penalties.
Trust May Be Dissolved:
In rare cases, a court might order the dissolution of a trust to ensure a fair distribution of assets during a divorce. This generally happens if the trust is deemed to be a sham or created specifically to defeat marital property claims.
Mingling of Trust Assets May Complicate Matters:
If assets from a trust are mixed or mingled with marital assets (for instance, using trust money for a marital home), this can complicate the trust’s status. The commingled assets might be considered marital property and subject to division.
Children May Be Considered:
If a trust is established primarily for the benefit of the couple’s children, courts usually try to ensure the trust’s purpose remains intact, safeguarding the children’s future.
Who is the beneficiary of a trust after divorce?
After a divorce, the original beneficiaries of the trust typically remain unchanged unless the trust document specifies otherwise or there’s a post-divorce modification.
Can a spouse hide assets in a trust?
While a spouse may attempt to hide assets in a trust, doing so is both unethical and illegal. Courts can take action if it’s discovered that assets were concealed during divorce proceedings.
What is the difference between a marital trust and a family trust?
A marital trust is specifically designed to benefit the surviving spouse, often for tax reasons, whereas a family trust can be set up to benefit any family member, including children or grandchildren.
How is money distributed from a trust?
Money is distributed from a trust based on its terms and provisions, typically overseen by a trustee who ensures that distributions align with the trust’s intended purpose.
What happens to an irrevocable trust in a divorce settlement?
Irrevocable trusts are generally protected from divorce settlements, as they can’t be easily changed or revoked. However, they may be considered if they’re seen as a source of income or if marital assets were used to fund them.
The nature of a trust matters in a divorce settlement. Assets in a revocable trust (where the grantor retains control) might be seen as marital assets, while irrevocable trusts (where control is surrendered) typically provide more protection from division, unless marital funds were used to fund them.
How can one protect trust assets from a beneficiary’s divorce?
To shield trust assets from a beneficiary’s divorce, one can incorporate specific provisions or use discretionary trusts that give the trustee greater control over distributions.
Does a trust protect assets from divorce in the US?
In the US, trusts can offer protection from divorce, especially if set up appropriately and before the union. However, how they’re treated varies based on state laws and the specifics of the trust.
Are all trusts considered marital property?
Trusts can be considered marital property if they were established or funded with marital assets. However, trusts created before marriage or with separate assets might remain separate.
Remember that trusts aren’t automatically exempt from divorce. Their treatment largely depends on the nature of the trust, state laws, and how they were funded.
What happens to a house in a family trust during a divorce?
A house in a family trust might remain protected during a divorce, especially if the trust predates the marriage. Still, its treatment can vary based on the trust’s specifics and the couple’s financial entanglements.
Inheritance Trusts and Divorce: Common Problems
With inheritance trusts, issues often arise when they’re commingled with marital assets, potentially transforming separate assets into marital property. One common issue with trust funds and divorce is determining how it impacts spousal support or alimony calculations.
It’s important to remember that the handling of trusts during divorce can vary considerably based on state laws. Some jurisdictions might provide more protection to trusts than others. Make sure you seek professional advice.
If you don’t have your own financial advisor and estate planning attorney, now may be a good time to seek professional counsel.
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360 Financial is one of Minnesota’s best independent wealth management firms. We work with clients in Minnesota and across the US. If you’d like to work with a team that always puts your best interests first and is committed to helping you create a lasting legacy, please get in touch.
About the Author: Mike Rogers
Mike Rogers is the President and founder of Wayzata-based 360 Financial. Prior to establishing the firm in 1995, he spent seven years building a solid financial base with two of the nation’s largest investment firms. As a fiduciary, he utilizes his 30+ years of experience to orchestrate and implement customized strategies tailored to address the issues and concerns of qualified retirement plan trustees, high-level professionals, and thriving business owners.
Mike holds the series 7 and 63 security registrations with LPL Financial. He served six years on the Benilde-St. Margaret’s Board of Directors, chairing the Investment Committee for many of those years.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.