Trusts are estate-planning tools designed to avoid probate or – sometimes – estate taxes. A divorcing spouse might be the beneficiary of a trust or he may be the settlor – the person who created it and transferred his property into it. Depending on which it is, the trust may be entirely separate from the divorce proceedings or it may be an integral part of property division between the spouses.
One of the more complicated intersections between divorce and trusts occurs when a spouse is the settlor of the trust. If he moved marital property into it – assets acquired after the date of the marriage – the other spouse has an interest in the assets of the trust, just as she would have had an interest in marital property if it had not been placed in a trust. In the case of an irrevocable trust, however, the property is out of the reach of both spouses. By definition, if you create an irrevocable trust, you cannot change your mind later and take the assets back. The trust holds them to be transferred to your beneficiaries after your death and divorce does not change that. If the trust is revocable, you can undo it. You can take the property back into your ownership or the court can order this done prior to issuing a divorce judgment. If the asset is marital property, your spouse is entitled to her share of it.
If you placed premarital property in a trust, it’s typically out of the picture if you divorce. This would be the case if you owned it outright or if you transferred it. In either case, it’s your separate property, generally not divisible in divorce, so your spouse would have no right to it – although this can vary a little by state law. Placing it in a trust would have the same effect as signing a premarital agreement in which your spouse concedes that she’s not entitled to your separate property – except your spouse must sign that agreement for it to be valid. You do not need her cooperation to establish a trust. As an added measure, you can make your trust a domestic asset protection trust, which must be irrevocable but which allows you to name yourself as a beneficiary so you can take it back later. If the DAPT documents are correctly drawn, the property in a DAPT is also immune from your creditors. But not all states recognize DAPTs, so check with a local attorney to see if this is an option for you.
If you’re the beneficiary of a trust, your spouse’s ability to take ownership of the property it holds on your behalf depends on a few factors. If the settlor of the trust thought to include spendthrift provisions in the trust documents, your spouse typically can’t reach your inheritance if you divorce. These trusts allow the settlor to decide who will ultimately receive his property, and if he doesn’t want it to go to your spouse or your creditors, he can specifically say so and it won’t. This type of trust typically retains your property and the trustee makes income distributions to you. Depending on the laws in your state, your spouse might have a right to a share of some of the income of the trust property, and a handful of states give spouses special consideration, treating them differently from the average creditor. For the most part, however, spendthrift trusts are designed to protect against a beneficiary’s divorce.
Even if your state is one of a few that allows a spouse to “pierce” the spendthrift language in your trust fund and get to the assets in a divorce, it’s possible that she might not be able to claim them. If the trust is discretionary, it’s safe. This means the settlor gave his trustee total authority to decide when to give you money or make distributions. He can decide how large or how small those distributions might be. However, most trusts make distributions according to the settlor’s wishes as they’re specifically set out in the trust formation documents. This effectively gives you an ownership interest in the trust, so a divorce court may consider the assets as marital property in some states, even if the trust includes spendthrift provisions. A local attorney can look at the trust documents for you and tell you for sure whether you’re vulnerable.
- Offit Kurman: What Is a Spendthrift Trust? Asset Protection in a Divorce
- Nancy Burner & Associates: Spendthrift Trusts – Protecting Beneficiaries From Creditors
- American Bar Association: Domestic Asset Protection Trusts – An Alternative to Prenuptial Agreements
- Gutterman Griffiths: Determining When Trusts Are Property for the Purpose of Equitable Division
- California Bar Journal: Your Client Is Getting a Divorce
- Helsell Fetterman: Irrevocable Trusts
- Colorado Bar Association: Trusts in Divorce Property Divisions (PDF)
- Pixland/Pixland/Getty Images