Property – both marital and separate – is an integral part of most divorces, and estate planning can complicate the issue immeasurably. You can create an irrevocable trust before marriage to shield assets from division with your spouse in a divorce, but you might have limited success doing so after you're married.
If you're the beneficiary of an irrevocable trust – one that can't be undone or changed after the grantor has created it – your inheritance may be unrealized at the time of your divorce. You know you'll inherit at some point in the future, but you don't know when because the grantor has not yet died. This typically makes it your separate asset, not marital property, and separate assets are not divisible in a divorce. Some exceptions exist, however.
After the Grantor's Death
In some states, the appreciation of separate property is a marital asset. If the grantor has died and the assets held in trust for you gain in value during your marriage, your spouse may have a right to a share of this increase. An exception exists if the trust is discretionary – the trustee has the ultimate authority to determine when you receive disbursements, and, if so, how much. This can take the trust out of your divorce equation entirely. It's neither your separate asset nor a marital asset because you have no control over it. If you're receiving cash distributions and if you consistently deposit them in a separate account in your sole name, this money is your separate asset because it's an inheritance. If you place the money in a joint marital account, however, it may be at risk for distribution in a divorce. Some courts will include trust disbursements in your income for purposes of calculating alimony.
As the grantor or creator of an irrevocable trust, if you place assets into one before your marriage, these are never marital property and are never at risk in a divorce. You don't actually own them when you marry – your trust does. The downside, of course, is that an irrevocable trust is forever. You can't get these assets back later if you decide you don't mind sharing them with your spouse or after you divorce. A prenuptial agreement can also prevent premarital assets from distribution, and it's more flexible. Depending on your personal circumstances, it may be a better option, so speak with a professional if you have concerns about protecting your property before marriage.
Assets you acquire during your marriage are marital property. In some cases, an irrevocable trust can protect them from distribution in a divorce, but it depends on your timing. When you place assets in an irrevocable trust – even during your marriage – you give up ownership of them. If you no longer own them, they’re typically not divisible in a divorce because they're no longer part of your marital estate. This is particularly true if your spouse was aware of the transactions. If you transfer assets to an irrevocable trust as a means of "divorce planning," however, a court might consider this a fraudulent transfer. You can't deliberately remove assets from marital ownership – essentially giving them away – so your spouse doesn't get a share in a divorce. A judge can order the trust dissolved so he can divide the assets, or order you to pay half the value of the transferred assets to your spouse without dissolving the trust.
Video of the Day
- Matthews & Matthews: Irrevocable Family Trusts in Divorce – Some General Information on a Complex Area of the Law
- Divorce Source: Equitable Distribution and Irrevocable Trusts – The Marital Purpose Doctrine
- Forbes: Can a Trust Protect My Assets in a Divorce?
- The Modern Woman's Divorce Guide: Separate Property Basics