In the context of a divorce, questions about trust assets are common. When financial portfolios become more complex, financial trusts become more common. Trusts can serve variety of different purposes, and can be drafted in different ways. Trusts can be used as tools for gifting, asset management, and protection from creditor. And as expected, trusts also play a potentially big role in divorce proceedings as well.
What are Trusts?
Trusts create a fiduciary arrangement in which third party holds title to assets on behalf of the beneficiary (benefited party) appointed by the grantor of trust. Different types of trusts exist, created for different purposes. Some of these trusts include, but are not limited to: avoidance of probate, avoidance of taxable income, and to leave an inheritance for one’s heirs.
What is a Revocable Trust or Living Trust?
Revocable living trusts or “Inter Vivos” trusts are estate-planning tools that can help one avoid probate. A revocable trust also known as Living Trusts are often created in lieu of leaving the assets in a will. The trust gives grantor the access to the assets, but in the event of grantor’s death, trust, instead of passing through probate, directly goes to the grantor’s named beneficiary. Under the revocable trust, the grantor retains control of the assets. The grantor can decide to name himself as the beneficiary or he can choose to name someone else as a beneficiary. Regardless of who is named as the beneficiary, the grantor is able to modify the trust as he or she sees fit.
Revocable Trust as Marital Property
The creation of the revocable trust determines whether or not it is considered marital property. If an asset is placed in a trust before the marriage, it is categorized as separate property and does not go into effect at time of the divorce. However, the exceptions do exist, if it can be proven that the asset was placed into trust for purpose of keeping the assets separate. If any marital money at all was used to create the trust, the court will find the trust to be marital property.
Court never considers inheritance and gifts as marital property even when one spouse receives the inherited assets during the marriage. If one spouse inherited a trust from parents or grandparents during the marriage, this trust is almost never subject to equitable division during a divorce.
Irrevocable Trust as Marital Property
In a divorce proceeding, irrevocable trusts can be very powerful if drafted and implemented correctly because the assets, which are owned by third party, cannot be divided upon divorce. However, an irrevocable trust cannot be modified or terminated without beneficiary’s consent. Assets placed in the irrevocable trust become the property of the trust and no longer property of the creator of the trust. As with other assets acquired before the marriage, an irrevocable trust created before the marriage would be considered separate property in many states. If the trust was established during the marriage, it is likely to be considered marital property by the court.
If the court orders an irrevocable trusts to be divided, the grantor will have to obtain consent from the beneficiary of the trust before the trust can be terminated. Further complicating matters is the fact that the spouse is often the beneficiary for irrevocable trusts established during the marriage. It is very difficult to show that a trust created during marriage is actually separate property.
Can Irrevocable Trusts be used to Keep Assets from my Spouse?
It may seem as if creating an irrevocable trust would be a solution to retain assets through a divorce proceeding. Creating an irrevocable trust after marital difficulties arise, is a bad idea. A court will view this transaction as a fraudulent conveyance. This can be especially problematic for the spouse that granted the irrevocable trust because the court will declare the irrevocable trust assets marital property. The problem arises if the court does not void the irrevocable trust. Because the irrevocable trust, technically no longer belongs to the grantor, the grantor does not have access to these funds. However, the court is likely to still order the other spouse be paid a percentage of the funds in the trust. The result is the grantor cannot access the trust funds and has to pay the spouse the amount awarded by the court.
Equitable Distribution of Assets
In Georgia, both spouses are recognized as having equitable interest in all marital property acquired during the course of the marriage. However, unlike states that have community property laws, the equitable distribution in Georgia does not result in an equal division of property between the spouses.
When it comes to dividing property, Courts consider many factors including, but not limited to: Who created and funded the trust; the purpose of the trust; and the source of the funds and assets the grantor put into the trust are all factors to be analyzed. Generally, it becomes very difficult to show that a trust was created during a marriage is a separate property. However, it is even more difficult to show that the trust was created for the purposes of keeping assets from the spouse.
How Does a Trust Affect my Support Payments?
All forms of income are viewed in the aggregate and used to determine the amount of spousal and child support that a party must pay. If one spouse receives interest payments from a revocable trust, this is income that must be reported to the court to be used in the calculation of support payments trust. Support payments are based on several factors in addition to income but significant interest earned from a trust by one party is likely to affect the outcome of support payments.
This article is written for educational purposes and lays out the purpose trusts play in a divorce proceeding. If you have significant assets, complications may arise when trying to divide the marital property. Thus, it is generally advised to consult with an experienced divorce and family law attorney to determine division of property during divorce proceeding. Consulting with an attorney is highly recommended to ensure proper categorization and distribution of assets in a trust. To speak with one of our experienced divorce, trust and family law attorneys call 770-609-1247 today.