Navigating estate planning and trusts in the context of marriage can be complex, especially when accounting for unforeseen events like divorce and how these financial vehicles might be scrutinized if the marriage ends. Estate planning clients should consider several key factors when creating trusts during marriage to ensure fairness and legal clarity.
Trusts Created During Marriage
While third-party trusts established by family members may be excluded from marital assets, trusts created by a couple (either individually or jointly) during the marriage often face closer scrutiny. For instance, revocable trusts created by someone related to you are generally not treated as your “property” in divorce proceedings, because the third party retains control and can make changes or revoke the trust. This is not to be confused with a revocable trust you create and fund with your own property.
Irrevocable Trusts & Other Asset Transfers
Irrevocable trusts are more permanent, transferring control and ownership from the settlor (creator) to the trustee, and potentially removing assets from the marital estate. While such assets aren’t typically divided in a divorce, if this type of trust is funded with marital assets or if a trust transfer appears fraudulent, courts may still consider them in property divisions. Courts may reverse a sudden asset transfer as an attempt to limit what a spouse would receive in divorce due to the suspicious timing. Trusts created close to a divorce and other actions like decanting (knowingly transferring trust assets to a new trust) or exercising certain trustee powers can also raise concerns about improper asset protection strategies in anticipation of divorce.
Protecting Your Interests
- Plan for Possible Divorce: For greater peace of mind in the event of a possible divorce, to provide transparency and prevent disputes, you should discuss your intent to keep assets separate or marital with an estate planning attorney. Depending on the complexity involved, it may be prudent to consult other specialists as well.
- Ensure Documentation Clarity: Thinking ahead about trust structure and setting clear terms for asset use and beneficiary rights after divorce can reduce conflicts later on. When creating trusts, especially joint revocable trusts with a spouse, exercise caution and outline whether any assets will remain separate or become marital property. Such trusts can merge property, complicating division if a divorce occurs.
- Consider Independent Counsel and Marital Agreements: Couples should consider a marital agreement to establish mutual consent for trust creation and funding. This can strengthen each party’s understanding of their rights and obligations regarding trust assets and prevent litigation. Encouraging independent legal counsel helps to ensure fairness and reduces misunderstandings.
Final Thoughts
Clients can proactively address the potential impacts of divorce, avoiding unexpected outcomes while maintaining control over assets. By planning ahead and seeking the right advice, you can create a balanced approach to trust and estate planning that respects both marital assets and personal interests.
