Couples often come to marriage with some of their own assets and income. Once married, they may decide to combine their money into a joint account in which case it becomes “marital property.” They can also choose to keep some or all of it separate so that it stays “separate property.” The distinction between marital and separate property is important because, in divorce, only marital property is divided between the parties using the principles of equitable distribution. Problems can arise, however, if separate property is used in ways that convert it to marital property. For example, this can happen with trust funds. If a spouse is the beneficiary of a trust and he or she uses the money to buy an asset for the benefit of both spouses, there is a risk that the asset may not be protected from equitable distribution in divorce.
Generally, assets in a trust are not subject to equitable distribution unless they contain marital property. Further, any money paid from a trust to a beneficiary-spouse remains separate property provided it is maintained in a separate account and not commingled with marital funds. However, if the trust funds are put into a joint account, used to buy a marital asset or used to pay ordinary marital expenses, they become marital property with one exception. If the beneficiary spouse uses trust money as a down payment on or for capital improvements on an asset or to purchase real estate, it remains separate property provided documents exist to trace those contributions from the trust.
Where a beneficiary-spouse wants to entirely protect trust assets and income from equitable distribution, it is best to have the trust take title to anything purchased using money from the trust. For example, if the beneficiary wants to buy a house for the couple to live in, the house should be titled in the trust’s name. The benefit to this approach is that the assets are not owned by the beneficiary-spouse and never become marital property even if they are used to purchase property that will be used by both parties. However, for this to work, the home must remain in the trust and no marital funds should be used to purchase, make mortgage payments, or maintain the home. In this way, the non-beneficiary spouse is prevented from asserting an equitable distribution claim on the property.
Trusts can present unique challenges in equitable distribution and support calculations. If you are considering a divorce, and you know that one of the potential assets is a trust, please contact us to learn how we can help you obtain the best results in your matter.