Generally, trusts are considered the separate property of the spouse named as beneficiary. However, that is not true if the assets in the trust contain marital property. The distinction between marital and separate property is important because only marital property is subject to equitable distribution in divorce meaning that it is subject to division by a court to the extent the parties cannot reach an agreement. As a result, in divorce actions, the trust should be carefully examined to determine whether it contains any assets that are marital in nature. If they are, a spouse can go to court to obtain his or her fair share of those marital assets notwithstanding their being in a trust.
The first step in determining whether a spouse is entitled to a portion of a trust is to understand the rules governing separate and marital property. Marital property is property acquired after the parties’ wedding date. Separate property is property acquired before the parties’ wedding date or through inheritance or a gift made directly to a party during the marriage and remains titled solely in that party’s name. A trust set up in one spouse’s name can be considered separate property regardless of whether it is set up before or after marriage. However, when it is created during a marriage, the non-beneficiary spouse must raise the question of whether any marital assets have been put into the trust.
While there are legitimate reasons for a spouse to set up a trust during marriage, sometimes it is done in order to improperly shield assets from equitable distribution. Often, the non-beneficiary spouse is not aware of the trust or thinks the money came from another source such as a family member. In the divorce action, the non-beneficiary spouse may trace the source of the assets in the trust to determine if they are actually marital property and, thus, subject to equitable distribution. A forensic accountant is invaluable in helping with this process by utilizing various accounting and investigative techniques to examine where the funds in the trust came from.
If it is determined that the trust contains marital property, the trust can be broken to remove the marital property contained therein. A formal application will need to be made to the court to obtain the marital property so it can be included in the calculation of equitable distribution.
If you are considering a divorce and know that one of the potential assets is a trust, please contact us to help ensure your rights are protected.