It’s common for “high net individuals” to set up trusts as part of tax shelter, wealth protection measures, and estate planning, but that presents a unique set of challenges when it comes to divorce. A trust is a legal agreement in which the trustor (the person who creates the trust) gives the trustee (the person in charge of the trust) the right to hold title to assets or property for the benefit of a beneficiary (the person for whom the trust is created). The trust is usually given a different name, affording the trustor added privacy. The outcome of high net worth divorce proceedings involving trusts will greatly depend on the nature of the trust.
Revocable vs. Irrevocable Trusts
When a trustor creates a revocable trust, he or she has an option to modify or terminate the trust at any time. If a trust is irrevocable, then a trustor cannot modify or terminate it without a court order. Once property is transferred into the trust, the terms can’t be changed. The logic is that the property is owned by the trust and not the trustor. In a high net worth divorce, property in a revocable or irrevocable trust can be subjected to division, but that is based on whether it was formed before or during the marriage.
Premarital and Marital Property in a Trust
Property owned by a spouse before the marriage is generally not subject to division in divorce, so the other spouse would have no rights to it. Also, property in a trust created prior to marriage or received as a gift or part of an inheritance is not subject to equitable distribution. Any income from that trust is separate property provided it’s not commingled with marital assets.
All assets obtained, earned, or received during the marriage are presumed to be marital property, with the exception of gifts, inheritance, or personal injury settlements. If a revocable trust is established and the trustor places marital property in that trust during the marriage, the property can be removed and divided in divorce. Assets placed in an irrevocable trust, even during the marriage, will no longer be part of the marital estate and are typically not divisible in a divorce. But if a spouse transfers marital property to an irrevocable trust for “divorce planning” purposes, the court might consider that a fraudulent transfer and dissolve the trust for equal property distribution. Or, the court might award the other spouse a disproportionate share of the assets to compensate the spouse for the fraudulent transfer.