Dividing assets is one of the most trying and complicated issues of divorce for many people. You may have a business, rental properties, retirement savings, and other investments. But what if you have assets held in a trust (or trusts)? What happens to a trust in divorce? The answer is that it depends on the type of trust in question—including whether it is revocable or irrevocable—and whether assets in the trust are considered marital or separate property.
In any case, if you have assets and properties held in a trust, a New Jersey divorce lawyer can provide guidance specific for your situation and advocate for your rights and interests throughout the entire process of dividing assets.
There are many different types of trusts that are set up by high-net-worth people for a variety of reasons, including to protect wealth, reduce taxes, bypass probate, support beneficiaries, and give to charitable foundations. Here we talk about the two basic categories of trusts, revocable and irrevocable, and give a general overview of what happens to them when marriages are ending.
REVOCABLE TRUSTS
A revocable trust can be changed or revoked after it is established. Revocable trusts are also referred to in estate planning as revocable living trusts (there are also irrevocable living trusts—to learn more about irrevocable trusts see the next section).
What happens to a revocable living trust in divorce is dependent on a couple of things. If you and your spouse set the trust up together, the trust will typically need to be dissolved and the assets in it subject to equitable distribution as described in N.J.S.A. 2A:34-23.1.
If one of you has a revocable trust in your name only that you put assets into, assets in it may still be subject to division. Determinations may need to be made as to whether properties in the trust are separate or marital. This may be the case even if you had the trust prior to your marriage if after marriage any assets held in the trust were commingled.
Separate and Marital Property
Sometimes divorcing people are confused about what is considered separate property and what is considered marital property. In general terms, marital property is property acquired during marriage. Separate property is property you had before marriage. It can also be an inheritance you received during marriage, such as from your parents, a gift that was given only to you, or assets protected by an enforceable prenuptial or postnuptial agreement.
However, separate property does not always stay separate. If it is commingled with marital property, such as in a joint bank account, or used to benefit the household during marriage, or the funds are used to purchase or sustain a marital assets, it could be considered transmuted and therefore converted to marital property.
IRREVOCABLE TRUSTS
An irrevocable trust has that name for a reason. Once set up, it typically cannot be changed or revoked because, in essence, it no longer belongs to you, or you and your spouse if established together. It is a separate instrument that will be distributed under the terms that were established when the trust was set up. Some types of irrevocable trusts include:
- Bypass trusts that serve to reduce estate taxes
- Spendthrift trusts that protect and manage the assets of beneficiaries
- Special needs trusts to provide for disabled adults or children
- Charitable trusts that benefit non-profit entities while also reducing estate taxes
- Irrevocable life insurance trusts that can reduce estate taxes and have other benefits.
So, in general, assets in an irrevocable trust are not subject to division in divorce. However, as with so many issues of divorce, things are not always set in stone one way or another.
If you or your spouse set up an irrevocable trust and included marital assets without the consent of the other spouse, then further discussion is necessary. If you or your spouse intentionally tried to shield assets in this way, a judge could potentially order the irrevocable trust to be dissolved and divided. Or the spouse who set it up could be ordered to pay the other spouse the value of those marital assets.
PROPERTY INHERITED THROUGH A TRUST
As touched on in the earlier discussion of separate and marital property, inherited assets are generally considered separate property. So, if you inherited property through a trust when your parents or another relative died, and you did not commingle it or transmute its contents, it is probably not subject to equitable distribution in your divorce. But if it was mingled with marital assets or the contents were transmuted, then it may be considered marital property and be divided. This is applicable to any property you inherited, whether through a trust or not.
WHAT HAPPENS TO A TRUST IN DIVORCE IS COMPLEX—GET ANSWERS FROM AN EXPERIENCED NEW JERSEY ATTORNEY WHEN YOUR MARRIAGE IS ENDING
There is no simple answer to what will happen to a trust or trusts in divorce. Trust structures and terms are uniquely tailored to individual marital and family situations. Each situation must be considered and addressed based on the trust involved and the overall finances and other circumstances of the spouses.
To find out what could happen in your complicated financial situation and protect your rights and interests requires well-informed legal guidance. Our family law firm, located in Hackensack and offering support throughout Bergen County and New Jersey, can provide the stellar guidance needed.
We focus entirely on family law and the intricate issues of divorce. Our attorneys have decades of combined legal experience effectively guiding affluent clients through all aspects of the divorce process and helping them achieve the best possible outcomes related to assets, alimony, and child custody and support. If you need assistance after divorce, setting up a new trust for your assets or drafting or revising a will to include assets, we can provide names of professionals to assist with the estate planning process.
Don’t hesitate to contact [MFR] Men’s & Fathers’ Rights Divorce Lawyers at (201) 880-9770 to arrange a confidential consultation. We provide strategic legal guidance that you can count on.
