Can My Spouse Claim Rights to My Trust Fund during Divorce?

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When it comes to a property settlement, having a trust fund can make for a sticky financial situation. Divorce forces spouses to consider every asset that can be counted as part of their union. 

A trust fund (also just called a trust) is a legal entity that holds property for another person or group of people. The property is financial in nature, consisting of any combination of cash, stocks, bonds, property, or other products that hold value to the beneficiary. The contents of the trust are placed by the grantor with a trustee (a person or legal entity charged with the responsibility of responsibly managing the account).

In many cases, a trust fund is designed to release the finances when a specific event happens, such as a death. Other possible scenarios include trust funds created for one specific purpose, such as paying for college or buying a home.

Why Do Trusts Exist?

In the end, trusts really exist to make sure that funds are responsibly, appropriately managed at the proper time. Many people set up a trust fund to keep money safe, and they set it aside until a specific time, like when their grandchildren turn 18. These situations are relatively common for passing wealth along to future generations at a time when they’re deemed responsible enough to manage finances on their own.

Trusts can also exist to ensure that certain funds will be used in a specified manner with the help of a third-party trustee. Commonly, you will find a trustee that is responsible for managing the finances of these affairs, or issuing checks on behalf of the beneficiary for a set purpose like college.

Generally speaking, trusts are ultimately designed to appropriately manage funds. They may be structured to allow annual income releases or one-time payments for certain expenses. The specific details about why each trust is created are solely between the person creating it and the person it is bestowed upon.

Are Trusts Considered Separate or Marital Property?

As is the case in many issues regarding divorce, trusts can be considered separate or marital property depending upon the laws of your individual state. There is no cut-and-dry precedent for whether a trust could be determined to be a separate or marital property.

Most often, this issue hinges on the specific terms of the trust involved. If the terms are clear that the money was gifted to only one spouse, it is typically considered to be separate property. It becomes even more likely that a trust will be counted as separate property when the trust was bestowed prior to the beginning of a marriage.

When it comes to the terms of your trust fund, ambiguity could lead to the entire account being counted as marital property. It may seem unreasonable when it was created to provide income and inheritance for just one spouse. But in order to claim your trust as separate property, the terms must be clear.

Prenuptial and postnuptial agreements can also contribute to how your trust will be counted in a settlement. If the trust fund was to be counted as combined property after the union was official, it could be equally divided between both spouses in a settlement.

The Terms of the Trust Are Important in Divorce

If the terms of your trust are ambiguous, you must consider a few other things prior to heading into your settlement agreements. Trusts could be factored into any potential alimony or support payments, which you are ordered to pay through the court. Many individuals who have access to a trust fund could have serious financial implications regarding their monthly obligation to their spouses and dependents.

A trust could also be counted as an income or asset during a property settlement. Without clear instructions and terms spelled out for the trust, it could be counted as one of these two items. In this type of scenario, it could lessen what you would otherwise be entitled to—in terms of dividing the marital assets.

Gain Control of Your Trust in Divorce

When you think that your marriage could have a rocky end, it is critical to ensure that the terms of your trust are completely clear. To ensure that there is no ambiguity when it comes to identifying your trust as separate property, have a lawyer review the details in the event of a future divorce.

Likewise, you should try to keep those trust funds separate from any major purchases that the two of you make as a married couple. If major portions of the trust fund are used to purchase items that become marital assets, it becomes even more unclear whether the trust fund should be counted as separate or marital property.

Set up prenuptial or postnuptial agreements that include information about the trust fund. These agreements can help protect your financial interests, and they can be referred to in court, should a divorce make it to trial. Putting measures in place to protect yourself gives you the best possible chance of success at securing a financially stable future for yourself. Your trust fund was created to give you more financial freedom to improve your life, so make sure that it stays in your hands — not your ex-spouse’s.

 

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Shawn Leamon, MBA, CDFA is the host of the “Divorce and Your Money Show” and Managing Partner of LaGrande Global, with offices in Dallas, New York and Hanover, New Hampshire.

Shawn Leamon, MBA, CDFA

Dallas, Texas

Shawn C. H. Leamon is Managing Partner of LaGrande Global, a firm that helps successful families manage large financial transitions like divorce, inheritance and selling a business.

He earned his Bachelor of Arts from Dartmouth College, double majoring in Economics and Philosophy, and his Masters in Business Administration at Spain’s IE Business School.

Before founding LaGrande Global, Shawn helped manage $1.1 billion in client assets at Bernstein Global Wealth Management. He also worked as a credit research analyst at J.P. Morgan. He is a Certified Divorce Financial Analyst, and he has been an advisor to numerous high-stakes divorce cases.

Shawn is the author of two well-received finance books: Managing Private Wealth: Principles, and Divorce and Your Money: The No-Nonsense Guide, both published in 2016.

In his spare time, Shawn is an ultra-endurance athlete and has competed in events as long as 24 hours. He is an Eagle Scout and a member of the Alumni Board of Greenhill School.