Are family trusts protected from divorce?

Depending on how and when they were set up, family trusts can, under the law of each jurisdiction, grant some protection against divorce. Here are the main considerations:

1. Timing of Creation: The timing of when the trust was created also appears to be a determining factor in the likelihood that it will be treated as separate property and thus better protect it from divorce. Of course, trusts prepared after the date of marriage can be protective as well, but they would most likely attract closer scrutiny from the courts when determining whether such a trust should be categorized as marital property.
2.  Source of Funds: Trusts funded with assets that clearly are separate property, like an inheritance received by one spouse before or during the marriage, are more likely to be safe from division in divorce. However, if marital money is used to make a contribution to the trust, that contribution may be subject to claims in divorce.
3. Discretionary trusts: those under which there is no obligation to distribute—offer more protection. This is because the spouse cannot claim any specific asset as part of the divorce settlement.
4. Spendthrift Provisions: A spendthrift clause in a trust can protect the trust's assets from creditors, including a divorcing spouse. In such a provision, the beneficiaries are restricted from assigning to third parties their interests in the trust, which may include creditors.
5. Trustee's role: Independence and control of the trustee can also make a huge difference in how the trust will be treated in divorce. If the trustee is independent and his or her actions are not controlled by either spouse, then it would be more probable that the trust would be found separate from marital assets.
6. Legal Jurisdiction: There may be vast differences in how divorce law views trusts in different jurisdictions. Some jurisdictions may have more protective laws on the trust assets in divorce than others.

In light of the foregoing factors, while family trusts may afford some protection against divorce, the effectiveness of that protection depends upon the terms, conditions, and applicable laws in force in that jurisdiction. Any person who wants to establish a family trust to protect his or her assets against divorce must seek the advice of a qualified attorney who has basic knowledge of family law and trusts. At One Pacific Trust, our vision is to be the leading provider of trust services.