Living Trusts and Divorce: Ensuring Asset Protection

Divorce can affect your financial life in innumerable ways, especially when it comes to the division of assets. A living trust is very important for many individuals in estate planning; if you already have one or are contemplating setting one up, here is how living trusts and divorce interact-and how they can possibly protect you during such an awful time. One Pacific Trust addresses the needs of clients with complicated ways of living trusts and divorce by guiding them on the management and protection of their assets in keeping with personal and financial goals.

An important distinction, when approaching living trusts and divorce, is when the trust was created, whether it was prior to or during the marriage. If a living trust was created prior to marriage, and if the assets placed within the trust remained separate, then those assets may be deemed protected and could be excluded from the marital estate upon divorce. This can protect a substantial portion of your wealth from equitable distribution as part of the settlement.

However, if the living trust was established during marriage or the marital assets were thrown into that trust, then such assets might be part of the marital estate. In these instances, living trusts and divorce become more complicated in that the court may decide such assets are divisible based on the jurisdiction and how the trust is administered.

Beyond asset protection, understanding how living trusts and divorce are connected will ultimately show you how to ensure your assets are taken care of according to your wishes once the divorce is settled. In this regard, at One Pacific Trust, we would like to emphasize that disputes, which may be expected to arise at the time of divorce, can be avoided by cautiously preparing and managing the terms of a trust. This calls for the nomination of a reliable trustee and clear terms that are in concert with your long-range plans.

Living Trusts and Divorce

Living Trusts and Divorce: Asset Division Explained

Living trusts and divorce are inextricably linked regarding property division. A living trust is a plan of an estate that allows you to transfer your assets into the trust to be managed by a trustee-usually yourself or the person of your designation-who manages the assets on your behalf during your lifetime. In such a trust, at your death, the assets will be distributed to your beneficiaries in accordance with the terms of the trust. Here, however, is where the complications set in, particularly where divorce is involved because the treatment of these assets can greatly influence the divorce settlement.

There are several aspects involved with living trusts and divorce. If the living trust was established before marriage and at all times was maintained separate, it is possible those assets would be treated as exempt and excluded from the marital estate division in the divorce. This will help shield those assets from division between the two spouses and keep them with the beneficiaries who are meant to inherit under that trust.

If the living trust had been established during the course of marriage or if marital assets were placed into such a trust, it would then be seen as part of the marital property. Therefore, division of such property may become a part of the divorce settlement. This is especially true in cases where couples have combined marital funds with the assets held in the trust, as this can lead to disputes regarding what should or should not be considered marital property and what should be permitted to stay protected under the living trust.

The second pertinent aspect about living trusts and divorce relates to the trustee himself/herself. If the trustee is the spouse creating the trust, the ownership of the assets then becomes a point of contention in the marriage dissolution. The court may need to make a decision on whether or not the trust has been employed as a means of preventing specific assets from being truly and equitably distributed and thus creates another step in the process.

Living Trust Protection from Divorce

Living Trust Protection from Divorce

A carefully drafted trust and careful dealing with assets are essential for living trust protection from divorce. Here are a few strategies that help you protect your assets within a living trust during a divorce:

1. Set up the Trust Before Marriage: A living trust can be given a layer of protection if done prior to marriage and one keeps the assets out of marital property. This can ensure that the assets remain yours and are not subject to division in a divorce.
2. Avoid Commingling of Assets: Adding marital assets to your living trust could be deemed to have made those assets part of the marital estate and, thus, subject to division. To maintain protection, keep your trust assets separate from those acquired during the marriage.
3. Use an Irrevocable Trust: While a revocable living trust is one that can be changed or revoked during one's lifetime, an irrevocable trust cannot be. Because this irrevocable trust more clearly takes these assets out of your direct control, it may provide a better shield from asset division in divorce.
4. Consider a Prenuptial or Postnuptial Agreement: A prenuptial or postnuptial agreement can also address what will happen to the assets in the living trust upon divorce. A prenuptial or postnuptial agreement may strengthen, rather than supersede, the protections afforded by a living trust by detailing that the assets are separate.

How to Make a Living Trust

How to Make a Living Trust

If you’re considering creating a living trust, here’s how to make a living trust that meets your needs:

1. Identify Your Assets: Start by making a list of all the assets you want to include in your living trust, such as real estate, bank accounts, investments, and personal property. This will help you understand what will be placed in the trust.
2. Choose a Trustee: Decide who will manage the trust. You can act as your own trustee during your lifetime, but you’ll also need to appoint a successor trustee who will take over after your death or if you become incapacitated.
3. Draft the Trust Document: The trust document outlines how the assets in the trust will be managed and distributed. You can use a lawyer to draft the document or use online tools to create it yourself. Ensure that the document meets all legal requirements and reflects your wishes accurately.
4. Transfer Assets into the Trust: To fund the trust, you’ll need to transfer ownership of your assets into the trust’s name. This may involve changing the title of real estate, updating beneficiary designations on accounts, and transferring personal property.
5. Store the Trust Document Safely: Keep the original trust document in a safe place, such as a safe deposit box or a fireproof safe. Make sure that your trustee and any other key individuals know where to find the document.
6. Review and Update the Trust Regularly: Your circumstances may change over time, so it’s important to review and update your living trust as needed. This ensures that the trust continues to reflect your current wishes and provides the intended protections.

Conclusion

Long-range planning and an understanding of how to protect your assets in navigating living trusts and divorce are very important. You can begin to ensure your financial future by taking steps to ensure living trust protection from divorce, coupled with knowledge of how a living trust may be constructed to ensure that you have total control over your assets. Proper planning, either at the beginning of a marriage or through updating of an already existing trust, might be all that is required for the protection of your wealth and your wishes.