While no one wants to plan for the event that they’ll eventually go through a divorce when getting married, “till death do us part” isn’t for everyone. Divorce is a long and treacherous process, both legally and emotionally.
Protecting your assets is one way to ease the pressure of a divorce. Working with the professionals at Blake Harris Law will help you preserve as many of your assets as possible. One way to accomplish this is by using a trust to protect assets in a divorce.
You may worry about how a divorce will impact your access to personal assets. Keep reading to learn what assets are in jeopardy during a divorce and how to protect them.
How a Trust Can Protect Your Assets in a Divorce
A trust is a tool that involves a third party, called the trustee, holding assets for the trust grantor to pass on to a beneficiary.
Trusts are often used to distribute assets to loved ones after they’re gone. Some may even name their spouse as a beneficiary. However, in the event they divorce from their spouse, their rightful ownership is called into question.
There are many ways to create security for beneficiaries by creating a trust such that the intended beneficiary will receive and maintain ownership of all of the assets contained within.
Separation of Ownership and Benefit
During a divorce, spouses must divide their assets between themselves, usually with the assistance of legal representation, to ensure the fairness of the division.
This process involves determining which assets are individual and which are marital.
Individual assets are those the spouses owned before the marriage. However, if those assets were commingled during the marriage, the law may deem them marital assets.
Are trusts considered marital property?
It depends. In some cases, yes. When a trust holds assets belonging to both spouses, it is marital property. Even if it doesn’t, if one spouse argues for their right to a trust, they may attempt to collect some of the assets from it.
Ways To Protect Your Trust: Language
When establishing a trust you want to protect from a divorce, first pay attention to the language you’re using. A clear plan for your trust will ensure you’re using the exact language you need to protect it.
Leave no room for interpretation. That way, no one can call your intention for the trust into question during a divorce. For example, you can state plainly that non-beneficiaries are not entitled to any assets in the trust.
Ways To Protect Your Trust: Work With Your Trustee
Choosing the right trustee is essential to protecting your trust. If you anticipate a divorce, you may direct your trustee to alter a revocable trust to protect your assets as much as possible. You may also have your trustee shift assets to a more secure place if you have concerns about the parameters of the trust itself.
Ways To Protect Your Trust: Avoid Commingling
When your assets commingle with your spouse’s, they become marital property. Avoid this by keeping your assets as separate as possible. Using money from a shared bank account, shared property, or other shared financial assets to fund a trust makes it very hard to protect in a divorce.
Ways To Protect Your Trust: Distributing Assets
Strategic distribution is another practice of using a trust to protect assets in a divorce. Distributing assets from a trust directly to a designated beneficiary makes it more vulnerable during a divorce. Instead, consider distributing funds indirectly.
Include language in the trust document that specifies procedures for a third party to make payments on their behalf.
Asset Division and Trust Agreement
If you want to prepare to protect your assets, it’s important to be familiar with some of the vocabulary. The assets at play are marital assets, separate assets, and trust assets.
Marital assets refer to property, bank accounts, or anything else of financial value that spouses share during a marriage. This could be a home or a joint bank account.
Separate assets are the assets each spouse owned before the marriage that were never commingled.
Finally, trust assets are the assets that fund a trust. These assets can either be separate or marital.
So, does a trust protect assets from a divorce?
It can. If your trust consists of separate assets and specifies that non-beneficiaries are not entitled to any of the assets funding it, it has a better chance of remaining yours.
The ideal time to set up a trust to protect your assets from divorce is before marriage.
If you can establish this trust before marriage, ensure you don’t add any commingled assets to it afterward.
You might wonder: Can I set up a trust without my spouse?
Yes. If you’re already married and want to set up a trust on your own, you can. However, be careful not to use any shared assets between you and your spouse in the trust. Otherwise, they will also have rights to it.
The Type of Trust to Make: Irrevocable vs. Revocable
The type of trust you establish matters when trying to protect your assets from divorce. The main types of trusts relevant to this topic are:
- Revocable trusts
- Irrevocable trusts
- Domestic asset protection trusts
- Offshore asset protection trusts
Revocable trusts, also called living trusts, allow you to amend or withdraw them at any time. As the grantor and trustee of the trust, you have the power to alter the terms. This means you can change the assets funding the trust, the beneficiaries, or any other terms regarding distribution. Revocable trusts do not provide any asset protection in the case of divorce or against any other legal claims.
Often, you cannot alter the terms of an irrevocable trust once they are set. This may protect your assets during divorce since the beneficiary and assets are set in stone. For example, irrevocable trusts are ideal for inheritance and divorce. A couple may establish an irrevocable trust with their child as a beneficiary. In this case, a divorce shouldn’t impact the trust. Alternatively, you can protect separate assets with an irrevocable trust.
Domestic Asset Protection Trusts
Domestic asset protection trusts are a form of domestic asset protection. This is a type of irrevocable trust. Once the trust owns the assets, they may not be part of the division of assets. However, using a domestic asset protection trust is risky, as the past has shown that they can and have been compromised by outside forces.
Asset protection in cases of divorce is complex, so consider speaking to a legal professional before deciding which trust to use.
Offshore Asset Protection Trusts
Offshore asset protection trusts are generally the safest and most powerful tool for protecting assets. This is a type of irrevocable trust; however, it can still allow for a great deal of flexibility over the assets and the terms of the trusts. Once the trust owns the assets, they cannot be part of the division of assets.
Avoiding Probate and Taxes
Another benefit of trusts is you can use them to avoid probate. Probate is the legal process an estate must go through before assets are distributed to beneficiaries. If you have established trusts, they may be able to avoid probate and be transferred to your beneficiaries sooner.
While you cannot use trusts to avoid taxes, some revocable trusts come with tax benefits.
Consultation and Professional Guidance
Using a trust to protect assets in a divorce is just the beginning.
Asset protection varies depending on circumstances, assets, and state laws. Blake Harris Law helps clients nationally learn how to protect their assets. A legal professional will help you decide the ideal course of action.
To learn how to protect your assets today, contact Blake Harris Law.