Three Questions That May Determine How A Trust Is Treated During Asset Division

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Many people use trust funds as a way of guaranteeing that their loved ones will not suffer financially in the future. For example, you can create a trust fund to benefit your children after your death or when they reach a certain age. However, if you are divorcing, expect your spouse to have an interest in your trust fund. Here are three questions whose answers may help you determine whether and how the fund will be divided:

When Did You Create the Trust?

In most states, your spouse has no claim to your trust fund if you created and funded it before getting hitched. In fact, you don't even need anybody's approval to set up such a trust. In such a case, the trust is a separate asset, and you may deal with it as you deem it. Don't forget that the court may require you to prove that you did not commingle the trust assets with marital assets.

However, if you created the trust after getting married, the court will look at how you funded it. If you used marital assets to fund the trust, it would be divided between the two of you just like any other marital asset. However, it may be treated as your personal property if you funded it with your separate assets, such as your inheritance money, even if you created it during your marriage.

What Type of Trust Is It?

The court will also consider the type of trust you are dealing with. If it is an irrevocable trust, then you have no say in it irrespective of who funded it. By definition, an irrevocable trust cannot be modified or canceled; the beneficiary (even if they are your soon-to-be-divorces spouse) will still have their rights to the trust. In fact, it is the beneficiary who can voluntarily relinquish their rights to the trust.

What Does Your State's Law Say?

All the above questions will mean naught if state's law says otherwise. For example, the general agreement is that trust funds funded with premarital property remain the property of the spouse who funded it. In essence, when your partner agrees (by signing the relevant documents) to a trust fund created by your premarital assets, it means that they recognize the fund as your separate property. However, some states don't recognize such agreements, so your partner might still have a say on your trust fund.

In short, there is no simple answer as to whether the trust you created will be divided during divorce. It all depends on different factors, some of which have been described above. Talk to a lawyer or law firm like Leonard & Kershaw to analyze your particular situation and advise you on what to expect.