What Happens to a Trust in a Divorce?
A trust allows you to set aside assets for your spouse, children, or another beneficiary. Some types of trusts allow you to spare your heirs steep taxes, and you could ensure that the beneficiaries you choose spend their inheritance wisely.
Trusts are relatively rare. According to the AARP, just 4 out of 10 people have them. But during divorce, couples must decide how to split their assets. Sometimes, couples eye the amount of money inside the trust and wonder what should happen next.
Trusts are complicated, and the laws surrounding them are difficult and hard to understand. For many divorcing people, it's best to hire a lawyer and ask for advice about what to do next.
Main types of trusts
Accountants and financial planners create varied tools to help their clients save money and protect their assets. Companies can provide a staggering number of trust options to people who want to preserve their legacy.
That said, most trusts can be placed into one of two groups: revocable trusts or irrevocable trusts.
A revocable trust may also be called a living trust. While you're alive, you retain control of your trust assets, and you can alter all sorts of details when your circumstances change. You can also dissolve the trust at any point. The money in this account remains yours.
An irrevocable trust transfers assets from your estate to the beneficiary. Once an account like this is established, you can't change the terms in any way. And you can't dissolve the account, even if you need the money later.
Who gets the money?
A trust is designed with longevity in mind. People who create them hope to support someone or something else. State laws can restrain how trusts function during a divorce, but a few general rules could apply.
Couples often create revocable trusts to pass their assets along to their children or other heirs. Since revocable trusts can be changed, some couples opt to dissolve them during divorce and split the contents evenly, as they would with any other shared property.
When couples create irrevocable trusts, they pass assets to another party. When they tally up what they have, these trusts aren't counted. After all, they no longer own what's inside them. These trusts remain outside divorce discussions.
Property inherited from a trust
In most states, an inherited property is considered separate property. For example, if your aunt gave you $10,000 in a trust, that money remains yours during the divorce. The divided property includes assets both parties owned during the marriage.
Creating a trust during divorce
Some couples want to ensure that their children – not their spouses – benefit from the split. Setting up a trust could be a good way to do just that.
But couples must put money in there that is communal, or shared, to make this option work. They can’t set up trusts to hide money from one another.
After the divorce is final, parties should look at the trusts that remain and make sure they don’t need to make changes to them. For example, if you retain exclusive rights to your revocable trust in return for a smaller piece of the estate, you probably want to make sure your ex-partner isn’t listed as the beneficiary when you die.
Should you get help?
Untangling the rules about estates isn’t easy. It’s always smart to get legal help when you’re dealing with complicated divorce scenarios, including trusts and pensions. The advice you get can help you make smart fiscal decisions.
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