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What Happens to Trust Funds in a Divorce?

Posted by Mariya Furman | Feb 01, 2023

A trust fund is a legal estate planning tool that holds property or assets for someone, such as money, property, stocks, bonds, a business, or a combination of different assets.

Trust funds are managed by a trustee, who must act for the grantor's and beneficiary's benefit. They can take many forms and provide certain tax benefits, financial protections, and support for anyone involved.

What you need to know about trust funds and a divorce is that some trusts protect assets and other do not. In addition, trusts usually are privately administered.

What Happens to Trust Funds in a Divorce?
In California, a trust fund created before getting married is considered separate property.

In California, trusts created before marriage is considered separate property. Other trusts, such as domestic or foreign asset protection, revocable, and irrevocable trusts, also protect assets in a divorce.

Business owners and people with a high net worth will typically seek ways to protect their assets. Sometimes, however, these same people will not try to safeguard their assets when they marry in California.

While nobody expects to get divorced when they are getting married, any person with substantial business interest or assets would be wise to have a strategy in place to protect their interest in case of the dissolution of their marriage later.

Thus, establishing trust for a business or an accumulation of wealth is one way to protect their assets in a divorce. In addition, a trust is one way to manage assets, protect a business, manage gifts, and protect money from creditors.

As noted, in California, any property owned or trusts established by a spouse before they get married is classified as separate property and will not be divided between spouses when they divorce. Let's review this vital subject in more detail below.

What Should You Know About Trust Funds and Divorce?

 A common way for someone to protect their assets is by placing them into a trust. This strategy could also protect their assets from creditors or someone who wants to file a lawsuit against a business owner. But, as noted, they can also protect assets in a divorce, which often makes the case more complex.

Trusts are legal arrangements where a trustee manages assets placed in it for the benefit of the beneficiary. Some of the common assets placed in a trust include the following:

  • real property;
  • personal property; and
  • financial accounts.

The trust document guides how the trust assets will be managed and distributed to the beneficiaries. The trustee has a fiduciary duty to follow the instructions within the trust document.

People who have received an inheritance, own a business or professional practice, or have other property they want to keep separate from their spouse can create a trust to protect them.

Since California is a community property state, any property acquired during the marriage is subjected to equal distribution between the spouses in case of divorce.

Suppose a trust beneficiary receives a cash distribution during the marriage. In that case, it's considered their separate property unless it's turned into marital or commingled property.

If a spouse is named as the trust's beneficiary, this can protect assets. For example, suppose a spouse is not allowed to demand a distribution. In that case, the property is not considered their assets, and they will not be subjected to marital property division in case of a divorce.

What About a Domestic or Foreign Asset Protection Trust?

If you are a business owner planning on getting married, you would be wise to draft a domestic or foreign asset protection trust as it transfers business ownership and other types of separate property to the trust.

Domestic or Foreign Asset Protection Trust
Business owners should seek help from a lawyer.

Suppose the marriage ends up in a California divorce court. In that case, the assets will not be equally divided because the spouse does not own them.

A domestic asset protection is an irrevocable and self-settled trust. The beneficiary is the grantor that can access the trust funds. This trust can be subjected to exemption claims, such as the following:

Both of these trusts listed above are often preferred for business owners of the following:

  • limited partnerships;
  • limited liability companies;
  • C-corporations.

All business owners should seek legal guidance from a qualified lawyer before they draft a trust to ensure it's lawful and enforceable.

Revocable or Irrevocable Trust

Some other options for a trust are revocable and irrevocable trusts, which parents typically create to manage gifts and inheritance.

In a revocable trust, the holder has primary control over when and if the benefits are distributed. An irrevocable trust involves income interest, the level of control the beneficiary has in determining the distribution of the assets in the trust.

Simply put, the trust holder decides when assets are distributed. In both scenarios, the assets are not considered the beneficiary's property because they don't control the distribution.

Suppose an irrevocable trust requires holders to distribute the assets regularly. In that case, any money transferred to the beneficiary will be considered their property and could be divided during divorce proceedings.

What About Trusts and Child Support?

While assets held in a trust might not be subjected to equal division in case of a divorce, they might still impact issues such as child support.

Suppose a California family court decides that a parent's one-time gift or inheritance is a special circumstance that allows them to justify deviating from the child support guidelines. In that case, it could be considered a child support award.

Trust Funds and Child Support
Contact our law firm for legal assistance.

Further, if a spouse receives regular disbursements from trust assets, the court can consider its income when calculating child support. A trustee's primary objective is to protect trust assets. Still, they can't act in bad faith or with an improper motive.

Any trustee who withholds trust funds for the purpose of avoiding paying child support for a beneficiary can be found in violation of the rules and forced by the court to make trust distributions to pay child support or arrears.

After a beneficiary receives a trust disbursement, a judge can order the beneficiary to pay child support arrears with the funds. Further, a “trust garnishment” could be placed on trust income to satisfy a child support obligation.

If you are considering protecting your assets in a divorce or are planning to marry a trust fund beneficiary, we can help you. Our certified family law specialist understands the often complicated rules regarding trusts, community property, separate property, and divorce.

If you want to discuss a legal strategy that protects your best interests, you can contact our law firm for a free case evaluation by phone or by using the contact form. The Los Angeles family law and divorce attorneys at Furman & Zavatsky provide legal representation across Southern California.

About the Author

Mariya Furman

Attorney Mariya Furman is licensed to practice before all of the Courts of the State of California, the United States Court of Appeals for the Ninth Circuit, and the United States District Court for the Central District of California. After receiving a Bachelor of Arts degree from Case Illinois I...

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