Trusts can do a lot more than pass on family riches — a well-crafted trust can ensure that your children and grandchildren will inherit your wealth and not to an ex-spouse in the event of a divorce. And not only can a trust protect your assets from divorce, but from creditors and taxes as well.
How Do Trusts Protect Your Assets From Divorce?
Broadly speaking, trusts can shield your assets from divorce because assets in a trust are not owned by you. Trust property is owned by the trust itself, a legal entity. The trust’s assets are controlled by a trustee on behalf of the trust’s beneficiaries. If you are not a trust beneficiary, your ex-spouse is not entitled to the trust’s assets in a divorce.
What Kinds of Trusts Can Protect Your Assets?
Only trusts containing separate property, those set up as irrevocable trusts, and those with third party beneficiaries can protect your assets. Let’s look at each of these elements.
Does the Trust Contain Separate Property or Community Property?
Separate property is shielded from your spouse in a California divorce. Separate property is the property you owned before the marriage by earning or acquiring it — including assets given to you as a gift or inheritance not to be owned jointly with your spouse.
This is different from community property, which is property either you or your spouse earned or acquired during marriage. This includes any assets you acquired from the day of your wedding to the day of your separation. In California, community property is split evenly between you and your spouse in divorce.
The kind of trust that best protects your assets from divorce is one that contains separate property. The trust does not need to be created before marriage. If it is established before marriage, any property transferred into it after marriage cannot be community property. Otherwise, your spouse could have rights to it in divorce.
Is It an Irrevocable Trust or Revocable Trust?
Irrevocable trusts cannot be transferred back to you. They are different from revocable trusts, which contain assets that can be transferred back into your own name.
Irrevocable trusts containing community property could even protect those assets in a divorce proceeding. Community property in an irrevocable trust could even avoid becoming part of the marital estate. This would apply if you and your spouse jointly agreed to transfer the community property into the irrevocable trust.
Irrevocable self-settled trusts also shield your assets from divorce because you, as grantor, do not serve as trustee. Instead, an independent third party is the trustee and makes distributions at their own discretion. As a mere discretionary beneficiary of the trust, you have no control over the distribution of trust assets. So those assets will not become part of the marital estate for splitting in a divorce.
What Is a Third-Party Trust?
Third-party discretionary trusts are created and funded entirely for a third-party’s benefit. Often, they are created for children or grandchildren and funded within the parents’ or grandparents’ lifetime. To best protect assets from divorce, third-party trusts should name anyone but a child beneficiary as the trustee.
Note that any distributions made to a married beneficiary will become marital property and split with their spouse in divorce. Therefore, you should advise your child or grandchild beneficiary to deposit the distributions into an account in their name only. Any distribution deposited into a shared account will become marital property.
Contact a Palmdale CA Estate Planning Attorney
Trusts are an attractive option to consider in your estate planning, as they can be flexibly designed to meet your personal goals. At Herbert Law Office, we can help you build a trust that protects your hard-earned assets and ensures that your wishes are carried out. Speak to an experienced Palmdale CA estate planning attorney to learn more how to protect your assets from divorce.