FAMILY LAW: Know Thy Trust: Orchestrating Assets in Divorce Cases

Vol. 33 No. 1

By

Deborah Rysso is an elder law attorney and partner at Rysso & Wingfield, PLLC, in Traverse City, Michigan.

All trusts are not created equal. But no matter what kind of trust it is, chances are good that it will need to be addressed and changed during the course of a divorce. Family law attorneys must pay particular attention to trusts that surface in a divorce case. At a minimum, they must recognize that a spouse should be removed as a fiduciary and that other potentially thorny situations need to be identified.

Structure of a trust. The person setting up a trust is known as the “grantor” (or “settlor” or “trustmaker”). In the trust document, the grantor identifies who will serve as “initial” and “successor” trustees. The trustee has a duty to follow the terms of the trust. The grantor also identifies lifetime and at-death beneficiaries, which are the people or organizations to receive distributions from the trust.

A trust is part of a “complete estate plan.” A complete estate plan includes all the common, frequently necessary documents such as a pour-over will, assignment of personal property, financial durable power of attorney, health care durable power of attorney, and deeds transferring real estate into the trust. These documents—in addition to the trust—may need to be changed during the divorce.

A client must change the estate plan during a divorce because, generally, the soon-to-be-ex-spouse is named to serve as a fiduciary and is a beneficiary. Often, divorcing spouses want these provisions removed. Even when spouses do not want to remove the spouse as a fiduciary and/or beneficiary, the documents should be updated to clarify that even though spouses are divorcing, they want to continue to include each other in their estate plans. This eliminates any ambiguity as to what the spouses’ intentions are post-divorce. Finally, couples with minor children should identify future guardians and/or conservators for the children in the event that parents predecease children or become unable to care for children younger than 18 years old.

Trusts created during a person’s lifetime often are called “living trusts.” Others are known as “testamentary” trusts and are formed via a last will and testament and, therefore, begin after death.

Trust funding. Individuals “fund” a trust by transferring assets into the name of the trust. Usually the attorney handles the drafting and recording of deeds into the trust, but the client is responsible (with the attorney’s guidance) for transferring other assets into the trust. Once transferred, the trust, rather than the individual, owns the assets, and the terms of the trust guide asset use.

One of the first tasks for a divorce attorney is to ascertain which assets are owned by the trust or which assets list the trust as beneficiary. If the trust is being amended or revoked, asset ownership and beneficiary designations must be adjusted accordingly. Further, depending on the terms of the trust, trust assets may or may not be available, which may affect the terms of the divorce judgment.

Can the trust be changed? The first question to answer is whether the trust is revocable or irrevocable. These terms mean simply: Can the trust be changed or revoked, or does the trust prohibit change or revocation? The terms “revocable” and “irrevocable” do not delineate what type of trust is involved. Different types of trusts may either be revocable or irrevocable, but all revocable trusts are not the same and all irrevocable trusts are not the same.

This is a common point of confusion. People will often say, “She has an irrevocable trust.” This phrasing alone is insufficient to tell what type of trust she has, or more succinctly, how the trust functions. The most common type of trust is a revocable living trust, often called a “family trust.” However, there are many other types of trusts.

If the estate plan is revocable, and if your client wants to change it, he or she can and should do so. Simply draft a letter advising the other party or his or her counsel that documents have been revoked and clarify that the other party is no longer a fiduciary under the particular documents.

Your client should then proceed to draft and sign new documents. You may want to refer the client back to his or her estate planning attorney to ensure that this is done correctly and that the new estate plan reflects the terms of the divorce judgment.

If your client’s estate plan is irrevocable, then review with your client the effect of not being able to change the document. Frequently, irrevocable trusts set up by married couples are for the benefit of their children, and the parents are comfortable knowing that the trust will continue to benefit the children. If there is a compelling need for a change of trustee, petition the court for such a modification. Other irrevocable trusts may not be part of the divorce judgment and need careful scrutiny.

Issues easily overlooked. Quite often the client does not fully understand estate planning or details of the divorce and fails to complete his or her tasks pertaining to estate planning or the divorce judgment. Trusts are often left unfunded—meaning that the trust is drafted and signed, but assets to fund it never get transferred. This can happen with real estate, stocks and bonds, bank accounts, business assets, etc., and depending on the timing, can affect divorcing parties long after the divorce.

Attempts to hide/shield trust assets. Divorcing parties often have the desire or intention to hide or shield assets from their spouses. They sometimes get the idea that a trust might serve that purpose. This depends on the asset and state rules.

Attempting to use a trust to prevent a spouse from having a claim against it usually won’t work, especially if trust assets are marital or community property. Like any other attempt to hide an asset, this would likely be frowned upon by a judge and be considered a fraudulent transfer. A judge can usually modify terms of a trust so that even if the trust stipulates it is unavailable to the divorcing parties, the judge can make it available.

There are, however, occasions when transferring assets to a trust is permissible to prevent them from becoming marital property. In noncommunity-property states, setting up a trust to segregate inherited assets from marital assets ensures that those assets pass to the spouse’s family members rather than to the other spouse’s family members. This practice is common and not indicative of an attempt to act unscrupulously.

Assets transferred into a trust prior to marriage may be shielded from a claim against a divorcing spouse, depending on the terms of the trust and the laws of the state. Likewise, a beneficiary of an irrevocable trust usually can safeguard trust assets from a spouse’s claim. One caveat to remember is that regardless of the type of trust fund, a court may include income from the trust when calculating child and spousal support.

A divorce attorney for a spouse who has an irrevocable trust should carefully consider the terms of the trust when attempting to divide the marital estate. Irrevocable trusts can have limitations on access to the funds. So even though a division of the marital estate may seem fair on paper, the spouse with the trust may end up not having sufficient access to cash.

Conclusion. If a trust is confusing, ask an experienced trust lawyer for his or her opinion as to its effect on the divorce. Because trusts are written for different purposes, but these purposes are not explained in the documents themselves, a trust can be confusing when it veers beyond traditional templates. Trusts also can be poorly drafted. Asking another lawyer for his or her opinion may save you and your client from serious trouble down the road.

ABA Section of Family Law

This article is an abridged and edited version of one that originally appeared on page 6 of Family Advocate, Fall 2015 (38:2).

For more information or to obtain a copy of the periodical in which the full article appears, please call the ABA Service Center at 800/285-2221.

WEBSITE: americanbar.org/family

PERIODICALS: Family Advocate, quarterly magazine (three issues with how-to articles and current trends and a fourth “Client Manual” issue for lawyers and clients); Family Law Quarterly, scholarly journal; Case Update, monthly electronic digest of family law cases nationwide; eNews, monthly electronic newsletter.

CLE AND OTHER PROGRAMS: Monthly webinars, spring/fall conferences, and the ABA Family Law Trial Advocacy Institute, the premier trial training program for family lawyers.

BOOKS AND OTHER RECENT PUBLICATIONS: Child-Custody Jurisdiction: The UCCJEA & PKPA; Complete Guide to Mediation, 2d ed.; The Business Tax Return Handbook, 4th ed.; Client Letters for the Family Lawyer; Becoming the Tech-Savvy Family Lawyer.

Advertisement

Advertisement: LawPay: The Way ABA Attorneys Get Paid

 

 

MyCase. Start your free trial. More billable hours. Everything all in one place.
Thomson Reuters ad. Put accurate law into action. Practical Law helps you move forward with fearless confidence. Request a free trial. (right arrow). Thomson Reuters logo. Thomson Reuters. The answer company.


  • About GPSolo magazine

  • Subscriptions

  • More Information

  • Contact Us