The question of whether a revocable trust can shield assets from divorce is complex and highly dependent on state law, the specific circumstances of the case, and how the trust was established and managed. While a revocable trust isn’t a foolproof shield, it *can* offer a degree of protection, but it’s crucial to understand its limitations. A revocable trust, sometimes called a living trust, allows you to control your assets during your lifetime and transfer them to beneficiaries after your death. However, because you retain control and access to the assets, they are generally considered available assets in a divorce proceeding. It’s important to remember that attempting to fraudulently transfer assets to a trust *during* divorce proceedings is almost certain to be viewed negatively by the court and can lead to severe penalties. Approximately 40-50% of marriages in the United States end in divorce, making asset protection during marital breakdown a genuine concern for many individuals.
What assets are typically considered marital property?
In most states, assets acquired *during* the marriage are considered marital property, regardless of whose name is on the title. This includes income earned, property purchased with that income, and even the increase in value of separate property (assets owned before the marriage) if it’s been commingled with marital assets. Separate property generally remains separate, but proving it can be difficult if it has been mixed with marital funds. For instance, if you inherited a sum of money *before* the marriage and kept it in a separate account, that’s likely separate property; however, if you deposited it into a joint account used for family expenses, it could be considered commingled and therefore marital property. California, a community property state, can potentially divide marital assets equally, while other states utilize equitable distribution, which means assets are divided fairly, but not necessarily equally.
When is a trust considered a separate asset?
A trust can be considered separate property, and thus shielded from divorce, if it was established with entirely separate assets *before* the marriage. This is where careful documentation is critical. You must be able to prove the origin of the funds used to fund the trust, demonstrating they weren’t acquired during the marriage. The trust document itself should clearly state that it holds separate property. Furthermore, maintaining strict separation between trust assets and marital assets is essential. No trust funds should be used for marital expenses, and no marital funds should be deposited into the trust. This is because commingling trust assets with marital assets can blur the lines and lead a court to view the trust assets as marital property.
Could establishing a trust during a divorce be considered fraudulent?
Absolutely. Establishing a trust *during* divorce proceedings, or shortly before, with the intent to hide assets from the court, is almost certainly considered fraudulent conveyance. This is a serious offense and can lead to severe penalties, including fines, legal fees, and even criminal charges. Courts are adept at uncovering such schemes, and attempting to hide assets will almost always backfire. The legal principle of “equitable distribution” aims for fairness, and concealing assets is a direct violation of that principle. In fact, courts can “pierce the veil” of the trust, meaning they can disregard the trust structure and treat the assets as if they were still owned directly by the individual.
What about assets funded into a trust *after* the marriage began?
Assets funded into a trust *after* the marriage has begun are generally considered marital property, even if the trust itself was established before the marriage. The timing of when the assets were placed in the trust is critical. If you transfer marital assets into a trust during the marriage, they remain marital property subject to division in a divorce. However, any income generated by those assets *within* the trust may be treated differently depending on state law. Some states consider this income separate property, while others consider it marital property. Careful estate planning with an experienced attorney is necessary to understand how these assets will be treated.
I remember a client who thought he was safe…
I once worked with a gentleman, let’s call him Robert, who believed he had insulated his assets by creating a revocable trust shortly *before* his marriage. He funded it with funds he claimed were inherited, but lacked adequate documentation. During his divorce, his wife’s attorney discovered a significant deposit into his account just prior to the inheritance date, demonstrating the funds were actually earned during the marriage. The court disregarded the trust entirely, treating the assets as marital property. Robert was not only facing a substantial property division, but also significant legal fees for the failed attempt to shield his assets. It was a painful, and expensive, lesson in the importance of proper documentation and timing.
But another client planned ahead and it worked beautifully…
Contrast that with Sarah, who came to me *before* her marriage. She had inherited a substantial sum and wanted to protect it in the event of a divorce. We established a revocable trust, carefully documenting the source of the funds, and ensuring the trust remained completely separate from any marital assets. Throughout her marriage, she never commingled funds, and the trust operated independently. Years later, when her marriage unfortunately ended, the court recognized the trust as separate property, shielding those assets from division. Sarah was immensely relieved and grateful that she had taken the proactive steps to protect her inheritance. This demonstrates that with careful planning and execution, a revocable trust can be a valuable tool in asset protection.
What steps can I take to maximize asset protection with a trust?
To maximize the potential for asset protection with a revocable trust, several steps are crucial. First, establish the trust *before* the marriage, if possible. Second, fund the trust with documented separate property. Third, maintain strict separation between trust assets and marital assets – no commingling. Fourth, keep meticulous records of all trust transactions. Finally, consult with an experienced estate planning attorney to ensure the trust is properly structured and administered according to the laws of your state. Remember, a revocable trust is not a foolproof shield, but with careful planning and execution, it can provide a significant degree of protection. Statistics from the American Academy of Matrimonial Lawyers show that roughly 70% of divorce cases involve disputes over property division, highlighting the importance of proactive asset protection planning.
About Steven F. Bliss Esq. at San Diego Probate Law:
Secure Your Family’s Future with San Diego’s Trusted Trust Attorney. Minimize estate taxes with stress-free Probate. We craft wills, trusts, & customized plans to ensure your wishes are met and loved ones protected.
My skills are as follows:
● Probate Law: Efficiently navigate the court process.
● Probate Law: Minimize taxes & distribute assets smoothly.
● Trust Law: Protect your legacy & loved ones with wills & trusts.
● Bankruptcy Law: Knowledgeable guidance helping clients regain financial stability.
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Feel free to ask Attorney Steve Bliss about: “Can a trust own vehicles?” or “Can I sell property during the probate process?” and even “Should I name a bank or institution as trustee?” Or any other related questions that you may have about Probate or my trust law practice.