Enduring a divorce is already complicated on its own. What makes it more complicated is the involvement of one or more trusts, leaving one or both spouses confused about how to move forward. If this is your current dilemma, a trust litigation attorney at Litvak Litvak Mehrtens and Carlton want to help. Everyone deserves the smoothest divorce process possible, especially with trusts in the picture. Call us today at 303-951-4506 and we’ll take care of everything for you.
What Is a Trust?
A trust is a legal arrangement that allows a trustee to manage and direct assets in a trust fund on behalf of a beneficiary. Having a trust gives a trustee more options in asset management, whether they want to protect their wealth or simply pass it down to the next generation. Trusts are often associated with rich families, but you don’t have to be a billionaire to create and benefit from a trust.
What is the Purpose of a Trust?
Oftentimes, trusts provide a lot of crucial planning advantages that wills don’t provide. For example, a trust would allow family members a quick estate settling process. This is because a trust would save them from dividing assets through a probate court after you die. By creating a trust, you can also:
Determine how to distribute your assets and when your beneficiaries will have access to them
Prevent your beneficiaries from paying estate taxes and court fees
Protect your assets from loss through divorce settlements
Direct where assets should go if a beneficiary dies
Protect your assets from your beneficiary’s creditors
Types of Trusts
There are multiple types of trusts to choose from, and they all serve different purposes.
One of the most common trusts available is a living, or revocable, trust which allows you to put assets in a trust while you’re still alive. Revocable trusts also allow you to choose which beneficiary controls the trust once you die. You may want to create a revocable trust if you:
Want someone else to accept responsibility for some or all of your property
Have a business and want to make sure it operates smoothly whenever you die or become disabled
Want to reduce the chances of your will being challenged
Desire to protect your assets from yourself or your beneficiaries in the event of incompetence or incapacity
However, there is a downside to revocable trusts. You won’t escape estate taxes while you’re alive, even if revocable trusts minimize taxes after you die.
Comparatively, you can’t alter an irrevocable trust once it’s created. Additionally, you give up full control of the assets that you put into it. One of the benefits of an irrevocable trust, however, is that it protects beneficiaries from probate court and estate taxes.
Marital or “A” Trusts
This type of trust essentially gives your spouse everything they’ll need when you die. All income from the assets included in the trust will go to the surviving spouse. When the remaining spouse dies, the trust will then go to the couple’s chosen heirs.
Credit Shelter Trusts
This type of trust allows a married couple to take full advantage of tax exemptions from their estate. In 2021, that added up to $11.7 million per person, or $23.4 million per couple according to the IRS. In a credit shelter trust, the surviving spouse can receive income from the trust’s assets until they die. However when both spouses die, assets worth more than this amount are usually subject to a 40% estate tax.
Charitable Remainder Trust
A charitable remainder trust establishes a certain amount of income for beneficiaries for a certain period of time. The rest of the money goes to specific charities that a trustee chooses before they die.
How Do I Create a Trust?
Creating a trust is a fairly simple process made easier by a trust litigation attorney. Here are the basic steps in creating the perfect trust for you, your family, and your assets:
Why do you want the trust? This is an important question to ask yourself to determine what type of trust is best for you. Do you need a trust that provides tax benefits, or do you need a living trust? Do you need a trust that protects your assets from an incompetent beneficiary? You should think about these things and more when picking the best trust for you.
Pick the right trust litigation attorney. Obviously, not all trusts are the same, so it’s important to pick the right attorney with the experience you need. Additionally, you need to know exactly how much your attorney will charge you for helping you create a trust. At Litvak Litvak Mehrtens and Carlton, we can help you with all this and more.
Lastly, establish the trust. Once you’ve picked the right trust litigation attorney, you’ll work through the specifics of a trust that meets your needs. Make sure to ask your attorney what your trust specifically can and can’t pay for.
What Happens to Trusts in a Divorce?
Divorce is already complicated on its own, but what makes it even more complicated is if one or both spouses have a trust. For example, you might have created a revocable trust to avoid future probates with no idea that you would get divorced one day. Unfortunately, your revocable trust could have property that your spouse is entitled to, even in a divorce. So what happens now?
Are Trusts Marital or Separate Property in a Divorce?
Property is generally put into two categories when a divorce happens: separate property and marital property.
Separate property is either acquired before marriage or through inheritance during the marriage. Basically, separate property belongs to the spouse who originally acquired it.
Meanwhile, marital property is property that’s acquired after marriage. So when a couple divorces, most marital property divides evenly between the two spouses. But property division can be complicated when it includes:
- Deferred compensation plans
What Happens if My Divorce Involves Trusts?
Expanding on the last bullet point above, deciding who gets what in a divorce that involves a trust depends on the type of trust and when a spouse acquired the assets.
Revocable Trust with Non-Marital Property
If a spouse created a revocable trust before marriage and didn’t add property to it after the marriage, then it’s non-marital property. This means the trust assets are fully theirs. Non-marital property isn’t up for division during divorce.
Revocable Trust with Marital and Non-Marital Property
Meanwhile, if a spouse’s trust has both marital and non-marital property, their ability to claim the non-marital portion in a divorce depends on whether they can prove the identity of their non-marital contributions. However, if no one can prove who contributed what assets, the court may treat the entire trust as divisible marital property.
Revocable Trust Established by a Third Party
But what if one of the spouses is a beneficiary of a previously established revocable trust? Meaning, a parent or a grandparent established the trust. In this case, the spouse has no property right in the trust assets because the parent (or grandparent) owns it and already established the rules. Therefore, the trust isn’t included in divisible marital property.
One Spouse as the Settler of an Irrevocable Trust
What if a spouse is the settler of an irrevocable trust? In this case, the spouse has no power to terminate the trust. After a spouse transfers marital or non-marital property to an irrevocable trust, the trust is now the property owner. Many states often rule that a divorce court has the power over an irrevocable trust only if it’s a party to the lawsuit. This means if a spouse wants to take action affecting the trust, they must sue the trust as if it’s an additional defendant in a divorce.
Irrevocable Trust Established by a Third Party
Comparatively to assets of a revocable trust established by a third party, irrevocable trust assets aren’t considered marital property. A spouse who is the beneficiary of the irrevocable trust doesn’t have property rights in assets that divide in a divorce. However, if one spouse is very wealthy due to an irrevocable trust, a judge could decide to award the other spouse more marital property for the sake of a fair division.
Do I Need a Trust Litigation Attorney?
Involving an experienced trust litigation attorney is the only way you can fully understand your rights in a divorce complicated by trusts. You may also need a trust litigation attorney for these reasons:
Wanting a say in when your beneficiaries will receive their inheritance
Wanting to lower your estate taxes
Not wanting your family or beneficiaries to go through probate court
Making sure your trust is valid and properly executed following your death
If any of these circumstances apply to you, you may need a trust litigation attorney.
Contact Litvak Litvak Mehrtens and Carlton Today
Trust litigation attorneys at Litvak Litvak Mehrtens and Carlton have years of experience in the realm of trusts and divorce. Call us at 303-951-4506 for a consultation if one or more trusts is complicating your divorce.