Using a Trust to Protect Assets in Divorce Proceedings
December 15th, 2020
Most of us work hard to provide for our families. But what happens to those hard-earned assets when a family is changed by divorce? The answer, too often, is that they end up going to a divorcing spouse. Planning for the possibility of a divorce—your own, or your child’s—is never pleasant. But if you want to protect assets from falling into unintended hands, it is wise to at least consider the possibility of a divorce in the future.
The good news is that creating a trust offers a multitude of benefits, and can protect your assets, or assets you intend for your child, from a divorce. A trust keeps assets from having to go through probate and allows you to control how trust income and assets will be distributed. Even if no beneficiary of your trust goes through a divorce, these other benefits will likely make having the trust worthwhile.
Protecting Assets With a Trust in the Event of Your Divorce
Divorce property division in Ohio is based on the principle of “equitable distribution:” essentially, a court will divide marital property between divorcing spouses in a way that is fair and equitable. As a general rule, this usually ends up being roughly equal. How does using a trust to protect assets in divorce work? By removing them from the category of “marital” property. How exactly you do this depends on your circumstances.
If you are not yet married, but have assets you want to protect in the event of a possible future divorce, you can place those assets in a living trust. With a living trust, you can be the creator (grantor) of the trust, the trustee who manages the assets, and the beneficiary. In the trust document, you name a successor beneficiary to inherit the assets upon your death. As long as assets are owned by the trust, they should not be treated as marital assets in a divorce. You can also use a legacy trust in prenuptial planning.
Ordinarily, assets you owned before your marriage would be treated as separate, not marital, assets. But what often happens is that those assets get “commingled” with marital assets—say, by being placed in a joint bank account. By keeping your separate assets in a trust, they are better protected from commingling and from being divided in your divorce.
If you are already married, you can still protect assets from divorce with a trust. One of the most secure ways to do so is with a Domestic Asset Protection Trust (DAPT). A DAPT is an irrevocable trust, meaning that once you create the trust and fund it, you can no longer terminate the trust and reclaim the assets.
This has definite advantages: if the assets are owned by the trust, and you cannot get them back, they cannot be divided in a divorce as marital property. They are also protected against other creditors. Assets in a DAPT are kept safe for beneficiaries of the trust, which could include other members of your family of origin, or your own children. Beneficiaries receive distributions from the trust according to the terms of the trust instrument you created.
Of course, the fact that you cannot reclaim assets from an irrevocable trust has downsides, too—most notably the fact that if you later need the money or other assets you placed in the trust, they are outside your reach as well as your spouse’s. Before creating an irrevocable trust, you should be sure you can afford to spare the assets in it.
Protecting Assets From Your Child’s Divorce
Many people are more worried about protecting assets from a child’s potential divorce than from their own. By the time your child is old enough to marry, you may have accumulated significant assets (and you can’t control who your child will choose to marry).
Putting assets in a trust can help you avoid a scenario like the following. You accumulate a tidy nest egg and enjoy a comfortable retirement with your spouse, who predeceases you. Your will leaves your entire estate, including your home, bank accounts, and investments, to your only child.
When you die, your child sells your house and puts the proceeds, along with the cash from your bank accounts, into the joint bank account they share with their spouse. Your stocks and bonds are rolled into their investment account.
A year or so later, their spouse files for divorce. In Ohio, inheritances are considered separate property, but since your child commingled their inheritance with marital property, the judge in their case treats the inherited assets as marital, and awards roughly half of them to your child’s now ex-spouse.
By placing the assets in a trust, rather than leaving them to your child in your will, you could avoid that outcome and protect your child’s inheritance. If you have questions about using a trust to protect assets in divorce, we invite you to contact Gudorf Law Group to schedule a consultation.