How to Protect a Trust Fund in a Divorce

When significant assets like a trust fund are involved in a divorce, couples may wonder whether it will be considered marital property and how the court might divide it in a settlement. The type of trust, how the funds are managed and when it was established can all influence the outcome of a divorce. Additionally, state laws and specific terms of the trust agreement play a significant role in determining what happens to these assets.

A financial advisor can help you during divorce by evaluating settlement options, dividing assets and planning for your financial future.

How a Trust Fund Works

A trust fund is a legal arrangement where assets are held by one party (the trustee) for the benefit of another person (the beneficiary). The person who creates the trust (the grantor or settlor) transfers ownership of property to the trust. A trustee then manages these assets according to specific instructions laid out in the trust documents.

Trust funds can hold different types of assets, including cash, investments, real estate and business ownership interests. The trust fund provides a way to structure the distribution of these assets.

Different types of trusts serve different purposes. Revocable trusts let the grantor retain control and make changes during their lifetime. Irrevocable trusts, once established, generally cannot be modified and often provide tax advantages and asset protection. Specialized trusts, such as spendthrift trusts, protect assets from beneficiaries’ creditors, while educational trusts specifically fund educational expenses.

How Assets Are Divided in a Divorce

State laws determine how assets are divided in divorce. Most states follow equitable distribution principles, meaning assets are divided fairly but not necessarily equally. Factors like each spouse’s earning capacity, contributions to the marriage and financial needs influence these decisions. In contrast, community property states such as California, Texas and Washington typically split marital assets 50/50, regardless of individual circumstances.

Courts classify assets as either marital or separate property during divorce. Marital property generally includes assets acquired during the marriage, regardless of whose name appears on the title. Separate property typically includes assets owned before marriage, as well as inheritances and gifts specifically given to one spouse. These usually remain with the original owner after divorce.

Prenuptial agreements can significantly impact how assets are divided in a divorce. These legal documents allow couples to designate certain assets as separate property, thus protecting them from division. However, courts may scrutinize prenups for fairness and proper execution, potentially invalidating agreements that appear unconscionable or were signed under duress.

Are Assets in a Trust Fund Protected From a Divorce?

A trust fund may protect certain assets during divorce proceedings, but the level of protection depends on several critical factors. Generally, third-party trusts established by someone other than the divorcing spouses offer stronger protection than self-settled trusts. When a parent or grandparent creates a trust for their descendant, those assets are typically considered separate property rather than marital assets. This places them outside the divorce settlement equation.

When a trust was established also plays an important role. Courts generally grant more protection to trusts created before marriage. Courts often view premarital trusts as separate property, especially if the trust assets were never commingled with marital funds or used for family expenses.

Irrevocable trusts typically offer stronger divorce protection than revocable trusts. Once assets are placed in an irrevocable trust, the grantor relinquishes control. This makes it difficult for courts to consider these assets part of the marital estate. Conversely, revocable trusts, where the grantor maintains control, may be more vulnerable during divorce proceedings since the assets remain accessible.

The protection level of trust fund assets during divorce varies considerably depending on state laws. Some states offer robust protection for certain trust structures, while others grant courts broader authority to include trust assets in divorce settlements. Consulting with an attorney familiar with trust and divorce laws in your specific jurisdiction is essential for understanding trust fund asset protection in divorce.

How to Protect Assets in a Divorce

Protecting your assets during divorce requires understanding legal options and taking proactive steps. Here are key strategies to consider when seeking to protect assets during divorce:

Consider a Prenuptial or Postnuptial Agreement

These documents outline how assets will be divided if the marriage ends. A prenuptial agreement is signed before marriage, while a postnuptial is created during the marriage. Both can clearly outline which assets remain separate property, potentially saving significant stress and legal costs during divorce proceedings.

Understand Separate vs. Marital Property

Assets acquired before marriage or received as gifts or inheritances typically qualify as separate property. This distinction is vital, as separate assets are generally not subject to division in divorce. However, commingling separate assets with marital funds can transform them into shared property.

Establish Trusts to Protect Certain Assets

Certain trusts created before marriage can help shield assets from division. Irrevocable trusts provide stronger protection because control of the assets is transferred to a trustee. It’s especially useful for protecting family wealth or inheritance that you want to keep separate from marital assets.

Document Everything and Maintain Transparency

Keep detailed records of all assets, especially those owned before marriage. Hiding assets is illegal and can result in severe penalties from the court. Honest documentation and disclosure will strengthen your position while maintaining legal compliance throughout the divorce process.

Bottom Line

Safeguarding a trust fund during divorce requires careful planning and an understanding of legal protections. The type, timing and structure of the trust play key roles in asset protection. Irrevocable trusts established before marriage generally offer the strongest protection, while revocable trusts may be considered marital property in many jurisdictions. Creating a trust before marriage or well in advance of divorce proceedings can help classify the assets as separate property.

Financial Tips for a Divorce

During a divorce, a financial advisor can help you understand your options, split assets effectively and adjust your financial plan for life after separation. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
After the divorce, review and revise wills, trusts, powers of attorney and beneficiary designations on insurance and retirement accounts to reflect your new situation.