What Happens to a Living Trust in a Divorce?

Divorce can be a challenging and emotionally draining process, often requiring careful consideration of various financial and legal matters. One aspect that frequently raises questions is how divorce affects estate planning materials like living trusts. If you've established a living trust as part of your estate planning strategy, you may be wondering about its fate during a divorce. 

In this article, we'll examine the implications of divorce on living trusts and provide valuable information to help you understand your options.

At Coastal Legal Affiliates, P.C., we strive to help you protect your assets and work through your divorce.

Understanding Living Trusts

A living trust, also known as a revocable trust, is a legal arrangement that allows you to transfer your assets into a trust during your lifetime. With a living trust, you maintain control over these assets as the trustee and can modify or revoke the trust at any time. Living trusts offer several benefits for asset protection, including:

• Avoiding probate: Assets in a living trust can bypass the probate process, potentially saving time and money for your beneficiaries.

• Maintaining privacy: Unlike wills, which become public record during probate, living trusts remain private.

• Providing flexibility: You can change or revoke the trust as your circumstances or wishes change.

• Enabling smooth asset management: In case of incapacity, a successor trustee can manage the trust assets on your behalf.

Many individuals and couples create living trusts as part of their estate planning strategy to protect their assets and provide for their loved ones. However, when divorce enters the picture, the status and management of these trusts can become complicated...

How Divorce Affects Living Trusts

When a couple decides to divorce, their living trust doesn't automatically dissolve or become invalid. Instead, the trust's fate depends on various factors, including the trust's structure, the nature of the assets it holds, and the specific laws of the state where the divorce is taking place. In general, three main scenarios can unfold:

• Division of trust assets: If the living trust contains marital property, these assets may need to be divided as part of the divorce settlement. This often involves identifying which assets are considered marital property and which are separate property.

• Revocation or modification: One or both spouses may choose to revoke or modify the existing trust. This can involve creating new, separate trusts for each individual or making changes to beneficiary designations.

• Continuation with modifications: In some cases, couples may decide to keep the trust intact but make necessary adjustments to reflect their new circumstances.

The specific outcome will depend on the couple's unique situation and the guidance of their legal representatives. At Coastal Legal Affiliates, P.C., we offer full estate planning services.

Factors Influencing Trust Division in Divorce

Several key factors come into play when determining how a living trust will be handled during a divorce. These typically include:

• Type of property in the trust: The nature of the assets held in the trust impacts how they will be divided. Marital property, including assets acquired during the marriage, is generally subject to division during divorce. Separate property, such as assets owned before marriage or received as gifts or inheritances, may remain with the original owner.

• State laws: Different states have varying laws regarding property division in divorce. Some states follow community property laws, while others use equitable distribution principles. These laws can affect how trust assets are categorized and divided.

• Trust creation date: When the trust was created can potentially impact how it will be treated during divorce. Trusts established before marriage may be treated differently than those created during the marriage.

• Prenuptial or postnuptial agreements: If the couple has a prenuptial or postnuptial agreement that addresses the handling of trust assets in case of divorce, this document can significantly influence the outcome.

• Contributions to the trust: The source of funds or assets contributed to the trust can play a role in determining how they're divided. If one spouse contributed separate property to the trust, they may have a stronger claim to those assets.

• The language in the trust: The trust itself may have provided for separation or divorce. It should be reviewed carefully by an attorney.

Steps to Protect Your Trust in Divorce

If you're going through a divorce and have concerns about your living trust, consider taking the following steps:

• Review your trust documents: Carefully examine your trust agreement to understand its terms and any provisions related to divorce.

• Consult with a legal professional: Work with an attorney experienced in estate planning and divorce to get personalized advice on your situation.

• Gather documentation: Collect all relevant financial records, including those related to the assets held within the trust, to help determine what's marital property and what's separate property.

• Consider mediation: If possible, try to reach an agreement with your spouse regarding the trust through mediation or collaborative divorce processes.

• Update beneficiary designations: Review and update beneficiary designations on accounts and insurance policies that may be linked to your trust.

Potential Challenges in Dividing Trust Assets

Dividing trust assets during a divorce can present several challenges. Some common issues include:

• Valuation disputes: Determining the fair market value of certain trust assets, such as businesses or properties, can lead to disagreements between divorcing spouses.

• Commingled assets: When a separate property has been mixed with marital property within a trust, it can be difficult to properly allocate these assets.

• Tax implications: Dividing trust assets may have tax consequences that need to be carefully considered and planned for.

• Emotional attachments: Certain trust assets may hold sentimental value for one or both spouses, making negotiations more challenging.

To address these challenges, it's crucial to work with experienced professionals who can provide guidance and help you find equitable solutions.

Creating a New Trust After Divorce

Once your divorce is finalized, you may want to establish new estate planning documents that reflect your current circumstances and goals. Here are some considerations when creating a post-divorce trust:

• Reassess your estate planning objectives: Consider your new financial situation and any changes in your family dynamics that might affect your estate planning needs.

• Review beneficiary designations: Make sure that your new trust aligns with your current wishes regarding beneficiaries, taking into account any obligations from your divorce settlement.

• Consider a pour-over will: This type of will can work in conjunction with your new trust to capture any assets that weren't transferred into the trust during your lifetime.

• Explore asset protection strategies: Depending on your situation, it may be beneficial to incorporate asset protection measures into your new trust to help safeguard your wealth.

Dealing with living trusts during a divorce can be a complicated process with significant implications for your financial future. If you're facing this situation, seeking professional guidance is crucial. By creating a new trust tailored to your post-divorce life, you can help secure your financial future and provide for your loved ones according to your wishes.

Contact an Estate Planning Attorney

Do you need assistance with your trust? We serve clients in Somerset, Massachusetts, and the surrounding areas of Fall River, Swansea, Dartmouth, New Bedford, Wareham, Lakeville, Plymouth, Kingston, Abington, Brockton, Attleboro, and Rockland, as well as Bristol County and Plymouth County. We also have attorneys licensed in Rhode Island.

Reach out to Coastal Legal Affiliates, P.C. for effective support as you take the next step.