Trusts can protect your assets in case of divorce

More than just for spoiled rich kids – how trusts can protect your assets in case of divorce

You may think of a trust as something only for the extremely wealthy. Or you may picture spoiled rich kids living the high life on money their parents or grandparents worked for years to acquire and placed in trust for them.

But trusts can do much more than simply pass on family wealth. If properly chosen and constructed, a trust can actually help insure that your money will pass on to your children and grandchildren by protecting it in the event of divorce – whether yours or your child’s.

What is a trust?

A trust is a legal document created to hold any type of property. A trust must have a minimum of three parties:

  • Grantor. Also sometimes referred to as the trustor, the grantor is the person who places assets into the trust.
  • Trustee. The person responsible for enforcing the terms of the trust and making distributions of trust assets. The trustee can be one or more individuals, or it a corporation, such as a bank or trust company that specializes in managing trusts. In some cases it is acceptable for the grantor to also serve as a trustee, but when the goal is asset protection in the event of divorce, it is best that the grantor appoint a third-party.
  • Beneficiary. The beneficiary is the person (or persons) entitled to receive distributions under the trust.

The trust language dictates how its assets should be distributed. Distributions can be either mandatory or discretionary. With mandatory distributions, a certain amount – whether a fixed dollar amount or a percentage of the trust’s assets – must be distributed at the time and manner specified in the trust. With discretionary distributions, the trustee can the amount and timing of any distributions, even if that means making no distributions at all.

Types of trusts

There are several different types of trusts. It is important to note that once assets are placed in a trust, they are owned by the trust, and not the person who transferred them in to trust.

  • Revocable Trust. Often referred to as a living trust, a revocable trust is a trust where the grantor, beneficiary and trustee is almost always the same person. The purpose of a revocable trust is to avoid the grantor’s family have to administer probate at his death, and to have provisions in place for the grantor’s care should he become mentally or physically incapacitated and unable to care for himself. During his lifetime the grantor can take out as much of the trust’s assets as he wishes, and may revoke the trust at any time and have all of its assets transferred back into his name.
  • Irrevocable Self-Settled Trust. A self-settled trust is similar to a revocable trust in that it is funded by the grantor with his own assets. What makes it different is that the grantor does not serve as trustee – that position is granted to an independent third party – and distributions are entirely discretionary.
  • Third-Party Trust. In this type of trust, the grantor creates and funds the trust for the benefit of a third-party. Typically, these are the trusts that parents create for their children, and can be funded either during the parents’ lifetime or at the parents’ death. Distributions are almost always discretionary, although some trusts provide for lump sum payments to be made as the beneficiary reaches certain ages, while others keep the money in trust until the child’s death.

How trusts provide asset protection

Of the three trusts described above, only the self-settled and third-party options have the potential to protect trust assets in the event of divorce. Because the grantor can withdraw assets from the revocable trust as in whatever amounts and as often as he wishes, it provides no asset protection whatsoever in the event of divorce.

Irrevocable Self-Settled Trust

An irrevocable self-settled trust has the potential to protect the grantor’s assets from being eligible for division as marital property in the event of divorce. Because the grantor is only a discretionary beneficiary of the trust and has no control over whether and when distributions are made to him, they will likely not be considered part of the marital estate in the event of a divorce, and thus not eligible for division.

However, it is extremely important to note that the trust could be included as part of the marital estate if its creation violated the fraudulent transfer rule. Under this rule, any transfer to a third-party, including a trust, is considered fraudulent and therefore invalid if it was made to hinder or avoid creditors. If the trust was created shortly before you filed for divorce, for example, your spouse could successfully argue that the transfer was made with the specific intent of keeping the assets from being subject to division during the divorce.

Third-Party Trust

A parent who wants to make sure his child’s inheritance is not subject to division in case of divorce should create a third-party discretionary trust, and name somebody other than the child to serve as trustee. Courts have ruled that because the beneficiary-spouse is only entitled to distributions at the trustee’s discretion, the assets of a third-party trust are not considered part of the marital estate, and are therefore not eligible for division between the spouses in the event of a divorce. This, coupled with the fact that the trust will provide the same protection whether created before or after marriage, makes the creation of a third party trust a smart choice for parents wanting to protect a child’s inheritance in the event of divorce.

It is important to note, however, that in the case of both the self-settled and third-party trusts, any actual distributions made to the beneficiary will be considered marital property and therefore subject to division in the event of divorce, unless the beneficiary places them in an account that is entirely separate from his spouse. Once any distribution is deposited into a shared account, it becomes marital property.

Final Thoughts

Because trusts can be flexibly designed to meet your goals, they are an attractive option to consider when working with your attorney to protect your or your child’s assets in the event of divorce. There may sometimes be tax consequences to creating and funding a trust, so be sure to talk to your attorney about whether any of these options are right for you.

Mike's Top FAQs About Divorce

How is a military pension divided in a divorce?

How is a military pension divided in a divorce?

Divorce proceedings are conducted by state courts and they can divide military pensions. The federal Uniformed Services Former Spouses’ Protection Act (USFSPA) allows (but does not mandate) state courts divide military retirement pensions upon divorce, legal separation or annulment.

How much of the pension gets divided?

The share of a pension to the non-military spouse could be as low as nothing or as high as half.

  • The non-military spouse might get 50 percent of the pension only if the marriage lasted the service member’s entire military career.
  • If the marriage lasted for part of the military career, the pension division will probably be prorated to reflect the time the spouse served in the military.

How an ex-spouse gets paid?

The USFSPA has a 10/10 Rule which states that if the couple was married for ten or more years while a spouse performed at least ten years of service, the government will make payments directly to the ex-spouse.

If this rule doesn’t apply, but the non-military spouse is awarded a portion of the pension payments, the service member gets paid the entire amount but will be obligated to the correct portion to the ex-spouse.

Another way to get paid is to have an actuary evaluate the military spouse’s pension to determine its current cash value. The military spouse would then give the other spouse an equivalent value in cash or non-marital property, leaving the military spouse with exclusive rights to the pension.

Posted in: Divorce, Family Law, Military Divorce, Property Division

How are disability payments to a military veteran handled in a divorce proceeding?

How are disability payments to a military veteran handled in a divorce proceeding?

The federal Uniformed Services Former Spouses Protection Act (the “USFSPA”) permits divorce courts to award ex-spouses of service members part of “disposable retired pay” (the retired pay available (after necessary deductions) based on salary and years of service). How that’s divided is decided by an agreement between the parties or by the judge.

  • Under the USFSPA, military disability pay is not “disposable retired pay” and is not subject to division in divorce.
  • If a service member waives retired pay in order to get disability pay, an ex-spouse can lose out on hundreds or thousands of dollars which they might have received.

There are two kinds of military disability pay and both are excluded from the USFSPA definition of disposable retired pay:

  1. Military Disability Retired Pay: This is for those are disabled such that they can’t perform their military duties.
  2. VA Disability Compensation: This type of compensation from the Department of Veteran’s Affairs (VA) covers injuries or disabilities that occurred while on active duty, or which were made worse by active service, including service related (not necessarily combat related) mental or physical injuries.

To get these VA benefits, a service member must waive a certain amount of retired pay. If this is done, the amount waived is subtracted from the amount available to the former spouse.

Spouses can have some protections or take steps to get the maximum payments:

  1. If there is a separation or property agreement, it should include a provision stating if the service member waives any retired pay for disability pay, the service member would make a monthly payment to the non-military spouse in an amount that makes up for the lost retired pay.
  2. If there is no such agreement and the divorce issues are being litigated, the judge can be asked to retain jurisdiction to order the military member to pay spousal support in the future, or to modify an existing alimony order based on any change in the parties’ circumstances. If retired pay is reduced because of disability pay, the non-military ex-spouse could request the judge to order the military member to pay spousal support (or increase it) to make up for the retired pay that’s been lost.

 

Posted in: Divorce, Family Law, Military Divorce

What is the Service members Civil Relief Act (SCRA) in a Military Divorce?

What is the Service members Civil Relief Act (SCRA) in a Military Divorce?

The SCRA was enacted in order to help protect service member’s rights if and when they are called to active duty. It protects regular service branch members, in conjunction with members of the Coast Guard serving on active duty in support of the armed forces, members of the National Guard when serving in an active duty status under federal orders, and Reserve members who are called to active duty.

The SCRA affords the right for any court proceedings to be put on hold, or provided a “stay” to postpone any administrative activity if a member’s active duty has an effect on their ability to proceed in the case.  This specifically applies to child custody issues as well and a stay of court and administrative proceedings would be afforded in order to protect the non-present spouse’s parental rights. The SCRA would be incredibly helpful if a spouse were to attempt to change the status of child custody while the service member is deployed.

A ninety-day stay is automatically granted when a service member requests this protection in writing. However, any further delay is decided at the discretion of the judge, hearing officer or magistrate that is assigned to the matter. This protection is not afforded nor does it protect a member’s invocation right for any criminal court proceedings.

There are also many individual state laws related to military child custody. Through the USA4 Military Families initiative, the DoD is partnering with states in order to further support military families. Specifically USA4 Military Families is striving to educate policymakers and ensure deployment separation does not determine child custody decisions.

Posted in: Divorce, Family Law, Military Divorce

What is a Family Care Plan for Child Custody in a Military Divorce?

What is a Family Care Plan for Child Custody in a Military Divorce?

As with normal civilians, military couples are presented with child custody issues if they are seeking dissolution of marriage. Members of the military are aware that active duty often requires time away from home due to deployments, training or frequent relocations. These factors may present custody issues, however there are ways to prevent or relieve some of the stresses that can evolve in a military divorce regarding child custody matters.

A Family Care Plan is highly recommended and sometimes required in order to clarify necessary details about the care of your child if a service member is called to active duty or deployed at no notice. Although most couples aren’t required to establish a family care plan, if you are or become a single parent due to death of spouse, separation/divorce, a service member can remain active but must meet the family care requirements of DOD – essentially requiring such members to have a “family care plan.”

A Family Care Plan is a set of documents describing who will care of your child during specific instances or if a military member is away on deployment or training. When it comes to a Family Care Plan there are some slight differences depending on the service, however most have three basic requirements: short-term care providers, long-term care providers, and care provision details. These support details include naming who will care for the child, financial details, medical specifications, and logistical considerations pertaining to food, housing, transportation, etc. These named care providers must be a non-military person, who agrees, in writing to accept the care of the member’s child or children. This person will also sign the Family Care Plan, indicating they consent and understand the responsibilities they are being entrusted with.

Posted in: Divorce, Family Law, Military Divorce

Can parents create their own agreement for child support?

Can parents create their own agreement for child support?

Yes, parents can stipulate their own agreement regarding child support, but it must be approved by the court. In order for the court to consider reviewing the agreement, it must meet the following guidelines:

  1. There must already be an open court case between the parents.
  2. The agreement must contain the following information:
    1. Each parent is fully aware of his/her child support rights.
    2. Each parent is aware of what the guideline child support amount would be.
    3. Neither parent is feeling pressured or forced to agree on the stated amount.
    4. Neither parent is receiving public assistance or has applied for public assistance.
    5. Both parents think that the agreed upon amount is in the best interest of the child.

After you have reached an agreement with the other parent and have created a stipulation consistent with these guidelines, you will both need to sign the document. If you do not have attorneys, your signatures will need to be notarized. You can then submit the stipulation for the court’s review. If you have a court date scheduled, you can bring the stipulation with you to the hearing for the judge’s review and signature, or you can go to the courthouse and ask to speak with a family law clerk to get it approved and signed.

After you have received the judge’s signature, you’ll need to file the original with the court clerk, and serve a file-stamped copy of the order on the other parent (or their attorney, if they have one.)

Posted in: Child Support, Family Law