Divorce is a life-changing occurrence that is also often financially complex, especially when it comes to the division of assets. A connection between the divorce and the trust is an important one. A couple’s trust will inevitably be affected by the divorce. But additionally, a trust can protect one’s assets during the separation process.
A trust is a legal arrangement in which one party, the grantor, transfers assets to another party, the trustee, to hold and manage for the benefit of the beneficiaries. The trust document states the terms that govern the trust, including how the assets are to be managed and distributed. Revocable trusts, also known as living trusts, allow for changes to be made during the lifetime of the grantor. Irrevocable trusts, as the name suggests, are very restrictive with respect to the ability to modify them.
During the divorce, the type of trust established can have significant consequences. In the event of divorce, the grantor may modify or dissolve the living trust and reclaim the assets, but the specifics of the divorce settlement may still affect the division of assets outside of the trust. Irrevocable trusts cannot be easily altered and therefore, in the case of divorce, the assets held in it may be considered separate property and may be protected from division as marital assets. However, the court may still have the authority to consider the trust’s assets when determining support or alimony payments.
In addition to the trust, couples can consider utilizing prenuptial agreements to protect assets before entering into a marriage or postnuptial agreements to protect the assets in case of divorce. These agreements allow individuals to specify the division and distribution of assets in the event of a divorce, providing a level of certainty and protection for both parties involved.
Once the divorce is finalized, it is important to review the existing estate planning documents and update them accordingly. The existing trust, will, powers of attorney, healthcare directives, and beneficiary designations should be reviewed and reconsidered as they related to an ex-spouse.
This may involve modifying beneficiaries, appointing new trustees, or adjusting distribution provisions to reflect the new circumstances. Additionally, beneficiary designations on one’s life insurance policies, retirement accounts, and other financial accounts should be evaluated and reconsidered. In many situations, divorce automatically revokes the ex-spouse as a beneficiary, but it is crucial to confirm this and designate new beneficiaries to ensure that one’s assets are distributed as intended.
It is also very important to reconsider the persons appointed as one’s agents under powers of attorney and healthcare directives. These legal documents grant decision-making authority in financial and health matters, should one become incapacitated. Oftentimes, an ex-spouse should be replaced with a trusted family member or friend.
Divorce can certainly complicate the administration and distribution of assets held within a trust, but the trust also offers flexibility and control that can help to protect assets during divorce. The use of a trust can be particularly beneficial in situations where one or both parties have significant assets or when a family business is involved.
Natalia Vander Laan is a Minden attorney.