DEALING WITH THIRD-PARTY TRUSTS IN DIVORCE

The importance of protecting assets through trust can’t be overstated. We’ve often written about this in the context of the value trust creation delivers in terms of providing a tax shelter and also allowing beneficiaries to avoid the hassle of having the assets tied up in probate after the grantor’s death.

Divorce situations can also present something of a challenge sometimes. Generally speaking, because Texas is a community property state, negotiating what the court might accept as a fair settlement of property division may not be tremendously difficult. But for couples with more complex property issues — perhaps because of closely-held businesses or a professional practice — an experienced attorney’s attention is typically required.

Third-party trusts might well be a factor in such cases. It’s not unusual for well-off parents or grandparents to set up trusts intended to directly benefit specific heirs. In the event of a divorce, it has been known for the assets of such trusts to become the focal point of dispute.

Under most conditions, trust money that is brought to a marriage by one spouse or the other tend to be vewed as separate property rather than marital property. As such, the funds would very likely be protected. But there have been legal fights over such matters in some states and so some legal observers recommend adding a layer of protective language when creating a trust.

Such language might mean including a clause that specifies that the grantor wants the funds protected from creditors and any claims by a potential ex-spouse. Another provision could leave control of asset distribution in the absolute control of an independent trustee.

Just to be a bit more safe, a couple might consider executing a pre- or post-nuptial agreement that acknowledges that the trust should be treated as separate property in the event of divorce. And to keep the line clearly drawn, those funds should never be handled in a way that might be construed as their being comingled with marital property.

Source: Forbes, “What Divorcing Women Need To Know About Protecting Third-Party Trusts,” Jeff Landers, Oct. 8, 2015