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Is my trust fund safe from divorce?

A trust fund can be part of a legacy from one generation to the next. When your loved ones name you as a beneficiary of a trust, they hope that you can benefit from their careful planning. Estate and financial planning professionals frequently advise that a trust represents a good way to protect assets from the claims of creditors as well as a way to keep assets safe from the claims of potential future spouses.

Unfortunately, such advice is often incomplete or sometimes totally incorrect. As well, such trusts were often created by parents, grandparents or other remote relatives who had no idea where or when their future descendants might marry or later divorce. Other times you or your spouse may have believed that transferring assets into a trust provided tax or estate benefits. Such advice may not have been totally accurate. Depending on the type of present trust benefit or future trust entitlement you might have, that trust interest could be classified as an asset to be considered in your divorce.

Dealing with trust interests in a divorce can be very complicated and working with a lawyer who thoroughly understand the issues can be vital. Here are some basic considerations you should weigh as you begin negotiating your divorce.

Fair distribution

In Colorado, “marital assets” are not necessarily allocated equally between two spouses. Instead, Colorado courts seek to find an “equitable” distribution. Nevertheless, an equal or nearly equal division is not uncommon. However, the key is determining what assets are classified as marital assets.

Typically, assets that you or your spouse acquired before the marriage will remain your separate property as will things that one of you received by gift or inheritance during the marriage. However, there is an important caveat: if the gift, inheritance or premarital asset has increased in value during the marriage, that increase in value is marital even though the item has never been transferred into joint names with your spouse.

When it comes to a trust, however, the type of trust and the terms for its distribution will be vital factors when it comes to determining whether any part of its value is marital. Even though your spouse cannot become a direct beneficiary of the trust, he or she may have a claim that some part of its overall value needs to be counted in computing the value of the marital assets you are receiving or keeping.

The KEY question in your case: Why type of trust do you have?

Some trust fund interests are more vulnerable than others. Before you worry that your spouse will be able to take part of your trust, investigate the type of trust you have and its provisions.

If the trust can still be terminated or changed by the person who created it, it is not likely to be relevant in your divorce. If it is a trust you or your spouse created during the marriage and can still cancel or change, the assets in the trust are likely to be treated as if no trust existed. If the trust was created by another person and can be changed – whatever you may or may not receive in the future is not likely to be relevant in your divorce.

However, if the trust cannot be cancelled or changed, your future benefit may be relevant in the divorce, even if you have not received it yet.

What safeguards do you have in place?

If you have a prenuptial or postnuptial agreement, there might be provisions to protect any trust you or your spouse might have. If there was no prenuptial or postnuptial agreement, it is important to work with a lawyer who understands the many variations in trust interests. As you are preparing to negotiate asset division, it is critical to gather your documents regarding both the trust account and your marriage documents so that a skilled attorney can help you determine whether your trust is protected. Regardless of the type of trust, it is important to talk to an experienced professional about negotiating the terms of your divorce, so you know your options and the best way to proceed.