What happens to a living trust in case of a divorce?
If you’ve been married, are thinking about getting married, are considering putting together a trust, there are lots of times that you might want to know what happens if there’s a trust and a divorce? First of all, we will set the expectation that this is a living trust, which means a trust that is set up during a lifetime. Sometimes there are testamentary trusts, which is a trust inside someone’s will, but it has not sprung into being until that will has been probated. So we are only talking about trusts set up during someone’s lifetime, which could be a trust that I set up for myself, or it could be a trust that someone else sets up for me. And that is going to be one of our key questions.
Who set up the trust? Where did the assets come from?
And there are differences between assets that I might put in trust for myself and assets that someone else might gift me in trust. So generally speaking, if someone else puts assets into a trust for me, either as a gift or an inheritance, that can be separate property. There are some caveats to that, of course, and one of those is specifically that it has to be kept separate. So if I inherit assets, even inside a trust, and I intermingle them and put some things from the trust into, say, my personal bank account, and then use money from the personal bank account to make repairs on the house in the trust, and generally just intermingle funds, if I have not kept this separate, and I’m going through a divorce, this trust might be considered marital property. There are a lot of specifics to every case, so this is just a generalization.
But another question, as we’re trying to decide is it marital property or not, is when were the assets put into trust? And largely, if they were put into trust before the marriage, there is a greater likelihood of it being a separate asset that the divorce cannot touch than if it was created during the marriage. Along the lines of, you know, reiterating intermingling funds, we really have to keep anything separate. It does not matter who, does not matter when, if it is not kept separate and apart, if it is intermingled with other marital assets, there is a really good chance that it ends up being a marital asset.
And then, of course, is the question of debts.
Georgia is a very creditor-friendly state, and it does not approve of the idea that I can put my money into a trust and then say, ”Haha, I cannot pay my debts. Creditors are out of luck.” So in Georgia, if I put my money into a trust and a creditor comes knocking, they are still going to ultimately be able to access those funds. In a divorce, your soon-to-be ex might be a creditor. There might be child support or spousal support or other debts, and so if you have created the trust for yourself, Georgia does not approve of you trying to avoid those debts. There are other states that have asset protection trusts. Georgia does not. And so you could definitely look at an out-of-state or offshore trust if that was something that you are interested in. But here in Georgia, you are not going to be able to avoid your creditors with your money just because you placed it in trust.
So there are a lot of fact specifics, but these are some of the issues that we look at when we try to figure out what happens to this particular trust in this particular divorce proceeding? So thank you for taking the time, and please subscribe for more content.