Tonight's post about Trusts and Divorce was written by one of our Marietta
Divorce Attorney's Jeannine Lowery.
Is creating a trust a good way to
protect assets in a divorce? Maybe, but then again, maybe not. If the Court finds the
trust was set up to hide assets you may end up losing BIG. Even if the
Court finds no wrongdoing, there's a chance that if the trust contains
marital property, your spouse will receive an equitable division of the
value of the trust.
Let's start with the basics. The first two questions that need to be
1. What's a trust? and
2. What kind of property (meaning marital property, separate property or
both) makes up the corpus or in layman's terms - property within the trust?
First, an express trust is a fiduciary arrangement that allows assets to
be held by a trustee for the benefit of a beneficiary. Trust terms are
controlled by the written terms of the trust instrument and applicable
state law. Generally, a person can create a trust and do as they chose
with their assets so long as it does not violate public policy or existing
law. Trusts can be revocable - the creator (settlor) of the trust can
modify or end the trust at any time, or irrevocable - the creator (settlor)
of the trust cannot revoke the trust.
So if you're getting a divorce, and a trust is involved, a good place
to start is figuring out whether the trust is revocable or irrevocable,
who the trustees are, who the beneficiaries are and what are the terms
of the trust are, as outlined in the trust instrument.
Second, Georgia is an equitable division jurisdiction with three classifications
1. Martial property - all assets acquired during the marriage through efforts
of both or either spouse.
2. Separate Property - assets acquired prior to the marriage or asset acquired
during the marriage through gifts or devise.
3. A hybrid of marital and separate property - separate property that has
increased in value during the marriage because of (1) either spouses efforts
or labor or (2) a contribution of martial property that increased the value.
Figuring out what kind of property is located within the trust will help
determine what rights you may have to receiving compensation for the property,
or what rights you have in protecting that property from a soon to be
ex-spouse, but it's no easy task.
There are not many cases that look at trusts and the implications for equitable
division during a divorce in Georgia. One of the few cases is
McGinn v. McGinn, 273 Ga. 292 (2001). In McGinn, the Supreme Court of Georgia found that
a marital asset placed in an irrevocable multi-beneficiary trust was a
separate entity and thus not subject to equitable distribution. That means
if you place your house, titled in your name, but bought and paid off
with your salary during the marriage (hence martial asset) into an irrevocable
multi-beneficiary trust with your kids as beneficiaries, that house is
no longer a martial asset subject to equitable division. Sounds like the
house is protected - but wait, there's more. The Court went on to
state that while the asset itself may not be divided, the Court could
use the value of the trust, the trusts income and the trusts future distributions
to determine appropriate alimony, child support and property division.
So even if the house cannot be sold and the profit divided, a Court is
likely to look at the transfer, the trust and the result and equitably
divide the rest of the estate to compensate for the transfer.
If the Court finds wrongdoing, and determines the transfer as a
fraudulent conveyance your spouse may be entitled to both an equitable distribution of the trust
property and damages, including attorney fees. Trusts are a great tool
with many benefits, but they may not be a sword when it comes to protecting
marital assets from a spouse in a divorce, unless it's a sword you fall on.