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Trusts and Divorce – Asset Protection or Fraud?

On Behalf of | Feb 5, 2015 | Divorce

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 answered are:

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 of property:

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.

Jeannine Lowery