When it comes to divorce, property can be a tricky issue, depending on where you live. In California, for example, the formula for dividing marital property is pretty straightforward. It's a community property state, so both you and your spouse are entitled to half the assets acquired during your marriage. Most states don't follow community property law, however. The fact that inheritances such as trust funds may or may not be considered marital property further complicates things.
Inheritances as Separate Property
Many states make a distinction between marital and separate property, and only marital property is subject to division in a divorce – either 50/50 in a community property state, or possibly more unevenly in one of the other equitable distribution states. Separate property is typically defined as anything you owned before you got married, or anything you receive through bequest or as a gift during the marriage. Unless the trust names your husband as a beneficiary as well, he would have no right to any part of the asset if you divorce in one of these states. Even then, he would only receive the funds bequeathed to him, not those intended for you. But as with any general rule, exceptions exist.
Exceptions to the Rule
Some states make no distinction between marital and separate property. In others, there's a line between them, but it's blurred. Section 770(a)(2) of the California Family Code specifically exempts property received by "bequest, devise, or descent" from distribution as community property, whereas Section 751(a) of the Vermont statutes includes all property owned by spouses, "however and whenever acquired." In Michigan, a court might distribute proceeds from a trust fund bequeathed to one spouse if the divorce would leave the other spouse destitute unless he receives a share.
Understanding Commingled Funds
Even if your trust fund itself is not at risk in a divorce, your husband might still get a piece of it, depending on what you do with the money as you receive it. If you deposit your trust fund income into a marital checking, savings or investment account, you've commingled the money such that your husband would be entitled to a share of it in a divorce. Likewise, if you use the money as a down payment on the family home, to invest in your husband's business, or even to just make repairs to your home, it usually ceases to be your separate property. Future trust fund payments would not be at risk as long as your state treats an inheritance as your separate property, but the funds you receive while married may become marital or community property if you don't segregate them in an account in your sole name or if you use them for anything that benefits the marriage.
Take Some Precautions
Typically, you'd become the trustee of your trust fund after the death of the grantor: the person who set up the trust. You can take precautions while the grantor is still alive and ask him to create a spendthrift trust instead. With this type of trust, a third party is named as trustee instead and has control over distributions made to you. Because you have no right to dictate when you receive money, or even how much, the trust fund isn't technically your asset and is usually safe in a divorce. If you have a good relationship with the named trustee, you can tap into the trust fund whenever you like regardless – you'd just need his cooperation. If you're already married and have already inherited a trust fund, another option is to create a postnuptial agreement to protect it as your separate property. Although some states take a dim view of postnuptial agreements, especially if they're not fair or equitable, most will allow you to use one to protect certain assets from distribution in a divorce.
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