Divorce is already complicated. For individuals who are beneficiaries of a trust, especially in high-asset divorces, important issues often come up when it’s time to divide property.
Many people assume that because a trust was set up long before the marriage, it’s automatically protected. Others may believe that if they never touched the principal, it’s safe from division. Unfortunately, the reality isn’t always that clear.
While trust funds are often considered separate property, the way they’re used during a marriage, and how clearly their terms are defined, can dramatically affect how they’re treated in divorce proceedings. If you’re a beneficiary of a trust and facing divorce, or even just planning for the future, it’s important to understand where the vulnerabilities lie.
The first question any court will ask is whether the trust is separate property (belonging to one spouse) or marital property (subject to division upon divorce). Generally, a trust that was established for the benefit of one spouse before the marriage, especially by a third party like a parent or grandparent, is considered separate. The original intention is key. If it was clearly created to benefit only one person and wasn’t intended to become shared during the marriage, that can be a strong starting point for protecting it.
However, not all trusts are structured equally. If the trust was created during the marriage or funded with marital assets, it may raise questions. Even a trust set up before the marriage can become part of the marital estate depending on how it’s handled over time.
Commingling is one of the biggest threats to the protection a trust might otherwise offer. This happens when trust distributions, whether income or principal, are deposited into joint accounts or used for shared expenses. For example, if trust income was used to pay for the family home, vacations, or joint investments, a court might consider that evidence that the funds became marital in nature.
Once that line is blurred, it becomes much harder to argue that the trust should be treated as entirely separate. Courts look at behavior, not just documents. If the trust money was routinely treated like joint money, it may not matter who technically “owned” it at the start.
Another layer to this issue involves the distinction between income and principal. Some trusts are structured to provide income to a beneficiary while keeping the principal untouched and preserved. Others allow more open access.
Courts may view income received from a trust as a marital asset, primarily if it was used during the marriage to support both spouses. If the income significantly impacted the lifestyle of the couple, that could influence spousal support calculations or become part of property division discussions. On the other hand, if the beneficiary never took distributions or only used them for personal, separate purposes, there may be stronger grounds to claim it remains separate property.
If the trust is discretionary, meaning the trustee has complete control over when and how funds are distributed, it’s usually harder for a divorcing spouse to claim a share. Courts typically don’t treat a discretionary trust as an asset if the beneficiary has no guaranteed right to access the funds.
Still, courts can consider the existence of a discretionary trust when determining a fair division of other property. Just because the trust itself may not be divided doesn’t mean it won’t influence the outcome. In some cases, a judge might offset the value of the trust by awarding other assets to the non-beneficiary spouse.
Divorce laws vary significantly from state to state. Some jurisdictions are more likely to treat inherited or gifted assets, including trusts, as separate property. Others are more aggressive in their approach to shared use of trust distributions. Community property states, for instance, often apply stricter standards for determining what constitutes marital property. If the divorce is taking place in one of these jurisdictions, a beneficiary may need to take additional steps to protect their interests.
Because of these variations, working with an attorney who has experience handling trusts in divorce cases isn’t optional—it’s necessary.
If you’re a trust beneficiary and marriage or divorce is on the horizon, now is the time to take action. The way you handle trust funds matters just as much as how the trust was written.
Here are a few practical steps to safeguard trust assets:
When emotions run high in a divorce, especially one involving significant assets, it’s easy to make decisions that can have long-term financial consequences. Whether you’re trying to protect family wealth or simply maintain what was intended to be yours, the guidance of legal and financial professionals is essential.
Too often, beneficiaries assume the trust will take care of itself. But courts don’t always treat trusts as off-limits, and simple mistakes, like using a joint account, can weaken your case. From reviewing trust terms to advising on asset strategy, having someone in your corner who understands how to navigate both trust law and divorce law is invaluable.
If you’re a trust beneficiary facing divorce, you need more than general legal advice—you need someone who understands the financial and legal nuances that come with protecting trust assets. We can help. Contact us today to schedule a confidential consultation and get the guidance you need to make wise, protective choices during divorce.