Irrevocable Trust Divorce & Equitable Distribution

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The court cannot divide assets owned by an irrevocable trust with an independent trustee.

Irrevocable Trusts can be very powerful in divorce if drafted and implemented correctly because regardless of a particular state’s recognition of the concept of separate or non-marital property, assets which are owned by a third party cannot be divided upon divorce. That is, even if your state endorses any type of ownership: Joint Tenancy, Joint Tenancy with right of survivorship, Tenants in Common, Tenancy by the Entirety, or Community Property; the law of equitable distribution applies only to property which is owned by one or both spouses. “The kinds of property subject to division, as set out in the statute, all share a common characteristic: they are owned by the parties, either jointly or separately.” Elkins v. Elkins, 763 N.E.2d 482, 486 (Ind. Ct. App. 2002).
The rule against the division of third-party property applies not only to property owned by third-party individuals, but also to property owned by legally independent entities. Thus, the court cannot divide assets owned by a corporation or partnership. E.g., Chen v. Li, 986 S.W.2d 927 (Mo. Ct. App. 1999) (corporation); In re Marriage of Werries, 247 Ill. App. 3d 639, 616 N.E.2d 1379 (1993) (partnership). But cf. Coleberd v. Coleberd, 933 S.W.2d 863 (Mo. Ct. App. 1996) (under unique Missouri partnership statutes a partnership is not an independent entity). However, the shares of the company are subject to division if they are in either spouse’s name. On a side note: however, if the shares of the legal entity (C-Corp or LLC) are owned by an irrevocable trust, the legal entity is, by definition, not in either spouse’s name and thus qualifies as being part of the trust and not part of the marital estate.
The court cannot divide assets owned by an irrevocable trust with an independent trustee. Review McGinn v. McGinn, 273 Ga. 292, 540 S.E.2d 604 (2001); Findlen v. Findlen, 695 A.2d 1216 (Me. 1997); Mikhail v. Mikhail, 124 Ohio Misc. 2d 5, 791 N.E.2d 468 (C.P. 2003); In re Marriage of Jones, 159 Or. App. 377, 981 P.2d 338 (1999); Endrody v. Endrody, 914 P.2d 1166 (Utah Ct. App. 1996). The court can, of course, divide any interest owned by the parties in the trust itself, but this would represent a poorly drafted irrevocable trust. E.g., Heinrich v. Heinrich, 609 So. 2d 94 (Fla. Dist. Ct. App. 1992). But cf., e.g., Williams v. Massa, 431 Mass. 619, 728 N.E.2d 932, 940-41 (2000) (remainder interest cannot be divided if it is unduly speculative; suggesting that most contingent remainders may be unduly speculative).
Revocable trusts are completely different because of the ability of the grantor to revoke or change the trust and thus assets within the revocable trust can be treated as marital property. E.g., In re Marriage of Seewald, 22 P.3d 580 (Colo. Ct. App. 2001); Wortman v. Wortman, 308 A.D.2d 486, 764 N.Y.S.2d 282 (2003); Dorn v. Heritage Trust Co., 24 P.3d 886 (Okla. Civ. App. 2001). Continue reading: Division of Assets or Property in Divorce
Rocco Beatrice, CPA, MST, MBA, Managing Director, Estate Street Partners, LLC.
Mr. Beatrice is an asset protection award winning trust and estate planning expert.
Category: Divorce, Irrevocable Trust

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