How Is a Trust Handled in a Divorce in NY?

When a couple goes through divorce proceedings in New York, one of the most complex and emotionally charged parts of the process is the division of assets. This is especially true when there is a trust involved. It doesn't matter if it is a revocable trust, an irrevocable trust, or trust funds that were created for children. It's very important to understand how a trust is handled when getting a divorce in New York State.

Per New York estate law, divorce courts use a principle known as equitable distribution. This means that the marital assets are fairly divided. The key word here is "fairly." That does not mean equally.

The big question is this: how does a trust fit into the divorce process? The answer actually depends on a number of factors, including the type of trust, when the trust was established, who the beneficiaries are, and how the trust was funded.

A New York estate planning attorney, or a New York divorce attorney, can help settle this during a divorce settlement as well as advise how to split IRAs during a divorce in NY.

What Is a Trust?

A trust document is a legal arrangement where one person, known as the grantor, transfers assets to a trustee. The trustee holds and manages the assets for the benefit of a beneficiaries. People create trusts for many reasons. They are used for estate planning, tax benefits, managing inheritance, and even protecting assets from creditors.

There are two types of trusts that come into play during a divorce: revocable trusts and irrevocable trusts.

A revocable trust is a trust that can be changed or revoked by the grantor at any time during their lifetime. An irrevocable trust is permanent, and it cannot be changed once it's established without the consent of any listed beneficiary.

Are Trusts Considered Marital Property in New York?

Because of New York law stating that divorcing spouses will share assets fairly in a settlement, it must be determined if the assets are marital assets or separate assets. In general, marital assets are those that were acquired during a marriage. Separate property, however, is not usually divided and includes inheritances and gifts that were specifically given to one spouse.

So how does this apply to trusts?

If a trust was created before the marriage, and it was funded with separate assets, these are usually not subject to the equitable distribution rule.

If a trust was created during the marriage, and if it was funded with marital assets, like jointly earned income, it is likely marital property, which is subject to equitable distribution.

Even if the trust is separate, any income that was generated during the marriage from the trust, or if the value of the asset grew, it could be considered to be marital property. This is especially true if the non-beneficiary spouse contributed to the growth.

Types of Trusts Common in NY Divorce Cases

Here are some of the common trusts found in New York:

Revocable Living Trusts

Revocable trusts are common tools for estate planning. Because they can be revoked or modified, courts in New York often treat a revocable trust as marital property if it was funded during the marriage.

Even if the trust was set up in one spouse's name, the ex spouse might still have access to it. The court will look at when the trust was created, where the funds came from, and how the assets were used during the marriage. If marital funds were used to fund the trust, the court will likely include it in the marital estate.

Irrevocable Trusts

An irrevocable trust is more difficult to divide in a divorce settlement because they are typically out of the grantor's control. However, there are situations where a court will include them as marital assets. Some of the things that will be looked at include who created the trust and who funded the trust. The court will also look at whether either spouse was a trustee or a beneficiary. Additionally, they will look at when the trust was set up and why the trust was created.

If one spouse is both the grantor and a beneficiary, and the trust was used to hide assets from the other spouse, or it's discovered that they were using it to limit the spouse's claim to the marital property, the court could still override that and award equitable compensation to the spouse.

Spendthrift Trusts

A spendthrift trust is used to protect a beneficiary from creditors, or sometimes even themselves. If one spouse is a beneficiary of this type of trust, the court will look at whether or not the income is regular and reliable enough to factor into spousal support or the division of property.

Trusts for Children

Trusts that are set up for children are typically not considered marital property. However, if both spouses funded and managed the trust, it could influence other parts of a divorce like child support and education costs.

Can a Trust Be Used to Hide Assets?

Some people will use a trust to hide money from their soon to be ex-spouse. New York courts take this seriously, and if they find evidence that shows this occurring they might declare the trust fraudulent, they might consider the trust assets as a full part of the estate, or they could award a share of other assets, like life insurance policies, bank accounts, retirement accounts, or other income generated during the marriage, to the other spouse.

Trusts and Spousal Support (Maintenance)

As a general rule, even if a trust cannot be divided, the income that the person gets from the trust can be used for spousal support. If the spouse gets more than $5,000 a month from the trust, it might increase their ability to pay support in the eyes of the court. Alternatively, the courts could decide that the spouse getting the trust payments may not need as much spousal maintenance and child support.

How an Albany Divorce Attorney Can Help

A New York divorce attorney can help those dealing with trusts created either during or before the marriage. This is complicated, and the Albany family attorneys must fully understand how equitable distribution laws work. An attorney can help with the following:

• Identify if a trust is marital or separate property

• Trace both financial and non-financial contributions

• Evaluate income from the trust for support

• Uncover hidden assets that might be in a trust

• Advocate for fair distribution or equitable compensation

Work with Divorce & Family Legal, LLC

Those who are going through a divorce and have a trust, it's important to work with a knowledgeable attorney. Said Ibrahim is one of those lawyers, and he will help his clients through the process of divorce in New York State. Call today to learn more.