Do I have to split a trust that I inherited before I got married with my ex as part of our divorce?
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UPDATED: Jul 28, 2017
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In the event you were to divorce, the assets that were placed in a trust established before your marriage are generally considered your separate and individual property. However, mixing your separate trust funds with your spouse’s may convert the trust assets into marital property.
You “inherited” a trust—but if it’s still a trust, you didn’t really inherit it. What you received was the right to payments from it under certain circumstances. The trust is a separate legal entity from you. That is the whole point of a trust, to separate the ownership of certain assets or property to keep them safe (whether from creditors, taxes, other family members, lawsuits, etc.). You may be the beneficiary under the trust, receiving distributions or payments from it, but the trust remains a separate legal “person” (so to speak) from you, and even if you owe someone else money (whether from a divorce or from a lawsuit), this will not affect the trust. The trust, as a separate legal entity, is not liable or responsible for your obligations, whether marital or otherwise.
The above is a bit of an oversimplification. There are two ways to lose the trust’s protection. The first is if the trust is actually a “sham.” Meaning, if instead of the trust being separate from your property, you have co-mingled or combined them in some way. If you have done that, the money or assets in the trust might be considered your property rather than separate trust property. By co-mingling personal and trust assets, you could deprive the trust of its separate identity, thus losing its protection.
The second way is not about the trust as a whole, but the proceeds from it. Any payments made to you by the trust (for example, distributions on a regular or periodic basis) will be income you receive, similar to receiving distributions or dividends from a business you own, or rent from a rental investment property, and similar to income received from a business or property—or, for that matter, from your job. If you receive those payments during marriage, those payments (not the principal or balance of the trust–only those payments made to you) may be considered marital property, the same way that your spouse’s income during marriage is considered marital property. Therefore, the trust itself is not at risk, but any money you received from the trust that is sitting in a bank account, for example, may be considered marital property.
You “inherited” the trust pre-marriage. That is, it was set up using money acquired pre-marriage. This again reinforces that the trust principal or corpus (the body of the trust) is not at risk, the same way that your spouse is not entitled to real estate purchased by, or gifted to, you, pre-marriage. Any assets a spouse gets before marriage are his or her own—they are not marital property. Using the real estate analogy, let’s say you acquired an investment rental property before marrying. Your spouse would have no right to the property itself. But rental income received during marriage is marital property, the same way that salary or wages from a job would be. Similarly, the trust’s principal, established before marriage, would not be considered marital property (unless you co-mingled trust and personal funds), but the receipt of payments or income during the marriage may be.