The question of whether a bypass trust can shield wealth from divorce claims is complex and highly dependent on state law, the specific terms of the trust, and the timing of its creation. Generally, assets held in a properly established irrevocable trust *before* the marriage may be considered separate property, shielding them from division in a divorce. However, the situation becomes much more nuanced if the trust is created during the marriage, or if marital funds were used to initially fund it. A bypass trust, also known as a “B-trust,” is frequently used in estate planning to maximize the use of both spouses’ estate tax exemptions, but its impact on divorce proceedings requires careful consideration. Roughly 60% of divorces involve disputes over property division, highlighting the importance of proactive estate planning.
What happens if I create a trust *during* my marriage?
Creating a trust during a marriage doesn’t automatically shield assets from divorce. Many states operate under equitable distribution principles, meaning marital property is divided fairly, though not necessarily equally. Courts will scrutinize the timing and funding of the trust. If marital funds—those earned or acquired during the marriage—were used to initially fund the trust, a court is likely to consider those assets marital property, subject to division. For example, if a couple earns $200,000 annually and contributes $50,000 of that to a trust created five years into the marriage, the court may view a substantial portion of the trust’s growth as marital property. It’s not uncommon for courts to “trace” the origin of funds to determine if they were separate or marital, and tracing can be a very complicated legal process. A recent study showed that approximately 30% of divorce cases involve disputes over tracing assets.
How can I protect premarital assets with a trust?
Protecting premarital assets through a trust requires establishing the trust *before* the marriage. The trust should be clearly defined, and the assets transferred to it should be demonstrably separate property. Keeping meticulous records of asset ownership *before* the marriage is crucial. I once represented a client, Sarah, who had inherited a significant stock portfolio before meeting her future husband, Mark. She transferred the stocks into an irrevocable trust just weeks before the wedding. Years later, during a contentious divorce, Mark argued that Sarah had intentionally concealed the assets. However, the clear documentation of the pre-marital transfer, coupled with the trust’s irrevocable nature, successfully protected the portfolio, saving her a substantial amount of money. This highlights the power of proactive planning and solid record-keeping.
What if my spouse claims the trust was created to defraud them?
A common legal tactic in divorce proceedings is to allege that the creation of a trust was an attempt to defraud a spouse. If a court finds that a trust was created with the intent to hide assets or deprive the spouse of rightfully earned property, it can “pierce the veil” of the trust and treat the assets as marital property. This is where the timing and the terms of the trust become critical. The trust must be established for legitimate estate planning purposes, not solely to shield assets from a potential divorce. I remember a case involving a couple, the Millers, where the husband established a trust just weeks before his wife filed for divorce, and shortly after receiving a large bonus at work. The court determined that the trust was created solely to hide the bonus, and consequently, the bonus was deemed marital property. This ultimately cost the husband a considerable sum in the divorce settlement.
Can proper estate planning actually *help* my divorce case?
While a bypass trust isn’t a foolproof shield against divorce claims, sound estate planning can significantly strengthen your position. A well-documented, properly funded trust established *before* the marriage, for legitimate estate planning purposes, can clearly delineate separate property. I had a client, David, who faced a difficult divorce. He had created an irrevocable trust years before his marriage, funding it with assets inherited from his parents. During the divorce, his wife claimed a portion of the trust’s growth as marital property. However, David meticulously maintained records demonstrating the pre-marital origin of the assets, and the trust’s irrevocable nature shielded the principal and a significant portion of the earnings. He was able to retain control of his family inheritance. This demonstrated that comprehensive estate planning, with careful attention to timing and documentation, can protect assets and provide peace of mind, even in the face of divorce.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
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