Trusts are legal tools used to help protect assets. An individual or couple can use these legal tools to protect almost any type of asset, including cash and real estate. There are two main categories of trusts, revocable and irrevocable. The owner of a revocable trust may change the terms of same at any time. Because of this, the assets remain in control of the owner and can be subject to creditors. The terms of an irrevocable trust cannot be changed once the assets have been placed in same without the consent of the beneficiaries. Because the control over the assets is removed from the owner, irrevocable trusts are mostly protected from creditors and tax consequences.
Impact of trusts on divorce
Revocable trusts, because the assets remain in the control of the trust owner, are generally subject to equitable distribution as part of the marital estate. Irrevocable trusts, however, are often outside of the marital estate and are subject only to the terms of the trust regarding distribution of the trust assets. Courts will review the type of trust at issue and consider various factors to determine if the trust is marital property. These factors can include when the trust was established and what assets were used to fund the trust. Another factor the courts will take into consideration is the language used to create the trust. In many cases, whether or not the court can take the trust into consideration will depend on the terms and conditions of the trust.
So, what happens when one spouse is the beneficiary of a trust that was created prior to the parties' marriage? Because the terms of the trust dictate when a beneficiary may receive income/assets from the trust, Pennsylvania has determined the that beneficiary spouse does not "acquire" the assets in the trust until he/she has the right to withdraw the principal of the trust. Solomon v. Solomon, 611 A.2d 686 (Pa. Superior Court). Therefore, only the increase in value of the principal of the trust the beneficiary spouse has access to during the marriage is considered marital property.
Marital Assets Moved Fraudulently into Trust
Often, a spouse will attempt to shield assets from equitable distribution by placing said assets in trust without the knowledge or consent of the other spouse. Pennsylvania Courts have allowed the injured spouse to challenge the transfer as fraudulent under Section 3505(e) of the Pennsylvania Divorce Code by showing that the transfer was made without adequate consideration to a third party (i.e. the trust) and that it was done without the consent of the injured spouse.
The exact impact of a trust on a divorce will depend on a myriad of facts. Please contact Testa & Pagnanelli, LLC to discuss your case and your best options for maximizing your results in settlement and/or equitable distribution.