How Are Trust Assets Handled on Divorce in the U.S.A. and U.K?
By: Paul Black, The Law Office of Paul Black
The happiest day of your life was your wedding day, but the fairytale is coming to an end. Divorce is often emotional and volatile. When property is involved, it can become quite contentious. Whenever you’re facing a major change in life circumstances, a lawyer can advise you about the best decisions for your particular situation and how to protect yourself legally.
Although U.S. and U.K. divorce laws share the same foundations and principles, there are several key differences regarding the division of marital assets.
The divorce rate is declining in the U.S.A., partially because couples are marrying when they’re older and more established. This means that assets like businesses and property are an existing part of the equation before they say “I do”. Anything added or purchased afterward is generally considered marital property.
During a divorce, these assets are either sold and the proceeds split or they’re divided after negotiations with a mediator or lawyers. Large items like businesses, properties, and trusts often complicate the issue.
Living in a community property state, such as California, affects asset division.
There are nine states that recognize the concept of community property during marriage. Courts in those states consider any assets obtained during the marriage to be the equal property of both partners. That includes businesses, investments, and any other object of monetary value. This is even if the asset is considered the property of only one partner, or the couple files taxes separately.
In cases where an asset continues to generate income, such as investments or rental properties, an alimony trust can be established. This channels generated income to a recipient former spouse through a third-party trustee.
In the absence of a legal agreement stating otherwise, all assets are divided 50/50 when a divorce is granted in a community property state. Therefore, it’s very important to legally distinguish between premarital and marital assets in advance of marriage.
Establishing a Trust
One way to protect assets (and limit tax liabilities) is through establishing a Trust. Understanding a bit about how trusts affect property division during a divorce can help you navigate the process.
Placing pre-marital assets into a trust makes them unavailable to your spouse even in a community property state. If you don’t want the drama of asking your future spouse to sign a “prenup” (prenuptial agreement), putting your assets into a trust before you get married is a legally sound option.
3 Types of Trust Assets
1. Trusts established during marriage are accessible only to the trustee. They’re considered separate from marital assets unless the marital property was transferred to that trust. They can be revoked by the judge, and assets sold or divided as part of the estate.
2. Irrevocable trusts, however, are considered untouchable in court. These are generally undone only by the death of the settlor.
3. Discretionary trusts must follow the directives of the settlor. If you’re the beneficiary, you’re protected by the stipulated rules. A trustee is designated to make decisions regarding how and when funds are distributed to beneficiaries.
Depending on the nature of the trust, some of the assets from those funds could be considered marital property during divorce proceedings. For example, unless a “spendthrift clause” specifically decrees that funds from the trust are closed to future ex-spouses, some may be awarded as part of the settlement.
Although the U.S. and the U.K. share a common language, their attitudes toward marriage and divorce are a bit different. The process of obtaining a divorce in the United States is much simpler than in the U.K. Although it usually requires a waiting period of at least six months, a no-fault divorce is an option in many states.
While contested divorces aren’t as common in the U.S., proving infidelity can increase the financial settlement for an injured spouse in 21 states. Views on what constitutes adultery differ between the countries. If you have dual U.S./U.K. citizenship, it pays to investigate which legal system works in your favour before deciding where to file.
In the UK
The approach taken in the Courts here, is somewhat different. we outlined the main points in our post “Trusts and Divorce – A Guide” which can be found here.
Marriage is a union of many things, and that includes assets. No-one enters into a partnership thinking it will fail, but it is important to protect yourself legally and financially for whatever the future holds. Sitting down with a lawyer before major life decisions will provide the foundation for a smooth transition if things don’t work out the way you planned.
About the author:
Paul Black is a probate attorney in Atlanta, GA, and founding partner of The Law Office of Paul Black, where he focuses on elder law, estate planning, and special needs planning. Paul has been named as a SuperLawyers “Rising Star” in the area of Estate Planning and as a member of Georgia’s “Legal Elite” by Georgia Trend magazine.
If you would like more details on this or want to discuss your family law matter, please do not hesitate to contact James, Frank or Evelyn. Paradigm Family Law offers a free initial consultation and our fixed fee solutions cover financial proceedings from start to finish. You can call us on 01904 217225 or email us to [email protected].