In a recent article published by the Lawyer’s Daily, the issues of Family Trusts was addressed in relation to their significance in the face of divorce or separation by parties relevant to the Trust. As the authors acknowledge in their article, while trusts are typically complex entities, they become even more complicated in circumstances where a divorcing person is either the Trustee of a trust, or a beneficiary of a Trust.
In general, a trust holds property, which is held and managed by Trustees appointed to the trust. The property held by the trust is generally being held for the benefit of the beneficiaries of the trust. The person who transfers property to a trust is called the Settlor of the trust and they may transfer property or assets to a trust for any number of reasons, but quite often for tax or estate planning purposes. The property that is held by the trust is not owned by the trust, but is held for the benefit of the beneficiaries. If you have ever heard the phrase “held in trust”, this is what it refers to – the trust holds the property in trust for the beneficiaries, who are the actual “beneficial owners” of the property.
In divorce matters, trusts usually become an issue when a divorcing party is either a beneficiary, or a Trustee. In the case of a beneficiary, the spouse could potentially assert a claim to either the capital assets of the Trust – arguing that they be considered property of the beneficiary; or to spousal support on the basis of the income generated by trust. The situation becomes more complex when the beneficiary is a discretionary beneficiary – where the Trustees have the full discretion as to whether to pay out income, or distribute capital assets, from the trust to the beneficiaries. In this case, if the beneficiary has no guarantee over receiving the assets or the income it becomes much more difficult to argue a claim to support or property over assets and funds that are not actually guaranteed to be provided to the beneficiary.
In the case of Trustee spouses who hold legal title to the property of the trust, for the benefit of the beneficiaries, the opposing party may attempt to claim the value of that property as being part of the matrimonial assets. Or, alternatively, if a Trustee spouse is paying themselves as a beneficiary out of the trust, that income, which is determined in part by the Trustee spouse could be considered part of the actual income of the Trustee spouse for support purposes.
As was stated above, the matters with Trusts are complicated, and made even more complex by the fact that decisions in how to address the capital and income of a trust are very fact driven and variable based on the facts of any given family and the particulars of the trust in question.
Quite often, in order to attempt to protect the assets of the trust, and the beneficiaries, Trustees will require beneficiaries to obtain a prenuptial agreement from any future spouses as part of the conditions of being a beneficiary. While this does not protect the Trustee should they divorce, prenuptials for beneficiaries is another important aspect of trust planning.
If you require assistance relating the breakdown of a relationship in the presence of a family trust, the lawyers as Mincher Koeman LLP can help you. Call us at (403) 910-3000 or email us at firstname.lastname@example.org.