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Is Your Child’s Trust Fund Safe from Your Child’s Spouse?

October 6, 2022

If you want to preserve assets for your children or grandchildren, you may already have heard about using a trust fund. Property placed in a trust fund is held and managed by a trustee for the benefit of a beneficiary. There are many advantages to creating a trust, including that it allows you to control when and how money is distributed to beneficiaries and protects assets from creditors. If set up properly, trust funds can also be kept safe from distribution in divorce, meaning that your child’s spouse will be unable to receive any portion of the assets held in trust if the marriage ends. This is because those funds are not the property of your child; the trust owns them. However, there are many different types of trusts and particular language that is required to achieve your desired outcome so an attorney is necessary to help advise you of your options and implement your plan.

What Are Some of the Considerations in Creating and Structuring a Trust?

There are several general considerations in creating any trust. These include deciding when beneficiaries should get distributions, how long the trust should last, and whether you need an independent trustee or a trust protector. If you are planning to establish an irrevocable trust, you also need to determine how much you can afford to place in a trust and whether it is worth it based on the amount you want to secure.

When it comes to safeguarding assets in the event of your child’s divorce, some of these questions take on added importance. For example, to protect a trust from distribution, you must structure it so that your child cannot control those assets. Your child should not serve as the sole trustee and/or have unrestricted power to remove and replace the trustees.

In addition, care must be taken in deciding how much trust income is paid to your child and how often. Regular mandatory payments from a trust can be used by the court to calculate spousal and child support. However, the undistributed trust principal is typically not counted for support purposes.

In some cases, you may want to bypass your child in favor of your grandchildren especially if your child is older and has children. In this instance, you may still need to consider what happens if your grandchild divorces.

Are There Steps Your Child Can Take to Ensure the Trust Fund Is Protected in Divorce?

Your child should have a prenuptial (or post-nuptial) agreement in addition to the trust. Such an agreement can designate trust income and assets as separate property not subject to equitable distribution. Trust funds also should not be commingled. If separate funds are deposited into a joint bank account or used to pay for marital expenses, they may become marital property subject to division in divorce.

Can You Make Your Child’s Spouse a Beneficiary or Trustee of the Trust?

Trust beneficiaries and trustees do not have to be limited to lineal descendants. However, it is recommended that you place limitations on the spouse’s rights. For example, the spouse could be prohibited from getting money or being a trustee if he or she cohabits or marries another individual. You may also want to designate a trust protector who has the power to add or remove beneficiaries of the trust, such as your child’s spouse if the circumstances warrant it.

When Should You Set Up a Trust?

Trusts have other advantages besides protecting assets in divorce so even if your child is not currently married, it may be beneficial to set it up now. It’s best to consult an attorney who can help you develop a comprehensive estate plan that could include a trust in the appropriate circumstances. Our attorneys have extensive experience drafting trusts and estate plans to help clients leave a lasting legacy for their families. Contact us to discuss your estate planning needs.

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