Inheritance Trusts & Divorce
While many people allow their heirs to inherit their property outright, some leave property for certain heirs in the form of a trust. Called "testamentary trusts" because they're set up by a testator's last will and testament, these trusts protect the heir's inheritance from seizure by creditors. These creditors include a soon-to-be-ex-spouse in a divorce case.
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What A Trust Is
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A trust is when someone conveys property to one person or entity, called the trustee, to hold for the benefit of someone else, a beneficiary. The trustee holds legal title but doesn't actually own the property in the traditional sense of the word. Although legal title involves the right to control the property, the trustee must always use this power for the benefit of the beneficiary. The beneficiary holds equitable title, which means he gets all the benefit of the property. Since neither the trustee nor the beneficiary actually owns the trust's property, a creditor typically can't get at it in most situations.
Marital Property Division In General
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Marital property division, like many other classes of law, varies from state to state. The majority of states follow equitable distribution, which requires an equitable, or fair, division of marital property and debt that can be unequal in the presence of certain statutory factors. A minority of states follows community property, which requires an equal division of the marital estate. Among the states in each system are variations as to what constitutes marital property and how the court should divide it. However, jurisdictions divide only marital property. Property left to either party in a testamentary trust does not constitute marital property.
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How A Testamentary Trust Works In Divorce
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Property left to you as the beneficiary of a testamentary trust is protected in your divorce for two reasons. On one level, the property wouldn't have been marital even if you had inherited it outright; the definition of marital property generally excludes property acquired by either party through inheritance. On another level, marital property has to be something a party actually owns at the time of separation or, in some states, divorce. Since the property in your trust isn't actually yours -- the trustee holds legal title, and you just enjoy the benefits -- it isn't something a court can divide in your divorce.
Indirect Ways Your Ex Can Get At Your Testamentary Trust
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Although trust property is not divisible by the court in either equitable distribution or community property proceedings, your ex can sometimes still get at some of the benefits in indirect ways. In equitable distribution states, your entitlement as beneficiary of a trust will probably qualify as a "distributional factor" entitling the other side to an unequal division of property and debt. In alimony and child support cases, the benefits you receive from the trust can be counted as income, increasing your ability to pay alimony and child support and reducing your need to receive it.
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