Introduction: The Nature and Purpose of Trusts
Most laypeople are familiar with the concept of a trust, but very few people in the general public understand how trusts work. Essentially, trusts are legal instruments which hold and distribute assets to selected beneficiaries. In a way, trusts can be likened to a special sort of asset account which is used specifically for the benefit of selected individuals. When a person establishes a trust, the creator of the trust (known as the “grantor” or “settlor”) chooses another person to manage and oversee the administration of the trust; this manager is known as the “trustee,” and there is a “fiduciary” relationship between the grantor and the trustee. This means that the trustee is obligated to fulfill the instructions of the trust, and may face serious consequences if he or she fails to satisfy this obligation.
Trusts can be set up to carry out a wide range of purposes. Typically, a grantor places assets in a trust (i.e. cash or other property), and then those assets are periodically distributed to beneficiaries. As the moniker implies, a beneficiary is literally just a person who has been selected to receive the assets of the trust. Importantly, trusts can be customized to suit a variety of purposes. Many grantors, for example, put restrictions on how trust assets may be used – education, professional training, healthcare, and so forth. In this way, trusts are highly useful because the grantor is able to firmly control how trust assets are used.
Trust Assets May Be Subject to Division in Divorce
How are trust assets handled in a divorce? The answer is that trust assets must be subjected to the same sort of analysis which is employed with any other type of asset. To determine whether trust assets are subject to division, there must be a determination as to the character of those assets – i.e. whether trust assets are separate property or marital property. If trust assets are characterized as marital property, then those assets will be subject to division, just like any other type of property. Relevant to this analysis is the variation of the trust itself: there are different types of trusts, and certain trusts (i.e. “irrevocable trusts”) are considered separate from the grantor for tax and ownership purposes.
Consider the following scenario: a husband and wife establish a revocable trust which is intended to hold assets until their child reaches the age of 18. All the assets placed in the trust are marital property, as the assets consist of cash earned by both spouses (in the form of wages) during the marriage. Because the trust is revocable, the trust assets are still considered as part of the marital estate. If the spouses end up divorcing, these assets will be counted as part of the marital estate and subject to division. This does not necessarily mean that the trust itself will be dissolved, but the assets will be taken into consideration during the division process.
Consider another scenario: one spouse regularly receives a distribution from a revocable trust established by his or her parents. Because the trust is considered part of the parents’ estate, and the distributions are “gifts” to the recipient spouse, these distributions are separate property and are not taken into account during the property division process.
Even if a trust (or its distributions to a spouse) is considered separate property, a Colorado court may still take it into account when dividing up the marital estate. The reason is because separate property assets can still be used as a reference to determine the overall economic circumstances of the spouses.
General Rule – Trusts Complicate Property Division
Trusts are complex entities which often have complicated instructions. As a general rule, readers need to know that trusts will invariably complicate the property division process. Again, from a property division standpoint, the same principles which determine characterization still apply, but the presence of a trust will always make the division process more difficult.
Contact the Drake Law Firm for More Information
If readers would like to learn more about trusts in a Colorado divorce, property division in general, or another aspect of the divorce process, contact one of the family law attorneys at the Drake Law Firm today by calling 720-637-2181.