Tuesday, January 11, 2011

The effect of divorce on irrevocable trusts.

When planning their estate, optimistic couples often do not take into consideration the effects that a future divorce would have on the disposition of their assets after their death.  Obviously, couples do not marry with the expectation of divorce, and it can be a sensitive subject to approach during the creation of an estate plan.  After all, divorce and death are painful subjects. 

The legislature has directly addressed some estate planning issues that arise after a divorce including Section 2507(2) of the Pennsylvania Probate, Estates and Fiduciary Code.  This Section states that upon divorce any provisions in a pre-divorce Will that favor or relate to the testator’s former spouse will be ineffective, unless it is clear from the Will that any such provisions were meant to apply despite divorce.  There are similar provisions for revocable conveyances; however, there is not protection under the Pennsylvania code for irrevocable trusts created prior to a divorce

A trust is an instrument where the grantor (the person creating the trust) transfers their assets into a trust with terms that dictate how and to whom the income the trust generates should be distributed.  An irrevocable trust is a trust where the grantor, once he or she creates the trust and transfers assets into the trust, is unable to revoke the contents or terms of the trust.  Irrevocable trusts are used because, although they remove future control of the assets from the grantor, they can offer some tax benefits and creditor protection that revocable trusts and other estate planning instruments do not provide.  At the time of the trust’s creation, the grantor of an irrevocable trust, like other trusts, is free to direct how the proceeds of the trust are distributed to third parties.  These third parties often include the grantor’s family members. 

After divorce, while Wills and many revocable conveyances are protected under the Pennsylvania statue, irrevocable trusts are not.  Therefore, a failure to plan for what will happen to an irrevocable trust in the event of a divorce could result in the grantor’s estranged spouse receiving significant funding from the trust, despite the dissolution of the relationship between the parties.  Accordingly, it is important, while creating an irrevocable trust, to include language in the terms of the trust that will alter the distribution to the estranged spouse in the case of divorce.  Such language could state that legal separation or divorce is to have the same effect on the trust that the death of the spouse would have.  Thus, the estranged spouse would cease to have any claim or interest in the trust upon divorce.  The provisions could also state that the interests of third parties (such as other members of the grantor’s family or the couple’s children) that would have become ripe upon the death of the spouse are to become effective upon divorce. Thus, if legal separation or divorce occurs, the spouse will not continue to benefit from the trust, and other third parties will continue to receive the proceeds as directed by the trust’s terms. 

Trusts, estates, wills and divorce documents involve complex language and laws.  Consult with an attorney to make sure that you have adequate protection. 

Written by Elizabeth Early, law clerk at the Law Offices of Linda A. Kerns, LLC.  Edited by Linda A. Kerns.


Florida Lemon Law said...

even if a spouse's interest in a third-party spendthrift Trust like this one is considered a "non-marital" asset, any enhancement in value and appreciation of the Trust during the marriage due to the efforts of either spouse could nevertheless be a "marital asset." For example, what if the spouse/discretionary beneficiary also serves as sole Trustee of her Trust (or perhaps Co-Trustee with a compliant relative) and is active in the management/oversight of the Trust's investments during the marriage? Would the Trust's appreciation during the marriage be considered a "marital asset?"

Florida Lemon Law

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Unknown said...

What if the sole trustee gets divorced, ( me). The soon to be ex-spouse, (wife) has been excluded from the the living trust and its irrivocable. No assets have been comingled. Is she entitled to any of it. Getting divorced in Oregon

Linda A. Kerns, Esquire said...

It is impossible (and irresponsible)to answer specific questions without understanding all of the details of each specific case. Additionally, I currently only practice in PA and NJ. Obtain legal advice from an experienced attorney in your jurisdiction.

Linda A. Kerns, Esquire said...

Thank you for all of your comments and your interest in my writing.

Anonymous said...

In New Jersey, if a child has an irrivocable trust from one parent with a fully paid for investment home held in the trust, can the childs parents divorce cause the child to lose the home in the trust?? Only one parent currently knows of the trust.

Anonymous said...

It is irresponsible to post inaccurate information, especially when people are seeking correct answers to guide their lives. Pennsylvania adopted the UTC trust code in 2006. It assumes all trust are irrevocable unless stated otherwise. 7710.2 by its terms governs all inter vivos trust including irrevocable one. It states " The rules of construction that apply in the Commonwealth to the provisions of testamentary trusts also apply as appropriate to the provisions of inter vivos trust.

fortune cookie said...

what happens if : someone creates a trust prior to marriage and its a Irrevocable Trust in which the Grantor and Beneficiary are the same person. You take pre-marital assets and after marriage transfer your assets into the trust and any income from those assets during your marriage you live off of and during divorce expect the trust will be exempt from support obligations. One question is what if the person is a NJ resident but has family and the assets are in PA and creates a PA trust but is not a resident? and created this "self settled" trust in 2002 but files the first return in 2009 ?