The division of assets is a complicated, stressful process in any divorce. But when one spouse is a beneficiary of a trust, this adds unique complexities to the divorce proceedings. When a trust is involved, it is important that both the beneficiary spouse and the nonbeneficiary spouse protect their interests by consulting with an attorney with expertise in how trusts are addressed in divorce under Connecticut law.
What is a trust?
A trust is an entity created to hold assets for the benefit of certain persons or entities, and which is managed by somebody called a trustee. The trustee has a fiduciary duty to act in the best interest of the trust. The concept of a trustee is similar to that of the executor of a will: The trustee must carry out the wishes of the creator, or settlor, of the trust, which are detailed in the trust document, just as an executor is charged with distributing the contents of an estate pursuant to the will.
A trust can be a testamentary trust, which means it was created by a will and becomes effective upon the settlor’s death. Or it can be a living trust, or inter-vivos trust, which means the assets are placed in the trust while the settlor is still alive.
How much control does a beneficiary have over the funds in the trust?
How much control the beneficiary has over the funds depends on the terms of the trust.
For instance, in some trusts, the terms state that the beneficiary may go to the trustee and demand the withdrawal of certain funds or property held by the trust when certain events happen, such as when the beneficiary turns 30 years old, gets married, has a child, or wants to buy a home. Under those circumstances, the trust document will say the trustee does not have a choice and must provide the funds or property to the beneficiary. The terms may dictate that the beneficiary be given power of appointment for a certain percentage of assets when he reaches a certain age, such as 25 percent upon reaching age 25.
Alternately, some trusts are spend-thrift trusts, which means the trustee has complete discretion over whether or not to give funds or property from the trust to the beneficiary.
How are spend-thrift and non-spend-thrift trusts treated in divorce in Connecticut?
A spend-thrift trust is designed to protect the funds inside the trust from any creditors of the beneficiary. In previous cases, the Supreme Court of Connecticut has considered a spouse that is divorcing a beneficiary to be a creditor in this context.
How a spend-thrift trust is navigated in divorce proceedings has importance to three parties: the nonbeneficiary spouse, who usually wants to share in the trust property and income; the beneficiary spouse, whose goal is usually to protect that property and income from having to be shared with the other spouse; and, very importantly, the trustee, who is not married to anybody and is in charge of the trust corpus.
Under Connecticut law, property that is inside a non-spend-thrift trust is potentially subject to distribution to the nonbeneficiary spouse in a divorce to the extent that assets in general would be distributed to the spouse. Whatever rights the beneficiary has under the trust document, the court can, under certain circumstances, make that person share the benefits of those rights with the other spouse.
In relation to a spend-thrift trust, the court might order the beneficiary to ask the trustee for money, but the court cannot order the trustee to distribute the money. The trustee’s duty is not to the divorce court; it’s to the person or entity that put the money in the trust, and the relationship between settlor and trustee is defined by the trust document. The trustee has the duty to protect the purpose and integrity of the trust.
What about funds that the beneficiary received from the trust before the divorce?
Even in the case of a spend-thrift trust, both spouses must be mindful that if the trustee gives money or property to the beneficiary spouse before or during the marriage, the money or property is no longer inside the trust, is marital property, and is subject to distribution to either spouse.
What about funds received from the trust after divorce?
The court could order the beneficiary spouse to share with the other spouse what he or she receives from a spend-thrift trust after the divorce if and only if there is an alimony order. If alimony is not ordered at the time of the divorce, it cannot be ordered afterward.
Proceeds from the spend-thrift trust received after divorce can, however, be applied to child support, whether or not it was ordered at the time of the divorce. Child support can always be sought if the child is a minor.
Distributed funds could also be ordered to be used for college, but only up to the in-state cost of tuition, room and board, and mandatory fees at the University of Connecticut (the child can go to a different college, but only that amount will be ordered paid).
What about if there is a premarital agreement?
Our family attorneys at Ruel Ruel Burns Feldman & Britt have been hired to draft premarital or prenuptial agreements where one of the goals is to protect the trust for which our client is the beneficiary. In these premarital agreements, the other spouse may waive his or her right to the income, assets, and proceeds from the trust.
Even with a premarital agreement, however, the terms of the agreement cannot serve to result in an unconscionable outcome. Unconscionability is a subjective term but often means that the other person cannot become a ward of the state or be rendered unable to take care of the children.
Keep in mind that while premarital agreements and spend-thrift trusts can protect property, they cannot prevent litigation. Litigation can always be presented.
Even when there is a premarital agreement or a spend-thrift trust in place, there are creative solutions that can lead to a reasonable resolution. For instance, perhaps the beneficiary spouse can keep the trust property, but the other spouse gets 90 percent of the property outside the trust. The latter part normally would not be fair, but because of the existence of the trust, it may be fair.
At Ruel Ruel Burns Feldman & Britt, we have represented both beneficiary spouses and nonbeneficiary spouses, as well as trustees, in divorces involving trusts. This experience has provided us with many perspectives and insights to approach complex divorce matters and effectively deal with the other side.
Whether you are the beneficiary spouse or the nonbeneficiary spouse, the family law attorneys at Ruel Ruel Burns Feldman & Britt can provide you with expert guidance regarding your trust and divorce. Call 860-206-9096 or click here.