Estate planning is essential for families with children for a vast range of reasons, including guardianship preferences, inheritance, and preserving your legacy. When a couple with children is divorcing, ensuring that these children will receive their inheritance is often a significant concern for both parents. Family trusts allow parents to protect the assets they wish to pass on, such as a home, bank account assets, investments, or a family-owned business. Careful estate planning, including the formation of a trust, can offer many benefits to you and your children after a divorce. If you have questions about trusts and divorce, consider contacting a seasoned estate planning attorney at Von Rock Law by calling (866) 720-0195 to schedule a personalized consultation.
Revocable Trusts Versus Irrevocable Trusts
There are two primary types of trusts: revocable trusts and irrevocable trusts. With a revocable trust, also known as a living trust, the creator can change or dissolve it and make a new estate plan at any point. However, many family trusts are established as irrevocable trusts. Once the grantor finalizes an irrevocable trust, there is little freedom to make changes. That is because the property transferred to an irrevocable is no longer legally the property of the person or persons who initially formed the trust. A family trust can therefore hold its assets for the trust’s beneficiaries regardless of life-changing events.
Estate Planning When Divorcing with Children
Divorces are not only emotionally draining and stressful; they also almost always significantly impact finances and estate planning objectives. The most challenging part of the divorce proceedings for many couples is agreeing on the fair division of property and assets. California is a community property state, meaning a court will exercise its own judgment to divide a divorcing couple’s marital assets equitably unless the partners reach a different agreement independent of the court. During the divorce, the law considers everything owned jointly and acquired during the marriage community property. Property and assets a person held before or outside the marriage are separate.
Trusts and Community Property
If the couple created a revocable trust as community property or the two set it up together, they may need to dissolve it. Each partner can later make a new trust without their ex-spouse, naming the children as beneficiaries. However, it is important to note that divorcing couples cannot create a new trust until the proceedings are final.
The law recognizes trusts a person creates before marriage as separate property. A trust is a legal entity that owns its property and assets. With careful planning, certain trusts will safeguard the beneficiaries, making them standard estate planning tools for families.
Divorcing Spouses Cannot Use Trusts to Hide Assets
While using a trust to protect children’s inheritance during a divorce is legally permitted, using trusts to hide assets from a spouse is not. Both parties to the divorce must disclose all property and finances. According to the California Probate Code § 15203, trust grantors can create trusts only for lawful purposes. The divorce process in California has an extensive discovery procedure to ensure both spouses provide documentation to verify all their assets. There is an exhaustive preliminary and final disclosure process to complete before the divorce decree is issued.
Penalties for Hiding Assets
Among other penalties, if the court finds that one spouse has been using a trust to hide assets, the presiding judge could order that spouse to share half of the previously concealed money and property with the other partner. If the court determines that a spouse has been hiding $50,000 in a trust, they may mandate that spouse to give the other $25,000 during divorce proceedings.
The Differences Between an Outright Inheritance and an Inheritance in Trust
A trust may help to protect your children’s interest not only during your divorce, but in the event of their own. This is because of some key differences in how assets are inherited from a trust versus either intestate or via a Last Will and Testament.
Broadly speaking, an estate’s beneficiaries may receive assets in two main ways. These include outright, also known as free of trust, and through a revocable or irrevocable trust, known in either case as an inheritance in trust. For an outright inheritance, if the child marries and divorces, their ex-spouse could claim that the assets are marital property and argue that consequently the inherited assets should be divided as community property. When a trust is in place, it can protect an adult child’s inheritance, with a trustee managing how and when the children will receive their inheritance. An experienced estate lawyer at Von Rock Law can provide legal advice regarding trusts and divorce and help you prepare a solid estate plan to protect your legacy and your children’s inheritance.
Family Trusts Help Protect Assets During California Divorce Proceedings
A trust fund is a legal entity holding assets and property, with such assets or the income generated from them to be disbursed to beneficiaries at a specific time or under certain conditions, established in the trust documents. Estate trusts allow the grantor to direct and control the distribution of their assets, regardless of life-altering events such as divorce. Some types of trusts can also provide protection for the assets they contain during divorces. Trusts that provide asset protection during a divorce typically include family trusts and domestic or foreign asset protection trusts.
According to the American Bar Association, trust makers commonly establish family trusts to benefit their children and other family members. There are a few ways a family trust can protect children’s inheritance.
The Grantor Selects Trustees to Manage the Assets
The person who forms a trust has the power to select an individual of their choice as a trustee to manage the trust assets after the grantor’s death. Concerned grantors can even specify that an ex-spouse can never act as a trustee, to ensure that the former spouse will not handle the transferring of the inheritance to the children.
The Trustor Has the Freedom to Direct How Beneficiaries Spend the Inheritance
A grantor not only has the power to choose the trustee, but they can also choose how they want the beneficiaries to use the inheritance. They can set up a trust instructing that beneficiaries use the money to pay for college, purchase a home, and more. These requirements could help to protect beneficiaries from making rash financial decisions.
Call an Experienced Estate Planning Attorney Today
Many people realize that a divorce will change nearly every aspect of the family’s immediate habits. However, divorcing couples commonly fail to consider how this parting of ways will affect their individual financial legacies. When a couple decides to divorce, they should begin planning. For parenting couples, this includes creating or modifying their estate plans to protect their shared children. Once the proceedings start, they must wait until the divorce is final to make a new trust. For more information on trusts and divorce, schedule an appointment with a qualified estate planning lawyer with Von Rock Law at (866) 720-0195.
