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Investing trust assets and divorce

investing trust assets and divorce

The Connecticut Supreme Court found that trust assets were moved out of reach of a divorcing wife through a 'decanting process,' but would be considered for. As an alternative to a prenuptial or postnuptial agreement, one might consider whether a trust can protect assets in the event of a divorce. Generally speaking, a trust fund is divided like any other matrimonial asset, but the issues can be complex and will depend on many factors. ELYSION SOMEPLACE BETTER CHOMIKUJ PL

To split an IRA or health savings account HSA , financial institutions generally require the parties to submit a "transfer incident to divorce" form as well as a copy of the divorce decree. Fidelity requires a copy of the divorce decree or legal separation order signed by a judge along with the form. The form you need: Change of account registration Be sure to update your beneficiary information as soon as possible following the divorce. The payment of accounts after your death is generally governed by the most recent beneficiary designation on file so it's vital to keep them up to date.

Your estate planning documents such as a will or trust generally would not govern unless you specifically named the trust as the beneficiary. You should consult an attorney if you have any specific questions about your situation. Find out: How to update your beneficiaries Taxable investment accounts When it comes to taxable investments, it's not about the value you see on your statement, but what you get to keep after taxes.

In general, when dividing investments in a divorce, couples may have options: One option would be to sell investments and divvy up the proceeds. This can have tax consequences. Alternatively, you can generally split the investment holdings. For instance, if shares of stock are part of the marital property to be divided in half, one party gets 50 shares and the other party gets the remaining 50 shares.

The IRS allows divorcing spouses to each keep the same cost basis and holding period for an investment they already own. Cost basis is the price at which the investment was originally purchased. Holding period is important because profits from the sale of investments owned for a year or less are taxed at your ordinary income tax rate, while investments held for more than a year are taxed at lower long-term capital gains rates.

Assuming your investment has appreciated, you will end up with less than the sale price—because you have to pay taxes on any gains over the cost basis. Exactly how much will depend on your tax rate, holding period, and cost basis, which can vary for a single investment if you bought shares over time. So, if you're dividing investments equally, it's important that the cost basis is divided equally as well—your financial institution or Fidelity representative should be able to help with that.

Of course, other important things to think about with regard to investments are the future prospects for growth or income, your own tolerance for investment risk, your financial needs, and your timeframe for investing. Who gets the health insurance? Health insurance is a valuable asset too. Generally speaking, when the policy is through an employer, the health insurance stays with the primary owner.

But some states have laws that require employers with group policies to make them available to ex-spouses after a divorce. In some instances, you may have continued workplace health insurance coverage for a period of time after divorce. If you don't have coverage of your own at work, you may be able to continue your spouse's existing coverage through the Consolidated Omnibus Budget Reconciliation Act COBRA provisions of your health insurance which allows you to continue your current coverage for up to 36 months.

It may cost substantially more than your health insurance cost before the divorce, however. Ensuring that children have health insurance coverage is often a part of negotiations in divorce. Employers are required to extend group health care coverage to children of workers eligible for the plan.

If one parent has coverage through an employer, keeping the kids on the policy is often a solution. If there's no employer plan, making sure that kids have health insurance coverage may be part of the child support orders. Social Security and life insurance If your marriage lasted 10 years or more, and you have been divorced for more than 2 years, and you are unmarried, you can claim Social Security benefits on your ex-spouse's work record once you reach age There are some other caveats: You can only file on your ex-spouse's work record if the benefit you would get based on your own work is less than the benefit you would receive based on your ex-spouse's work.

Your benefit as a divorced spouse is equal to half of your ex-spouse's full retirement amount, if you start receiving benefits at your full retirement age. It is possible to set up the divorce agreement so that the cost of life insurance is included in alimony or child support payments. Disability insurance should also be a consideration.

In some cases, divorcing couples may be ordered to split life insurance policies. Whole life insurance has a cash value and may also be on the table for division in a divorce. With no support issues to consider, it is important to review your life and disability insurance, especially if you have been covered by an ex-spouse's employer plan. It may make sense to think about your specific insurance needs.

Protecting kids in divorce Planning for the future of your children is one of the most important considerations in divorce. How do the Courts deal with Trust assets in divorce proceedings? Given the increasing popularity of trust arrangements, family law has developed to deal with Trust assets on the breakdown of a marriage. The Court can treat Trust assets as income or capital available to one spouse and therefore available for division between the parties.

There must be certainty as to what the assets of the Trust include and who is to benefit from them. If these constituent parts exist, then further consideration will have to be given as to the appropriate way to deal with the Trust on the breakdown of a marriage. Depending on the circumstances or ways in which the Trust assets can be treated by trustees or beneficiaries, the Court may have scepticism as to whether or not a trust is genuine.

Judges are used to coming across Trusts in divorce proceedings and will take a robust approach if they consider that a Trust has been created to hide or obscure the financial reality. There is a duty on each party to be open and honest about their financial position and there could be serious consequences in cases where attempts are made to deceive the Court, or your spouse, as to the true financial picture.

That being said, most Trusts will be genuine and, in such circumstances, the resources that the Trust provides to the spouse will be of importance in deciding what the assets of the marriage are and how they should be divided. In some circumstances, there may be other assets outside of the Trust, which are sufficient to meet the needs of the spouse who does not benefit under a Trust but, if not, that spouse may have to claim against the Trust assets themselves.

Any party to marriage breakdown should seek legal advice. The genuine Trust Trusts can be set up for various genuine reasons, including: To avoid or manage tax; To invest inherited assets; To protect wealth for generations to come; To give third parties beneficial interests in property; or Provide discretionary income or capital to a class or classes of beneficiaries. If your spouse is a beneficiary under a Trust, then it would be relevant to consider what income or future capital they may receive as a result of what other benefit they are entitled to.

The Court will take this income, capital or other benefits into consideration when deciding what resources your spouse have available to him or her, along with the extent to which the Trust assets are available or will be available in the future. Of course, the resources available to any beneficiary spouse under a Trust will depend on the Trust assets themselves, along with the terms of the Trust deed.

As mentioned above, there are different types of Trusts set up for different purposes and they will contain different assets of varying value depending on the purpose of the Trust. The Court has frequently said that it must look past the often complex structure of the Trust itself to the reality of the situation and financial or other benefit received as a result of one spouse being the beneficiary of a Trust.

The question that the Court will most often ask itself when determining the reality of the situation is would the trustees, if asked to do so by the beneficiary, advance all of the capital available in the Trust immediately or in the foreseeable future. If you believe that your spouse is a beneficiary under Trust then it is important that the following are considered: The drafting of the Trust deed itself. Is your spouse the settlor of the Trust i. Who are the beneficiaries and what interests do they have?

The pattern of previous distribution of assets, including capital or income. The existence or contents of any letter of wishes dealing with the way the trustees exercise their duties and discretion under a discretionary Trust.

If the Court can establish that the Trust assets are available to the spouse who is a beneficiary, the Court may make orders that assume that the Trust assets could be used to meet payments due under a Court order or that the beneficiary spouse will have their assets replenished by the assets of the Trust if the order is made.

However, Trusts can be set up as a vehicle to protect assets that might otherwise be considered matrimonial.

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Inheritance trusts are considered separate for purposes of asset division, provided the assets within the inheritance trust have not been comingled, liquidated, or deposited into a joint marital account.

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She is responsible for overseeing the delivery of all Wealth Management services by teams of professionals. Beginning her career as a trusts and estate attorney, Sharon is a Fellow of the American College of Trust and Estate Counsel and a nationally recognized speaker and author. Sharon, tell us a little bit about your practice.

Sharon Klein: Hi, Dan — thanks very much. Wilmington Trust offers the full spectrum of wealth management services in the divorce arena. That can run the gamut from running comprehensive financial projections using sophisticated proprietary analytics to help give attorneys leverage at the negotiating table, to investing settlement proceeds after the divorce is final, to acting as the neutral and impartial trustee, to advising on insurance needs, to reviewing business valuations, to reviewing estate planning documents, which typically need to be updated after a divorce, to providing custom financing and comprehensive family office services.

Elena, do you want to tell us a little bit about yourself and your practice? Elena Karabatos: Yes, Dan — thank you. Our firm does exclusively matrimonial work in New York law, and in New York State we are recognized for doing the most complex financial litigations to mediations and collaborative divorce.

Basically, we do all types of matrimonial matters. Our practice is dedicated to many complex financial matters. We do see a lot of high-net-worth clients and as such, we deal with trusts all the time. Those are the initial questions that clients often come to me with. Sharon, what should matrimonial lawyers look for when dealing with trusts?

Because while much will depend on state law in terms of whether a trust interest is accessible in divorce, the starting point is always going to be to determine the nature of the trust interest. The bottom line is that the less likely a beneficiary is to receive a distribution and the less control a beneficiary has over trust assets, the less likely that the trust assets are going to be accessible in divorce.

I have six key questions I think advisors should ask as they review trust documents in order to answer the question: Is this trust interest accessible in divorce? Question 1: Who created the trust? Courts are less likely to consider a trust created by a third party, which is, for example, a parent or a grandparent, reachable in divorce, because that is more likely to have been done as legitimate estate planning, as opposed to, for example, a trust created by a spouse, which might be seen as trying to shelter assets in anticipation of divorce.

Question 2: Who are the beneficiaries? Question 3: On what basis can trustees make distributions? If a trustee is given broad authority to make distributions in its sole discretion, the timing and the amount of distributions will be uncertain. Yes, making it less likely that a beneficiary will receive a distribution than, for example, if a trustee is required to pay income, or required to pay principal to a trust beneficiary pursuant to a so-called ascertainable standard, for example, HEMS, which is health, education, maintenance, and support.

Question 4: Is there a spendthrift provision? A spendthrift provision is commonly inserted in trust instruments as a form of creditor protection. In essence, what happens is that a creditor has to wait until a distribution is made to that beneficiary to assert a claim against those assets.

Question 5: Does a beneficiary have control powers? Control features that trust and estates attorneys commonly insert in documents include the ability for the beneficiary to be a trustee, even giving the beneficiary the ability to pay principal to herself pursuant to an ascertainable standard, like HEMS because that will prevent adverse estate tax consequences, or giving the beneficiary the ability to remove and replace trustees or giving the beneficiary a so-called power of appointment, which enables the beneficiary to redirect the distribution of trust assets.

The more control, the more likely that the trust will be included in the marital balance sheet. Question 6: Who is the trustee? So, these are the six questions that I would ask at the outset, while reading the trust document. Great, thank you. Elena, beyond reading the trust document, what else should a matrimonial lawyer consider? Elena Karabatos: Well, first of all, I want to say thank you, Sharon, those are great questions.

Now, I, as the matrimonial attorney looking at those questions, really, my job is to paint the picture to the court. You must remember a matrimonial court, a family law court is a court of equity. What the judge is trying to create is a fair result. That judge may not know much about trust and estates, but the judge certainly knows about fairness. Did the spouse receive regular distributions? Did the family prepare and count on a significant distribution?

Was it intended to be left to the children? These are all important questions. Quite frankly, I need to know the answers to these questions, whether or not I represent the beneficiary spouse or whether I represent the spouse of the beneficiary. But the point is, the history of the distributions is a critical factor in determining how we can argue and use it in the context of the matrimonial action.

Anything else is not really relevant at this time. Bottom line is, I reach out to my trust and estates attorney, people like Sharon Klein. Sharon Klein: Thank you. Elena Karabatos: Right, that is important.

That is very important to call Sharon. Sharon Klein: Well, I think together, we would work very well, because I think you need both sides of that equation to be successful. So, Sharon if a couple is getting divorced and they have created a trust during the marriage, what issues or potential pitfalls should they pay close attention to? So now if we pivot and talk about trusts created by the spouses during the marriage, there are three issues that come to my mind immediately.

Some documents accomplish that by using the notion of a floating spouse, which means the spouse is a beneficiary if the spouse is married to the creator at the time a distribution is made. So, that is a self-adjusting definition and can adjust and readjust and readjust again, with every marriage, divorce, and remarriage.

The second issue that arises when parties to a marriage have created the trust is a tax issue. We know that people create trusts to get those assets out of their estate for estate tax purposes. Because that is ideal estate planning. In addition, in the marital trust context, grantor trust status is triggered automatically in certain circumstances.

If a party to a marriage creates a trust, and the spouse could be an income beneficiary, that is automatically a grantor trust. The person who created the trust will remain liable to pay the taxes attributable to the distributions made to his beloved ex-spouse forever, a kind of nasty tax result if you ask that person. The problem is that Section of the Internal Revenue Code has been repealed for divorces beginning in The date of the trust is irrelevant. Let me tell you, this is a big deal.

The most common estate planning techniques entered into by spouses to a marriage are oftentimes grantor trusts and this is where collaboration between family lawyers and estate lawyers and investment advisors is key because the tax impact can potentially be blunted. This needs to be dealt with before the divorce is final.

There are things that you could do, as I say to blunt the tax impact. For example, maybe you insert a reimbursement provision in the settlement agreement, making the creator whole for the ongoing tax liability. Perhaps you could terminate the trust and pay it out to the soon to be ex-spouse and equalize from the other assets.

The point is this is an issue that needs to be addressed before the divorce is final. There have been a number of cases that say even if one or the other spouse creates a trust and transfers marital assets to that trust, if neither spouse is a trustee, if neither spouse is a beneficiary, if neither spouse has control over the trust assets, then those assets are not considered available on the divorce balance sheet. Then you get a case like the Yerushalmi case, which recently came out of New York, in which the court struck down apparently legitimate estate planning.

But for whatever the reason, your marriage ends in divorce. Now, your former spouse claims half of your assets, even though you both signed a prenup when you both were engaged. A divorce court can still find many reasons to declare a prenuptial agreement as null. The reasons can range from paperwork not being filed properly to spouses being mentally unfit to understand what they signed.

You thought that assets you acquired before marriage were safe from your ex, but the court decides otherwise and awards half of your real estate assets to your ex-spouse. How a Trust Can Protect You From Divorce When you establish a living trust , you are taking the valuable personal property and transferring ownership of those items to another entity. This new entity is the trust, so it is the trust that owns the assets and not you.

Trust assets are not subject to probate, increased tax liability, and in this case, claims from an ex-spouse during divorce proceedings. Your ex-spouse was once in a marriage with you, not the trust. Although a trust is under the name of a trustee, which can be you, depending on the type and whether it is made revocable or irrevocable, the trust is always established for the benefit of named beneficiaries.

Also, you can still enjoy the benefits of income-producing assets contained within the trust. Keep in mind though, that income you receive from a trust is considered personal income which must be reported as such in your tax return. Moreover, this income can be considered when deciding spousal or child support. On the contrary, business owners also have the most at risk if they do not have a plan in place to protect what they have acquired throughout their business careers.

Without proper planning, business assets can be at risk during a divorce. In the state of California , several types of trusts, including those initiated before the marriage, are safe from divorce. Other types of trusts include domestic and foreign asset protection trusts.

Both types are beneficial for business owners and effective estate planning tools not only against divorce but also for preserving your wealth by reducing tax liability. The Differences in an Irrevocable Vs.

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