How Will My Trust Assets be Affected by a Divorce

It is critically important to work with an Estate Planning Attorney who understands the pros and cons of how others view assets of a trust. As a family law attorney, I often see how inadequate Estate Planning can significantly affect families. You deserve the knowledge and expertise that only a knowledgeable, experienced attorney can provide, so you can avoid the story I am about to share with you.

So, let’s begin our story…

Joe and Sally met in college and got married after graduation.

Like many couples, Sally and Joe had some children, and Sally purchased a home during their marriage. She titled the home in both of their names. Later on, Sally and Joe met with an Estate Planning Attorney and decided to transfer the house into the Joe Smith Marital Trust (“the Trust”), an irrevocable trust established by Sally for the benefit of Joe and their children. Sally’s plan was to protect the home from claims made by her heirs if she were to die before Joe during the marriage.

Sally named Joe as the sole trustee of the Trust.

The home continued to increase in value, and Joe and Sally had amassed a sizable amount of equity in the home.

Unfortunately, like many couples, after years of marriage, Joe and Sally wanted a divorce. They were unable to resolve their differences outside of the courtroom, so they went to trial to have a Judge decide how their assets and debts were to be divided.

The trial court judge determined that the home was marital property with $1,000.000.00 in equity, which should be divided between Joe and Sally. When Joe appealed the court’s decision, the trial court Judge’s decision was thrown out because she made a mistake. The Appellate Court determined that the trial court judge made a mistake when she categorized the home purchased during their marriage as marital, and Joe ultimately got the house and all $1,000,000.00 of the equity.

How did this happen? And how could it have been avoided?

Section 736.0602(1) of our Florida Statutes states that a “settlor” may “revoke or amend” a trust unless the terms of the Trust expressly provide that the Trust is irrevocable. Joe and Sally’s Trust unambiguously stated that Sally, as the settlor, waived all right, power, and authority to alter, amend, modify, revoke, or terminate the trust instrument.

Besides, Joe and Sally’s Trust contained no terms authorizing Sally to amend or revoke the Trust. Further, their Trust contained no provision dissolving the Trust upon divorce.

So, at this point, you are probably wondering what the heck is “marital property,” and why should I care?

When you divorce in Florida, our courts have to categorize everything that you and your spouse own and everything that you owe in debt. There are two categories, 1) Marital, and 2) Non-Marital.

Marital property are assets acquired during the marriage, individually by either spouse or jointly by both of them. Non-marital assets include assets acquired by either spouse prior to the marriage. There is a presumption that any asset acquired during the marriage is categorized as “Marital.”

This is important because when your assets are categorized as “Marital,” that means both you and your spouse have an ownership interest in that asset. Because both of you own a piece of an asset, the court must figure out a way to equitably or fairly divide it.

A common example would be a Husband and Wife who own two cars that are both relatively equal in value. Since a Judge cannot feasibly divide something like a car in half, the Judge will award one car to the Husband and the other vehicle to the Wife.

Under typical circumstances, when a married couple purchases a home during their marriage, that home and all of its equity will be considered “Marital” and fairly divided between each spouse during the divorce.

Courts typically will either order the house to be sold, and the proceeds split between each spouse. Or, one spouse will keep the house and pay 50% of the equity to the other spouse.

Unfortunately, in Joe and Sally Smith’s case, it was not this easy.

In their case, the home became Marital Property when it was purchased during the marriage. However, as soon as it was transferred into their irrevocable Trust, it lost its character as a marital asset. Rather, the home was now owned by an entity, the Trust, separate and apart from Joe and Sally.

When the home was placed into the Trust, the trial Court lost its ability to distribute it between Joe and Sally.

The Trust was essentially a separate entity and a non-party to the divorce. Our Courts cannot, in a divorce, make any decisions regarding property held by a non-party. In Joe and Sally’s situation, the Trust was not a party in their divorce.

The bottom line is that when your property is placed into an irrevocable trust, it is no longer your property and cannot be categorized as “Marital” and split between you and your spouse.

So, what’s the moral of this story? What’s your “takeaway?”

Make sure you choose an Estate Planning Attorney who understands how future events, such as a divorce, will impact your planning for the future. Otherwise, you might be unpleasantly surprised by what happens many years later, which could have been prevented with a little knowledge and foresight.

Author: A.J. Grossman III, J.D., LL.M., Esq.
Compass Law

Author Bio
A.J. Grossman III is an Orlando Divorce Attorney and Florida Supreme Court Certified Family Law Mediator. He has advanced Collaborative Divorce training and holds a Post-Doctorate Master of Laws degree from the world-renowned Straus Institute for Dispute Resolution.