Many couples choose to protect their assets before divorce through the use of prenuptial agreements, but such property division strategies are not always feasible. Considering that about half of Americans split up within the first eight years of marriage, an alternative to the prenuptial agreement would be useful. Experts say latecomers to property division should consider shielding their assets from the marital estate through the use of divorce trusts.
A financial shield known as a self-settled trust can help you protect assets for your sole benefit, effectively removing them from your spouse’s access. Ideally, you should set up these trust documents before you have any creditors. These include your spouse, or perhaps your soon-to-be ex-spouse. You do not have to tell your spouse about this trust if you establish it 31 days before marriage in some states. Other states also allow you to set up this type of specialized trust even after your marriage is formalized.
Experts in divorce and financial law urge caution when using these trusts, however. Do not put all of your money eggs in one basket. The trust should be seen as a safety net in the event of a divorce, not your primary source of income. If you put too much in the trust, your ex could successfully argue that you are trying to hide marital property.
Another trust option is known as the Delaware statutory trust. This type of trust is commonly used by entrepreneurs in lieu of establishing limited liability companies. If the trust becomes part of the marital estate, it would be an unattractive asset because of the tax structure. An ex-spouse could attempt to obtain the trust during the divorce, but that person would then have to bear the entire income tax burden, even if there is no distribution from the account.
So, even if you have not set up prenuptial documents, you could still protect your assets from the possibility of divorce. Consider consulting your financial planner and family attorney to learn more about your legal options and rights.
Source: online.barrons.com, “Divorce trusts” Tatiana Serafin, May. 18, 2013
