Are there exceptions to the independence of an irrevocable trust?
On behalf of Scaringi Law posted in Estate Planning on Friday, September 11, 2015.
In an interesting merging of family and estate law, a court recently concluded that a divorcing spouse had an interest in the other spouse's irrevocable trust.
In a divorce, a court may consider various issues when approaching the issues of spousal support and property division. Although an inheritance is generally not considered part of the marital estate, that line of division may become blurred when couples rely on an inheritance to support their marital lifestyle for many years. The same might be said of separately owned assets that were commingled after a couple married.
In this particular example, a husband was a named beneficiary to an irrevocable trust that contained a spendthrift clause intended to protect the trust assets from the husband's creditors. The trust instructed distributions from the trust's income and principal for the comfortable support, welfare, health, maintenance and education of the beneficiaries.
During a two-year period, the trustee made distributions to the husband totaling $800,000. The funds were applied to the couple's martial lifestyle and the support of their two children. After the couple filed for divorce, the trustee stopped making distributions to the husband.
Notably, a state court determined that the husband's interest in the trust was presently enforceable, had been used to support the couple's lifestyle during their marriage, and thus constituted marital property. Accordingly, the court determined that the husband should pay sixty percent of the value of his share in the trust to his wife.
Whereas the value of a revocable trust is generally imputed to its trustor because of the control retained over the trust, an irrevocable trust is different. After setting up an irrevocable trust and appointing a trustee, the trustor generally cannot exercise control over the trust principal or income. Yet control may also be imputed based on whether an individual can influence when distributions are made to him or her, as in this example.
Source: Wealth Management, "Interest in Irrevocable Trust is Marital Asset," Jillian Hirsch, Leiha Macauley and Darian Butcher, Sept. 9, 2015