As a couple goes through life together, having children and acquiring assets, they begin thinking of the future. They make estate plans and establish trusts to provide for each other and their heirs. However, if that marriage falls apart one day and the couple decides to divorce, all those plans may change. The spouses may still want to provide for their heirs, but they likely do not wish to leave anything for their spouse. Additionally, the property in the estate plan and the trust may be marital property, which must be divided as part of the divorce. What happens when the trust has terms outlining what can be done? Does divorce have any impact on the existing trusts and estates? These questions and others may be answered by a skilled South Carolina estate planning attorney at King Law Offices. Call (888) 748-5464 to schedule an appointment and explore how divorce affects your estate plan and trust.
Timing and Types of Trusts
When dealing with trusts, the individual’s role in the trust, the timing of the trust’s creation and the type of trust impacts how it is handled during a divorce. While trusts are often created as part of an estate plan, estates and trusts are not always connected. Trusts may be created separately for a variety of reasons.
Trust Creation Timing
When the trust was created can be a critical detail in what happens to the trust. If the trust was created prior to the marriage and has not had any marital assets added to it since the marriage, it will likely be considered separate property belonging to whichever spouse created it.
If the trust was created after the marriage and is made up of marital assets, it will be considered marital property. The court may order that the trust be dissolved and the assets in it added to the rest of the marital assets for distribution. However, South Carolina is an equitable distribution state per S.C. Code §20-3-620, which means that the assets are distributed equitably. As a result, the court may also consider the value of the trust with its assets and award other marital assets of similar value to one spouse while allowing the other spouse to keep the trust and its assets.
Trust Type
There are generally two types of trusts: revocable and irrevocable. As their names imply, a revocable trust can be dissolved or changed at any time for any reason and an irrevocable trust cannot be changed or dissolved for any reason once created.
Revocable trusts may be ordered dissolved by the court so that the assets within it can be added to the rest of the marital assets and distributed according to South Carolina law. However, even a court cannot dissolve or change an irrevocable trust. Additionally, irrevocable trust assets are not considered to be the property of the trust grantor but property of the trust. In other words, neither spouse owns the assets in an irrevocable trust. However, if marital assets were included in an irrevocable trust, one spouse may be required to reimburse the other spouse for those marital assets.
Are You a Grantor, Trustee, or Beneficiary?
The individual’s role in the trust may also play a role in what happens to the trust. In a revocable living trust, the individual may create the trust (grantor), appoint themselves as trustee, and name themselves as a beneficiary of the trust. However, they may also be appointed as trustee over a trust that someone else granted or be a beneficiary in a trust someone else granted. In these instances, if they are trustee or beneficiary of someone else’s trust, the trust will not be touched because it is not the individual’s. If they are a beneficiary, distributions from the trust may be considered separate property or marital property, depending on the trust’s terms and whether the individual has co-mingled those distributions with marital property.
What If the Trust’s Assets Are a Mix of Marital and Separate?
When couples create a trust to leave assets for their children or other loved ones, they may include marital assets, such as the family home, as well as separate assets that they want their children to have. This mixing of marital and separate assets in the trust can complicate matters.
Marital assets will be added to the rest of the marital assets for equitable distribution. Separate assets will typically remain with the spouse who owns them. However, there may be some doubt or disagreement over whether an asset is a marital or separate property. Divorcing spouses may need to hire a forensic accountant to determine the status of these assets.
Protect a Trust From Beneficiary Divorces
A trust grantor may be concerned about what happens to the trust in their own divorce, but they also need to consider how to protect the trust from a beneficiary’s divorce. Particularly in the case of a revocable trust, certain factors could sway a court to determine that distributions from the trust are marital property.
Use the Right Wording
If a beneficiary gets divorced, their spouse may try to claim that trust assets should be considered marital property or that they should get more marital assets because the beneficiary will be getting an inheritance. If this happens, the court may examine the trust documents to make a decision. The phrasing used in the trust terms can sway the court to decide one way or the other.
One way to phrase it is to ensure that trust distributions seem like a possibility rather than a guarantee. In other words, being clear that the beneficiary cannot access trust assets or distributions on demand can persuade the court that the inheritance is possible but not certain, and thus, trust assets should be excluded. Another option is to clearly state that nonbeneficiaries are not entitled to receive any assets from the trust, even if they are married to a beneficiary. This makes the trust grantor’s intentions clear and makes it less likely that the court will overrule the grantor’s wishes if the trust documents are called into question in a divorce.
Consider Indirect Asset Distributions
Sometimes, a trust grantor wants predictability over when assets will be distributed, or they want to ensure their heirs meet a certain standard or accomplishment before receiving them. The grantor may state that a beneficiary must reach a certain age or achieve a specific achievement, such as graduating college. However, doing so makes distributions look guaranteed—if the heir does this, they get a distribution. This can persuade a court to include trust assets as marital property to be divided.
Instead of distributing assets directly to the beneficiary, consider including provisions that allow payments to be made on their behalf. Leave out specific requirements for the payments to avoid making them appear guaranteed. A knowledgeable attorney with King Law Offices may be able to assist you in wording your trust to allow your beneficiaries to benefit while protecting the trust’s assets from potential divorces.
Expand the Trustee’s Powers
The trust grantor decides the terms of the trust, and the trustee’s job is to carry out those terms while also acting in the best interests of the beneficiaries. As the trust grantor, the individual can decide how much authority they would like the trustee to have. One way to protect trust assets is to allow the trustee the authority to remove a beneficiary from the trust if they are getting divorced or may get divorced. Another option is to give the trustee the authority to shift some assets into a new trust for the divorcing beneficiary’s benefit. These would be very specific terms included in the trust to grant the trustee these powers, so individuals may want to consult with an attorney to ensure they are properly worded and that the trustee understands what is expected of them in regard to those terms.
Make the Trust Irrevocable
In an irrevocable trust, once assets are transferred to the trust, the transfer is permanent. The trust cannot be dissolved until its purpose is served and the trust’s terms cannot be changed. This can make this type of trust slightly risky, as the grantor cannot change the beneficiaries or remove assets later if they change their mind. However, if the grantor is certain about which assets they want to leave to a particular heir, an irrevocable trust can protect those assets in the event that the heir gets divorced.
Individuals are not limited to having just one trust. They can create an irrevocable trust for a beneficiary who may get divorced and a second revocable trust in which they leave other assets to other heirs. They can also explore other strategies to keep assets in the family as they intend.
What Happens to the Estate and Estate Plan When You Get Divorced?
Trusts and estates can be complicated enough for many people to deal with. When they decide to divorce, trusts and estates can become even more complicated as they try to manage their emotions, deal with custody matters, and understand what happens to their estate plan and any trusts they have. There are two primary things that individuals should be aware of regarding trusts and estates in relation to divorce: what impact divorce has on them and what to do after the divorce.
Divorce’s Impact on Trusts and Estates
S.C. Code §62-7-607 states that divorce revokes any bequests to the spouse in a will, as well as any beneficiary designations that name the spouse in annuities, life insurance, and other transfers on death accounts. The divorce also ends the spouse’s designation as an agent in a power of attorney. What this means is that if the individual does not change these designations, the court will treat them as though the former spouse died first, and the next individual in line is given those assets or designations.
This knowledge often provides peace of mind to individuals who are divorcing and want to ensure their former spouse does not receive any of their assets when they die. However, it is important to realize that the former spouse’s revocation does not change anything else about the individual’s trusts and estates.
What to Do With Trusts and Estates After Divorce
While South Carolina law automatically revokes a former spouse’s designations in an individual’s trusts and estates, the individual should not rely on that alone. Divorce does more than make a spouse a former spouse. Divorce also changes the individual’s assets as the marital assets are divided between both spouses. Additionally, individuals may have made bequests to their former spouse’s children from a previous marriage or other relatives that they no longer wish to honor.
Therefore, once the divorce is final and the assets have been distributed and transferred to the appropriate spouse, individuals should review their estate plans and trusts and make all the necessary updates to reflect their new assets, name new beneficiaries in place of their former spouse, and appoint a new power of attorney if their spouse was previously named as their agent. After that, individuals should review their estate plan every three to five years or whenever they have undergone another significant life change, such as remarriage, relocation, the birth or death of a beneficiary, retirement, or significant income or asset change.
What Happens If You Remarry the Same Person?
S.C. Code §62-2-507 covers what happens to trusts and estates if an individual remarries their former spouse. This statute states that the provisions revoked due to the divorce will be revived if the individual remarries the same person or if their divorce is nullified. This is another reason that individuals should update their trusts and estates as soon as possible once the divorce has been made final. By putting their new plans in place, the individual prevents the old provisions from being revived if they remarry their former spouse. If the individual remarries their former spouse and wishes to include them in their estate plan again, they can do so, but they will not need to worry about the old provisions becoming effective again.
How a South Carolina Estate Planning Attorney Can Assist You
Divorce and the division of marital assets can take time, particularly when the divorcing couple does not agree on who gets what or whether a particular asset is marital or separate. Trusts and estates can make this process even more difficult, especially if the couple places both marital and separate assets in trusts. The court may need to review trust documents or other estate documents to determine asset status and who should get it. If you have questions regarding how to protect your estate plan, and particularly a trust, from divorce, a skilled South Carolina estate planning attorney may be able to answer those questions or offer guidance on how to structure them for the most protection before a divorce is even a possibility. Call King Law Offices at (888) 748-5464 to schedule an appointment and explore your options.
