When it comes to divorce cases, the treatment of trust income and assets can significantly impact the division of marital property. This blog post focuses on the differences between marital and separate property and the influence of trust assets on equitable distribution. 

Treatment of Trust Assets

Separate Property Nature of Trusts

Trusts are generally considered the separate property of the beneficiary spouse. Unless a trust contains marital property, the assets held within it are not subject to equitable distribution. This includes income and principal paid from the trust to the beneficiary spouse, as long as they are maintained in an account solely under the beneficiary spouse’s name and not mixed with marital funds. 

Exception: Commingling and Use of Trust Funds

If trust funds are commingled with marital funds, used to purchase marital assets, or utilized for ordinary marital expenses, they may lose their separate property status and become subject to equitable distribution. However, separate property contributions from the trust used for down payments or capital improvements on assets can retain their separate property character if there is clear documentation available to trace those contributions. The courts generally do not consider the commingling of separate funds with marital funds as a transmutation of separate property into marital property. However, if the party claiming the property as separate cannot trace the initial deposit of separate property to its form at the date of separation, transmutation may occur.

Tracing the Source of Trust Assets

When a spouse attempts to shield marital assets from equitable distribution by placing them into a trust, it is important to note that placing marital assets into a trust does not automatically convert them into separate property. The non-beneficiary spouse has the right to trace the source of assets in the trust to determine if they are marital property subject to distribution. The presumption is that assets in a separate property trust retain their separate property character unless there is commingling or transmutation.

Jurisdiction-Specific Considerations

The specific laws of the jurisdiction where the divorce takes place play a crucial role in the treatment of trust assets and income. Different states have varying rules regarding the treatment of gifts and inheritances upon divorce. The burden of proof lies with the party seeking to classify property as separate, requiring them to establish, by a preponderance of the evidence, that the asset is indeed separate property.

When it comes to the treatment of trust income in divorce cases, various factors need to be considered. Trusts are generally considered separate property, but their classification as marital or separate depends on factors like the commingling of funds and the parties’ intent. Separate property contributions to marital assets retain their separate status, but commingling or lack of tracing can transmute separate property into marital property subject to distribution. The specific laws of the jurisdiction where the divorce takes place are crucial, as different states have different rules. Different types of trusts, such as pure discretionary trusts and support trusts, have distinct implications. Pure discretionary trusts often exclude future distributions from alimony calculations, while support trusts may be subject to attachment by certain creditors. Ultimately, the determination of whether trust income is separate, or community property depends on the trust’s provisions, parties’ intent, and applicable laws.

At King Law, there are attorneys throughout North and South Carolina who handle these types of cases and can represent you in this unique situation. Call our toll-free number at 888-748-KING (5464) to request a consultation with one of these experienced attorneys.

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