What Happens to Trusts in Connecticut Divorces?

Many people wonder what happens to trusts in Connecticut divorces. Are they subject to property division? Do trusts impact alimony?  Child support?

How the divorce court will treat a trust is highly dependent on the specifics of that trust. That said, there are some general things to be aware of to give you a sense of how a court may view your trust.

Read on to learn more.

What are Trusts?

There are four basic things you need to know about trusts to understand how courts handle them in divorces:

• The three main roles in a trust: trustor, trustee, and beneficiary
• How a trust distributes assets to the beneficiaries
• Whether a trust can be changed

3 Main Trust Roles: Trustor, Trustee, Beneficiaries

At their most basics, a trust is a legal agreement in which one party, known as a trustor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary. Trusts are established to provide legal protection for the trustor’s assets and to make sure those assets are distributed according to the trustor’s wishes.

Distribution of Trust Assets

Sometimes, the trust’s assets (technically called the corpus) are distributed all at once, such as at the time of the trustor’s death or when a beneficiary reaches a certain age. Other trusts distribute the corpus, or perhaps the income earned from the trust assets, over time.

Changing the Trust

There are two pieces to know about changing the trust:

• Who can manage the trust’s assets, including distributions
• Whether the trust’s terms can be changed

Sometimes trust beneficiaries are also trustees who the trustor has given the right to control distributions or make changes to the trust. Other times, a trustor is the same person as the beneficiary.

How all of this is structured in a specific trust will impact how that trust is treated in a divorce.

How Do Trusts and Divorce Property Division Work?

The most common questions about trusts and Connecticut divorces surround whether they will be divided between the spouses.

There are two myths out there about property division and trusts — and they are the exact opposite of each other. All they have in common is that neither of them is true.

Here they are:

• Myth 1: Trusts are entirely shielded from division in divorces
• Myth 2: The entire value of the trust will be divided

Myth 1: Trusts are Entirely Shielded from Property Division in Divorces

Unlike in many other states, Connecticut law generally does not distinguish marital property from separate property. That means that like inheritances, sometimes trusts are subject to property division.  Connecticut is an “all property” property division divorce state. That means that Connecticut courts can divide all of either spouse’s property in a divorce — including trusts.

Courts tend to look to how much control or access a spouse has to trust in order to decide whether a trust is “on the table.”

For example, one Connecticut court didn’t consider a spouse’s unvested interest in a trust, contingent upon future events, an asset that the court can divorce in the divorce. Another Connecticut court decided a spouse’s income-only interest in a trust an asset to be divided in divorce because the spouse could not reach or control the trust assets that generated that income. It’s also important to know that the court has to decide whether a spouse’s interest in a trust exists at the time of the divorce. (Alimony and child support, on the other hand, can be modified post-judgment in the future.)

Myth 2: The Entire Value of the Trust Will be Divided

When a spouse has an interest in a trust, it may not be an interest in the entire trust. Once again, determining the specific nature of the spouse’s interest in the trust (including whether it’s vested or unvested or subject to any contingencies) is critical.

For example, prior to his divorce, a husband funded an irrevocable trust which, among other things, owned a large home. Under the trust, the husband had no power to revoke the trust or invade the corpus. However, he was able to live in the home owned by the trust. The court determined the trust’s value was how much the use of the house saved the husband in living expenses, not the value of the house itself.

Plus, it’s important to know that even if trust is subject to property division, that doesn’t mean a court will divide it equally.

Courts in equitable distribution states like Connecticut divide marital property according to what is fair, or equitable, for both spouses. This isn’t the same as equal distribution. Equitable does not necessarily mean 50%/50%.

What Will My Divorce Attorney Want to Know About My Trust?

Your divorce lawyer will want to review your trust and also learn about the history of how the trust was managed and used.

Things she will look for include:

• The trustee’s discretion to distribute or reinvest trust assets
• Whether the trustee has made any historical distributions at the beneficiary’s request
• The trustee’s ability to favor a current beneficiary in distributing assets
• Whether the beneficiary has a power of appointment, which facilitates a beneficiary’s ability to transfer assets to others (such a the beneficiary’s children)
• Any limits on the types of distributions to the beneficiary (such as housing, education, or health)

A full analysis of the circumstances can help give a sense of whether a court will consider a stream of income from a trust, all or a portion of the trust assets corpus, or a combination of both income and corpus as property subject to division in a divorce.

How Do Trusts and Alimony Work in Divorce?

Let’s now turn to trusts and alimony.

Here’s what you need to know.

Unlike in some other states, there is no alimony formula in Connecticut. Instead, there are multiple factors that the court considers. Predictably, income plays an important role in the determination of alimony. Two of the other factors that are particularly relevant when it comes to divorces involving trusts are: (1) the estates of the spouses and (2) property division in the divorce. Judges may take these factors into consideration when determining whether there will be alimony, and, if so, the amount of alimony and the length of time during which it will be paid.

How’s this all play out? A spouse’s income from a trust can factor into whether (and how much) alimony that spouse pays or receives.  So can a spouse’s access to trust assets, and how property is being divided in the divorce.

As with trusts, courts may not consider interests in gifts or inheritances that are contingent on a future event outside the party’s control to be part of the estate for alimony purposes.

How Do Trusts and Child Support Work in Divorce?

At its most basic level, child support in Connecticut is based on the two parents’ combined net income rather than on the actual costs (think necessary living expenses like food, shelter, and clothing) associated with raising a child. The Connecticut Child Support Guidelines specifically state that trust income is included in a parent’s net income for purposes of determining child support.

Next Steps

To get our insights on the options in your particular situation, please reach out.

Our first step at Freed Marcroft, the Goals & Planning Conference, is designed to get to the heart of your problem and unveil your true goals. Then, we take those goals along with the facts of your case and analyze them so that we can present you with recommendations and options on how to move forward.