Using Trusts to Protect Assets in a Divorce

Marriage is entered into with optimism and good faith, but it is almost careless not to prepare for the possibility of a marriage breakdown. Anyone who has acquired or built assets, such as a business, should seriously consider protecting them prior to marriage. Community Property v. Separate Property: Assets or debts acquired during a marriage are considered community property (except for inheritances or gifts from a third party) and both parties are equally entitled to and responsible for them.

California is one of nine states that recognize property acquired during a marriage as belonging to both parties. However, any assets or debts acquired prior to marriage (or after a marriage ends) are considered separate property. In the likelihood of a divorce the use of a trust in protecting assets is a popular and recommended tool.

A Domestic Asset Protection Trust (DAPT) or a Foreign Asset Protection Trust (FAPT) is a good option because these are irrevocable trusts. This means that the settlor (the person who creates the trust) does not have control over the trust or its assets (and neither does an ex-spouse or a creditor). A DAPT or FAPT protects assets because ownership of the assets is transferred from the individual to a trust, establishing that trust as owner of the assets. In the event of a divorce, the assets should be out of reach of the spouse because the trust will effectively be treated as a separate entity.

Unfortunately, divorce is not always cut and dry and sometimes, any loopholes in a trust are sought out and exploited. Further, family judges are notorious for ignoring the law in the interests of equity. But even if the assets of the trust are reachable in a divorce, the trust helps to establish the character of its assets. For example, a trust funded prior to marriage makes “tracing” easier, allowing us to argue that even if trust assets are reachable, they are the separate property of the settlor.

Klueger & Stein, LLP stresses the importance of working with an experienced and meticulous attorney who can draft a trust that eliminates any weak points, and ultimately protects the client’s assets from unintended recipients.