What Happens to My Marital Trust When I Get Divorced?
Divorce is a major life event, and when you’ve taken steps to protect your assets through a marital trust, it can add complexity to the process. A marital trust is typically set up with the goal of ensuring that one spouse is financially supported after the other’s passing. However, when divorce enters the picture, it’s not always clear how these trusts will be affected, and what actions need to be taken.
In this blog post, we’ll explore common real-life examples of how divorce impacts marital trusts and what steps you need to take to ensure your estate plan is adjusted accordingly. By understanding the potential consequences and taking proactive steps, you can make sure your wishes are honored, even in the midst of a divorce.
What Is a Marital Trust, and How Does It Work?
Before diving into the impact of divorce, let’s quickly review what a marital trust is. A marital trust is an estate planning tool designed to benefit your spouse after your death. It typically holds assets such as real estate, bank accounts, and investments, ensuring that your spouse is provided for after you pass away. A trust can also minimize estate taxes for the surviving spouse, depending on how it’s structured.
In a divorce scenario, a marital trust doesn’t automatically dissolve or divide assets like a regular property settlement. What happens instead depends largely on the terms of the trust and the divorce settlement. So, how does divorce alter that?
Common Scenarios and What You Need to Do
Let’s break down some real-life examples to illustrate how divorce can affect marital trusts—and what actions you’ll need to take.
1. The QTIP Trust: Dividing Income and Principal
One of the most common types of marital trusts is the QTIP Trust (Qualified Terminable Interest Property Trust). This trust allows the surviving spouse to receive income from the trust during their lifetime, with the remainder of the assets going to children or other beneficiaries after their death.
Example:
Let’s say that Sarah and Tom have been married for 20 years. They established a QTIP trust, which provides Sarah with income from their joint investments and home for the rest of her life. After Tom passes away, the remaining trust assets will go to their children. However, they’re now getting divorced.
What needs to happen? The QTIP trust will need to be revisited and likely amended. In this case, Sarah may no longer have the right to the income from the trust once the divorce is finalized. The divorce decree will determine whether she continues receiving those benefits, or if Tom’s portion of the trust assets will be divided between Sarah and other beneficiaries, like their children.
What Sarah Should Do: Sarah should consult with an estate planning attorney to revise the trust and her estate plan to reflect her new circumstances. If she’s no longer entitled to income from the trust, a modification is necessary to redirect the assets according to her preferences.
2. A/B Trust: How to Handle Tax and Asset Distribution
An A/B Trust divides the assets of the deceased spouse into two parts: one that benefits the surviving spouse (the A Trust) and one that goes to other beneficiaries (the B Trust). These trusts are commonly used to minimize estate taxes by taking advantage of each spouse’s estate tax exemption.
Example:
David and Michelle have been married for 15 years and created an A/B trust to reduce estate taxes. David dies, and Michelle inherits assets from the A Trust and receives income from the B Trust. Now, the couple is getting divorced, and David’s estate plan is still in place.
What needs to happen? The terms of the trust will likely need to be updated because Michelle is no longer part of the family unit. The B Trust, for example, might have named Michelle as a beneficiary, and in a divorce, she may no longer be entitled to those assets.
What David Should Do: David’s estate planning attorney will need to revisit the trust, particularly the provisions that direct income or assets to Michelle. He may want to redirect those assets to his children or a different family member. If he is in the midst of divorce proceedings, it’s crucial to act quickly to avoid confusion or conflict later.
3. Updating Beneficiaries and Trustees After Divorce
In many marital trusts, one spouse may be named as the trustee—the person who manages the trust on behalf of the beneficiaries. However, in the case of divorce, it’s a good idea to update these provisions to avoid potential conflicts down the road.
Example:
Cathy and Jake have been married for 10 years, and Cathy has named Jake as the trustee of her marital trust. After their divorce, Jake is no longer an appropriate choice as trustee, especially if Cathy no longer wants him to have any control over her assets.
What needs to happen? Cathy will need to revise the trust to remove Jake as trustee and appoint someone else—perhaps a neutral third party or family member.
What Cathy Should Do: Cathy should meet with her estate planning attorney to update the trust. She’ll need to amend the trust document to change the trustee and possibly update the beneficiaries to reflect her current wishes.
4. Trust Assets in Divorce Settlement: Dividing the Trust's Value
In some cases, marital trusts may hold significant assets that need to be divided during the divorce settlement process. For example, if a couple owns a home in the marital trust, it’s essential to determine how that home will be divided in the divorce.
Example:
Lily and Jack are divorcing after 12 years of marriage. They have a marital trust that holds their primary residence. The trust was initially set up to pass the house to Lily after Jack’s death, but now that they’re divorcing, the house is a point of contention.
What needs to happen? The couple will likely need to agree on how the value of the home is to be divided. In some cases, this could mean selling the property and splitting the proceeds or one spouse buying out the other’s share.
What Lily and Jack Should Do: They’ll need to work with their divorce attorneys and estate planning professionals to ensure the trust is amended to reflect the new property distribution. This might involve selling the home and dividing the assets, or one spouse taking full ownership, with adjustments made to the trust.
5. Divorce and the Trust’s Purpose: Reworking Your Estate Plan
After a divorce, many people want to rework the entire purpose of their trust. They may want to ensure that their children, other family members, or charitable organizations benefit, rather than their ex-spouse.
Example:
Julie and Mark created a marital trust that would provide for each other’s needs after death. Now, following their divorce, Julie doesn’t want Mark to receive any benefits from the trust. She wants her children to be the primary beneficiaries.
What needs to happen? Julie will need to completely amend her trust to reflect that Mark is no longer a beneficiary. She may choose to redirect the trust assets to her children or set up a new trust for them.
What Julie Should Do: Julie should meet with her attorney to update her estate plan. This may involve dissolving the existing trust and creating a new one, ensuring the beneficiaries align with her current intentions.
What You Should Do After Divorce
Divorce is a time of significant change, and your estate plan should reflect those changes. Whether it’s amending the terms of your marital trust or appointing new trustees and beneficiaries, taking the time to revisit your estate plan after a divorce is crucial. Here are some steps to help:
Consult with an Estate Planning Attorney: Ensure your trust is modified to reflect your new circumstances. An attorney can help you navigate the legalities of divorce and protect your interests.
Update Beneficiaries and Trustees: Don’t assume that divorce will automatically remove your ex-spouse from your trust. You must formally update these designations.
Reevaluate Your Trust’s Purpose: Consider whether the original intentions of the trust still align with your current goals. If not, make adjustments.
Consider a Post-Divorce Estate Plan: In some cases, it may make sense to create a brand-new estate plan altogether after divorce.
In the end, divorce doesn’t have to mean total upheaval for your estate plan, but it does require careful attention to ensure your assets are distributed according to your wishes. Whether you're navigating a QTIP trust, an A/B trust, or just revising your beneficiaries, taking proactive steps now will save you potential headaches later. If you're facing a divorce, reach out to an experienced estate planning attorney who can help guide you through the process and protect your assets for the future.
