A valuable trust can highlight the complexities of property division

On Behalf of | Oct 14, 2020 | Property Division

The substantial worth of a trust often makes these complex legal and fiduciary arrangements highly valued during divorce. Here in Connecticut, beneficiaries may believe the trust in question is safeguarded from property division. That belief may often prove erroneous.

Unlike most states, Connecticut makes no standard distinction between marital and separate (or nonmarital) property during divorce proceedings. All assets are potentially on the table or, at the very least, could impact a court’s final order.

Determining what is equitable

Property division is shaped by the concept of equitability, with the court aiming to split assets in a manner considered fair. The court may assign any or all of a litigant’s assets to the opposing litigant when creating the final financial orders. A trust, which is an inherently high-value item, may be taken into account when a court determines what is ultimately equitable.

Connecticut law recognizes that a spendthrift trust places trust assets beyond the reach of creditors to secure the assets against the beneficiary’s own improvidence. See, Powell–Ferri v. Ferri, 326 Conn. 457 (2017). However, the court may consider a litigant’s ability to earn additional income in determining how to allocate assets in alimony and financial orders. Connecticut courts typically do not invade the corpus of a trust. However, the judge may determine that past practices related to the trust may justify considering the trust or income streams associated with the trust in distributing assets in divorce.

Whether one or both aspects of a trust will influence a court order will often come down to each litigant’s actual and current interest in the trust, as well as other factors related to a beneficiary’s rights. An answer may depend on the scope of the beneficiary’s rights, including, but not limited to:

  • The trustee’s freedom to distribute or reinvest trust assets
  • Whether the beneficiary can transfer assets to their children via power of appointment
  • Any history of distributions, made upon the request of the beneficiary
  • Limits to distributions that restrict spending to specific needs

A thorough legal evaluation can help provide clarity on these matters.

Protected assets may still influence property division

Even in situations where a trust’s assets are purportedly shielded from property division, the value of its contents may still influence equitability calculations. A litigant that benefits from the substantial assets included in a protected trust may ultimately receive a smaller amount of other property as an offset. This would compensate for a fairness discrepancy between the two litigants.

Many individuals create trusts for the sole purpose of safeguarding assets. Beneficiaries clinging to the assumption the trust will be off-limits during divorce proceedings may need to rethink their mindset and adjust their strategy accordingly.