Can A Trust Protect Assets In A California Divorce?

Can A Trust Protect Assets In A California Divorce?

In California, trusts established before marriage are considered separate property. Other trusts, including domestic or foreign asset protection trusts, revocable trusts and irrevocable trusts, also protect assets in the event of divorce.

Small business owners and other individuals with sizable assets have worked hard for their successes and need to protect what they have earned. Sometimes, however, these hardworking individuals fail to safeguard their assets when they get married.

Though no one expects a marriage to end in divorce, people with sizeable assets or business interests should have a strategy to protect their interests if a split occurs. Establishing a trust for a small business or accumulation of wealth can protect these assets in the event of a divorce.

How Can Trusts Protect Assets?

In many states, including California, property owned by a spouse before he or she is married is considered separate property and is not divided between spouses when they divorce. Trusts, if established before the marriage, are also considered separate property. Using a trust is one way to manage assets, protect a small business, manage monetary gifts and protect money from creditors.

What Is A Domestic Or Foreign Asset Protection Trust?

Business owners who are engaged to be married should consider drafting a Domestic or Foreign Asset Protection Trust. This kind of trust transfers the ownership of the business and other separate property from the business owner to the trust. If the marriage ends in divorce, the court does not reach the assets in the trust because the spouse does not own the assets.

Domestic or Foreign Asset Protection Trusts are good options for owners of C-Corporations, Limited Partnerships and Limited Liability Companies, but not necessarily S-Corporations. It is important that a business owner seek the advice of a qualified attorney who can assist in drafting and structuring the trust to ensure property will remain in the right hands.

How Can Revocable And Irrevocable Trusts Protect Assets?

Other trust options are revocable and irrevocable trusts. These types of trusts are usually set up by an individual's parents or other family members to manage monetary gifts and inheritance. The main difference between a revocable trust and an irrevocable trust is the amount of control the trust holder or beneficiary has over the assets.

In a revocable trust, the trust holder-not the beneficiary-has control over when and if benefits are distributed. For example, a grandmother may hold the purse strings of a trust she set up for her married granddaughter. If the granddaughter divorces, her ex-spouse does not have access to the assets in the trust because the law considers the assets, or property, in the grandmother's possession.

An irrevocable trust can be a little trickier and involves something called income interest. Income interest is the amount of control the beneficiary has in deciding distribution of the assets in the trust. In some irrevocable trusts, the trust holder determines when assets are distributed. In these cases, the assets are not considered the beneficiary's property since he or she has no control in distribution of the assets.

In other types of irrevocable trusts, trust holders are required to distribute assets at regular intervals. In this case, any money transferred to the beneficiary is considered his or her property and can be divided during divorce proceedings.

If you own a small business or are the beneficiary of a revocable or irrevocable trust or would like to set up a trust to protect your assets, contact an experienced California family law attorney. An attorney can make sure you understand your options and take into account all possible considerations.

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