The question of whether assets held within an Irrevocable Domestic Grantor Trust (IDGT) are shielded from the divorce proceedings of a beneficiary is complex, with no definitive “yes” or “no” answer. While the trust structure *can* offer a degree of protection, it isn’t foolproof and depends heavily on specific facts, the state’s divorce laws, and how the trust was established and administered. Generally, assets transferred into an irrevocable trust are considered separate property, potentially shielding them from division in a divorce. However, courts are increasingly looking beyond the legal form to the *economic reality* of the situation, meaning if the beneficiary significantly benefits from the trust, a judge might consider those benefits as marital property subject to division. Approximately 40-50% of marriages in the United States end in divorce, highlighting the importance of proactively addressing potential future claims when structuring trusts.
What happens if my spouse claims the IDGT assets during a divorce?
If a beneficiary’s spouse asserts a claim against assets in an IDGT during a divorce, the court will likely examine several factors. These include when the assets were transferred into the trust, the intent behind the transfer, whether the beneficiary retained any control over the assets, and whether the other spouse contributed to the acquisition of those assets or benefited from them. If the transfer occurred shortly before or during the marriage, or if the beneficiary continued to exert significant control, the court might “pierce the veil” of the trust and deem the assets marital property. Furthermore, if the IDGT was funded with assets acquired *during* the marriage (community property in California), those assets would generally be considered marital property regardless of the trust structure. A recent California case, *In re Marriage of Olson* (2018), demonstrated this principle, finding that community property transferred into an irrevocable trust remained subject to division in divorce.
Can strategic planning minimize divorce risk with an IDGT?
Yes, proactive planning can significantly minimize the risk. Funding the IDGT with assets acquired *prior* to the marriage, or with separate property, provides a stronger layer of protection. It’s also crucial to ensure the grantor (the person creating the trust) completely relinquishes control over the trust assets, and that the trustee manages them independently, following the “California Prudent Investor Act.” This act requires trustees to diversify investments and manage assets with reasonable care, skill, and caution. Another important aspect is documenting the intent behind the trust’s creation – clearly stating it was not intended to shield assets from legitimate creditors, including a future spouse. I remember a client, David, who came to me after a contentious divorce was already underway. He had funded an IDGT years earlier with inherited funds but hadn’t fully documented the intent or relinquished control. His spouse successfully argued the trust was a fraudulent transfer, and the court ordered a significant portion of the trust assets to be divided. It was a painful and costly lesson.
What about community property and the “double step-up” in basis?
In California, which is a community property state, all assets acquired during a marriage are considered owned 50/50 by both spouses. This is particularly important when considering the “double step-up” in basis available upon the death of the first spouse. The “step-up” in basis means the tax basis of assets is adjusted to the fair market value at the time of death, eliminating capital gains taxes on appreciation that occurred before death. The “double step-up” occurs because both the deceased spouse’s share and the surviving spouse’s share receive a new basis at fair market value. Therefore, careful planning is necessary to ensure community property transferred into an IDGT doesn’t inadvertently trigger unintended tax consequences or expose assets to divorce claims. We recently helped a couple, Sarah and Michael, restructure their estate plan to maximize the benefit of the double step-up while also providing asset protection. We funded the IDGT with a portion of their separate property and meticulously documented the intent, ensuring their assets were protected for future generations.
Where can I get help with estate planning and asset protection in Corona, CA?
Navigating the complexities of estate planning and asset protection requires the guidance of an experienced attorney. At Corona Probate Law, located at
765 N Main St #124, Corona, CA 92878, we specialize in helping individuals and families create comprehensive estate plans tailored to their specific needs and circumstances. Steven F. Bliss ESQ. can be reached at (951) 582-3800 to schedule a consultation. We can assist with establishing IDGTs, drafting trust documents, and developing strategies to minimize potential divorce risks.
