Divorce proceedings can become particularly complex when one or both spouses have interests in a trust. While trusts are often used to preserve wealth, protect beneficiaries, or reduce estate taxes, they can create challenges when a marriage ends. This is especially true in Michigan’s complex family law environment.
Courts must determine whether trust assets are subject to equitable distribution, which depends on the type of trust, the beneficiary’s interest, and how the assets were used. Understanding how trust assets are treated in divorce is critical for protecting financial interests.
Types of Trusts and Their Relevance
Revocable and irrevocable trusts are treated differently in divorce proceedings. A revocable trust, where the grantor retains full control and can amend or revoke the trust at any time, is more likely to be considered part of the marital estate.
In contrast, an irrevocable trust generally places the assets beyond the grantor’s direct reach, making it harder to classify as marital property. Courts also consider when the trust was established. Trusts created during the marriage may be scrutinized more closely, especially if marital funds were used to fund or benefit the trust, potentially bringing those assets into the division process.
Michigan Asset Division Laws
Some states are community property states. In those states, everything is split 50-50 in a divorce. However, Michigan is not a community property state. In fact, Michigan divides marital property according to the principles of “equitable distribution.” Simply put, Michigan law dictates that marital assets, including trust assets, be divided fairly between spouses after a divorce. Marital assets include anything obtained during the marriage except an inheritance.
Each spouse may keep an inheritance IF they kept that inheritance separate from marital accounts. In other words, the inheritance property must remain in one spouse’s name and all inherited monies should be in a separate account NOT a joint account. Basically, once a couple puts inherited funds in a joint account, the monies become marital property.
Another item that may not be considered part of the marital estate would include any property someone owned before they were married. If that property remained separate throughout the marriage, it is not subject to division. However, there are always factors that may change this situation. So, consult a family law attorney for guidance on this matter.
Trust Assets in Other States
Michigan’s approach to asset division in divorce cases, particularly with trust assets, differs significantly from states like Florida. Florida is a “pure” equitable distribution state, similar to Michigan, but there are important distinctions in how each state handles marital property, trust assets, and inheritance.
For example, both Michigan and Florida reject the community property model, where assets are automatically divided 50-50. Instead, they follow equitable distribution, where courts consider factors such as the length of the marriage, the financial situation of each spouse, and contributions to the household when determining what is fair. However, Florida’s courts tend to favor more precise definitions of marital property, while Michigan’s flexible approach allows for broader interpretations, particularly concerning trust assets.
In Michigan, assets held in revocable trusts that are used during the marriage are typically included as part of the marital estate and subject to division. This mirrors Florida law, where revocable trusts may also be subject to division if they contribute to the couple’s lifestyle during the marriage. However, in both states, irrevocable trusts established before the marriage are generally protected from division, provided they were not co-mingled with marital funds.
Equitable Division in Revocable vs. Irrevocable Trusts
Trust assets held in revocable trusts may become part of the marital estate. As a result, they are considered marital property and may be divided in a divorce. In Reeves v. Reeves, 226 Mich. App.490 (1997) the Michigan Court of Appeals held that trust assets may be considered part of the marital estate if they were used during the marriage. In other words, the assets are subject to equitable division if used to support the marriage or if the assets contributed to the couple’s standard of living.
On the other hand, some assets held in irrevocable trusts may not be part of the marital estate. In Polk v. Polk, 233, Mich. App. 581(1991) the court looked at an irrevocable trust established before marriage. The court ruled that this particular trust was a pre-marital asset and never co-mingled with marital funds. Therefore, it was excluded from property division during the divorce.
Marital vs. Non-Marital Property
In divorce, courts distinguish between marital property, which is subject to equitable distribution, and non-marital property, which typically remains with the original owner. Trust assets may be considered non-marital if they were established before the marriage or funded entirely with separate property.
However, if trust income or principal was used to benefit both spouses or co-mingled with marital assets, such as being deposited into joint accounts or used for shared expenses, the court may classify those funds as marital. Even when property is held in a trust, its treatment depends on how it was managed, accessed, and utilized during the marriage.
Trust Beneficiaries and Equitable Distribution
When a spouse is a beneficiary of a trust, courts closely examine the nature of that interest to determine whether it is subject to equitable distribution. A current, vested interest such as the right to receive distributions or access trust principal—is more likely to be treated as a marital asset.
In contrast, future or contingent interests, which depend on uncertain events or trustee discretion, are less likely to be divided. Discretionary trusts, which give trustees broad control over distributions, may offer some protection, but courts can still scrutinize the trust’s terms, funding sources, and history of payments when evaluating asset division.
Protective Measures and Legal Strategies
Spendthrift provisions are commonly included in trusts to protect beneficiaries from creditors, including claims that may arise during divorce. These clauses restrict a beneficiary’s ability to transfer or pledge trust interests, making it more difficult for a spouse to access trust assets.
In addition, prenuptial and postnuptial agreements can be powerful tools to define whether certain trust interests remain separate property. When properly drafted, these agreements help safeguard inherited or gifted assets from becoming subject to equitable distribution.
Domestic Asset Protection Trust/Pre-Nuptial Agreements
In 2017, Domestic Asset Protection Trusts (DAPT) became legal in Michigan. This irrevocable trust may be useful for wealthy individuals, even successful business owners needing to protect their businesses from creditors. If an estate has a DAPT, it is important to inform a divorce attorney of this situation. Also, a signed pre-nuptial agreement will impact how assets are divided in a divorce. In summary, navigating trust assets remains a complicated process. As a result, contact an experienced divorce attorney familiar with estate planning.
