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Trusts and Divorce: The Potential Protection of Separate Property

Even though trusts are normally associated with estate planning, a trust can also have role in safeguarding assets during divorce. This article will provide an overview of separate and marital property in Colorado and explain how a trust can be used to protect assets from a former spouse.

Colorado Property Division

If a couple going through divorce cannot agree on how to divide their assets, a judge will do it for them in court through an asset division process. Colorado is an equitable division state, which means the court will first decide what property is separate property and what property is marital property. Separate property remains with each individual, and marital property is subject to division.

Once the property has been identified, the marital property will be divided equitably between the divorcing individuals. An equitable division is not an equal division and the court looks to a variety of factors to reach its decision.

Separate property is generally understood to include property owned by either spouse prior to marriage An inheritance received by either spouse either before or during marriage, a gift received by either spouse from a third party and payment received for pain and suffering related to a personal injury judgment is also potentially considered separate property. Marital property is all other property acquired during marriage no matter which spouse acquired the property or how the property is titled. A trust can be an important tool to protect assets from property division because assets placed in a trust established before marriage are typically treated as separate property.

Property held in a trust is treated as separate property because a trust allows a spouse to transfer the ownership of separate property to the trust. Once a trust is established the trust, rather than the person who created it, is the legal owner of the property. Therefore, a properly created trust may not even be subject to the asset division process. Moreover, unlike a prenuptial agreement a trust can be created without the approval of another person.

Trusts for Business Owners

A business owner may also benefit from the use of a trust for the same reasons as stated above. The establishment of a specific type of trust called a Domestic or Foreign Asset Protection Trust would allow an individual to transfer the ownership interest of the company to the trust. However, only certain types of business entity interests may be transferred to a Domestic or Foreign Asset Protection Trust.

Sometimes both spouses may benefit from the trust during marriage, for instance if the trust may be used to cover certain marital expenses like property tax on the marital home. When divorce occurs, one spouse will no longer indirectly benefit from the trust and alimony issues regarding the trust may come up. In Colorado, a claim for alimony cannot generally be enforced against a trust created before marriage, but the income of the trust may be considered in the determination of an alimony award.

The interplay between trusts, asset protection and divorce is complicated. Therefore it is important to carefully consider the terms and conditions of a trust. To ensure your assets are best protected before marriage and during divorce, contact an attorney experienced in estate planning and family law.