Use of Trusts: Divorce

How may trusts be used in a divorce context?

Although trusts are not particularly common in divorce situations, they can be used to provide economic protection and to achieve particular income and estate tax goals. If you decide to employ a trust in your divorce settlement, you should be aware of both the legal and tax ramifications.

Why are trusts used relatively infrequently in divorce contexts?

In divorce situations, there are several reasons why trusts are not often considered. First of all, trusts are expensive to establish and maintain. Most divorcing couples lack the necessary wealth to fund a trust in such a way that the economic and tax benefits of the trust will outweigh the cost. Secondly, the relationship between divorcing spouses is usually adversarial; mistrust must be overcome when developing an appropriate trust. Finally, because the rules for trust taxation are somewhat complex, attorneys sometimes discourage the use of trusts in divorce settlements.

Nevertheless, trusts are commonly used in the divorce context to handle life insurance proceeds.

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