Trusts and Divorce in New York

You most likely set up trusts as part of your comprehensive estate plan to transfer assets outside of probate. You may have revocable and/or irrevocable trusts in place. Now that you are considering or are filing for divorce, it is important to understand how the divorce may impact those trusts, whether they are included in the asset division of your divorce, and what your options are moving forward.

Are Trusts Marital Property?

If a trust is created before the couple is married, is it considered separate property? Separate property is not divided in a divorce. If a trust is created during the marriage and it is created only with separate property (such as an asset the spouse owned before the marriage), then the trust remains separate property and is not divided in the divorce.

Technically, trusts made up of marital assets are not considered marital property because the trust holds assets for one party on behalf of another. However, if a trust was created using marital property, it can be considered a marital asset. A trust is a marital asset if:

  • It is revocable
  • It is funded with marital assets

Irrevocable trusts are not considered marital property in New York. However, the court can take their existence into consideration when distributing marital property.

If a spouse is a beneficiary of a trust (such as from their own family), the distributions they receive from the trust are not marital property, as long as they are kept separate, such as in a separate bank account, and not commingled with marital assets.

Revocation Upon Divorce

New York Estates Powers and Trusts Law (EPTL) automatically revokes certain aspects of trusts when a couple divorces. Just as the divorce automatically revokes a will leaving a bequest to a spouse, any provision in a trust that names a spouse as a trustee (the person who manages and distributes the trust) is automatically revoked. If the trust is revocable any disposition of assets to a spouse through that trust is also revoked. However, the actual provisions and beneficiaries of the trust itself are not impacted by the divorce if the trust is irrevocable.

Irrevocable Trusts to Avoid Equitable Distribution

Since irrevocable trusts are not distributed in the divorce, they can sometimes be used as a mechanism for hiding assets from the divorce. The divorce court cannot dissolve the trust and distribute the assets that are in it, so some spouses use them to attempt to protect assets from the divorce. A case called Riechers v. Riechers determined that if it appears marital assets were transferred to an irrevocable trust to avoid distribution in the divorce, then the court can direct the distribution of other assets to compensate for the placement of marital assets into that irrevocable trust. For example, if there is $5 million in the irrevocable trust, the court could order the trustor to pay the other spouse $2.5 million as compensation for the marital assets placed in the trust. In determining how a trust will impact the asset distribution in the divorce, the court will consider:

  • The date the trust was created in relation to the date the couple separated or the date the divorce case was filed (closeness in time makes it suspicious)
  • Whether the intent in creating the trust was to shield the assets from the divorce

Marital Residence and Trusts

New York courts have held that if spouses jointly transfer the marital residence into an irrevocable trust, maintaining only the right to live in the home during their lives, the home is no longer a marital asset and will not be divided or considered when distributing the remaining marital assets.

Trust Income and Support

When a spouse is a beneficiary of a trust, the distributions they receive from the trust are not marital property (if they are kept separate), but in a case called Alvares-Correa v. Correa, the court determined that if a trust beneficiary has control and management over the trust from which they are paid, that the trust income must be considered when establishing spousal and child support.

Whether you have existing trusts or not, you should review and update your estate plan with your estate attorney so that you can implement a new will, health care directive, powers of attorney, and other documents immediately upon the finalization of the divorce.

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Dror Bikel

Dror Bikel founded and leads Bikel & Schanfield, New York’s best known firm for high-conflict matrimonial disputes. A New York Superlawyer℠ and twice recognized (2020 and 2021) New York Divorce Trial Lawyer of the Year, Dror’s reputation as a fearsome advocate in difficult custody and divorce disputes has led him to deliver solid outcomes in some of New York’s most complex family law trials. Attorney Bikel is a frequent commentator on high profile divorces for national and international media outlets. His book The 1% Divorce - When Titans Clash was a 5-category Amazon bestseller.

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