An important recommendation in many estate planning scenarios is that a child receive his or her inheritance in a trust, instead of outright. By using a trust to hold such property, the property is generally segregated and will likely be treated as the "separate property" of that child in the event the child ever goes through a divorce. As separate property, the other spouse should not receive an interest in that property as part of the divorce.
Not only will the trust property be treated as separate property, but the income distributed from the trust to the child (or property acquired with that income) can likewise receive separate property treatment. A recent Florida case indicates how NOT to deal with the income from a trust if one wants to preserve separate property status.
In the case, the wife/beneficiary received substantial income distributions from the trust - in excess of $8,000 per month. Instead of keeping these proceeds in a separate account, she placed them into a joint bank account with her husband. The couple pretty much lived off this income for their 19 year marriage, since the husband's sole source of income was Social Security disability payments of $569 per month.
During the course of the marriage, the couple used the funds of the joint account to purchase property in Alabama.
At the time of the divorce, the wife argued that the Alabama property was purchased with her separate property (the income of the trust for her benefit), and thus should not be factored into a property division with the husband. She argued that when she placed the assets into the joint account, she did not intend a gift to her husband. The appellate court, in reviewing these facts, held that the Alabama property was marital property, not the wife's separate property.
The two principal facts that worked against the wife appear fairly obvious, in retrospect. First, she should not have placed the income distributions in a joint account with her husband. Second, she should not have purchased the Alabama property in joint names. If she had avoided either of these, she might have prevailed. Now of course she may not have been concerned about planning for divorce during the term of her marriage, but this lack of planning did have a material effect in the end.
Thus, while the "segregation" principle seems obvious to some, it is not obvious to all. If an individual is interested in preserving separate property from a claim of a divorcing spouse, the individual needs to make the effort during marriage to segregate and keep those assets separate and apart from joint assets of the spouses or the assets of the other spouse.
Stough v. Stough, 1st DCA, April 21, 2006
Not only will the trust property be treated as separate property, but the income distributed from the trust to the child (or property acquired with that income) can likewise receive separate property treatment. A recent Florida case indicates how NOT to deal with the income from a trust if one wants to preserve separate property status.
In the case, the wife/beneficiary received substantial income distributions from the trust - in excess of $8,000 per month. Instead of keeping these proceeds in a separate account, she placed them into a joint bank account with her husband. The couple pretty much lived off this income for their 19 year marriage, since the husband's sole source of income was Social Security disability payments of $569 per month.
During the course of the marriage, the couple used the funds of the joint account to purchase property in Alabama.
At the time of the divorce, the wife argued that the Alabama property was purchased with her separate property (the income of the trust for her benefit), and thus should not be factored into a property division with the husband. She argued that when she placed the assets into the joint account, she did not intend a gift to her husband. The appellate court, in reviewing these facts, held that the Alabama property was marital property, not the wife's separate property.
The two principal facts that worked against the wife appear fairly obvious, in retrospect. First, she should not have placed the income distributions in a joint account with her husband. Second, she should not have purchased the Alabama property in joint names. If she had avoided either of these, she might have prevailed. Now of course she may not have been concerned about planning for divorce during the term of her marriage, but this lack of planning did have a material effect in the end.
Thus, while the "segregation" principle seems obvious to some, it is not obvious to all. If an individual is interested in preserving separate property from a claim of a divorcing spouse, the individual needs to make the effort during marriage to segregate and keep those assets separate and apart from joint assets of the spouses or the assets of the other spouse.
Stough v. Stough, 1st DCA, April 21, 2006
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