What Happens to Irrevocable Trusts During Divorces in North Carolina?

Irrevocable trusts have become exceedingly popular among many families in North Carolina, particularly those with high net worth. For many years, trusts have proven their worth as effective estate planning tools. They have the potential to help reduce or even eliminate estate taxes, inheritance taxes, income taxes, and capital gains taxes. However, the challenge of dealing with irrevocable trusts may become quite complicated during divorces. So, what exactly happens to these irrevocable trusts during North Carolina divorces?

As the name implies, an irrevocable trust cannot be canceled or altered once it has been established. If you name beneficiaries to your trust, it becomes very difficult to remove them at a later date. This obviously becomes an issue if you name your spouse as a beneficiary before becoming divorced. Irrevocable trusts may be especially problematic in high-net-worth divorces, as irrevocable trusts are quite common among wealthy families.

In some cases, trusts may shield assets from the equitable distribution process. This is because, for the most part, assets held in trusts are considered separate assets. For a spouse who wishes to protect their wealth from an ex, this might sound like good news. But for a spouse who wishes to access wealth held in a trust, this might sound like an unwelcome roadblock to financial security.

An irrevocable trust ensures that assets completely leave the hands of a grantor (the person who establishes the trust). Once the assets are contributed to a trust, they no longer legally belong to the grantor. Instead, they become the responsibility of the trustee to manage and distribute to beneficiaries. But while contributing assets to a trust may protect them from equitable distribution, doing so in anticipation of a divorce may be seen as fraudulent – or a breach of fiduciary duty. If a judge believes that the trust’s sole purpose is to prevent funds from reaching a spouse, they can order that the trust be dissolved – with the assets divided among the couple according to the normal equitable distribution process.

Perhaps the most obvious issue is the possibility of naming your spouse as a beneficiary to an irrevocable trust. Since irrevocable trusts cannot be altered or canceled, this may pose serious issues after a divorce. If you have set up an irrevocable trust, you may worry about the possibility of your spouse inheriting assets from the trust even after the marriage is over. This may be especially daunting if you split with your ex on bad terms.

There are a few potential methods to remove your spouse as a beneficiary to your irrevocable trust, however. For example, it is possible to get a court order that removes your spouse or cancels the trust altogether.

Another potential method involves “decanting” the trust. This strategy essentially allows the trustee to move assets from one trust to a new trust with different terms. Decanting may limit the ability of an ex-spouse to inherit assets from an irrevocable trust, and it may eliminate them from the trust altogether, depending on the circumstances.

In some cases, additional beneficiaries may act on their own accord to decant or alter the trust in a way that limits the ex’s access to the funds. For example, a spouse might select his wife and children as beneficiaries. In order to prevent the ex-wife from getting access to the funds, the children may exercise their power as beneficiaries to work with the trustee and decant the assets to another trust.

In the past, irrevocable trusts have been shielded from division due to their “spendthrift” status. The purpose of these trusts is to offer protection from creditors. When an ex-spouse tries to access the funds as part of a divorce settlement, they essentially become classified as creditors. Although many states do not allow the decanting of trusts, North Carolina is one of the many states that do, according to § 36C-8B-7.

If you have been searching for an experienced North Carolina divorce attorney, look no further than Arnold & Smith, PLLC. Over the years, we have helped numerous divorcing spouses across the Tar Heel State, including those who have high net worths. We know that various estate planning tools may pose issues as spouses divide property. Book a consultation at your earliest convenience to determine the best route forward.