Many are confused about the status of property acquired prior to marriage and how the status of that property could be impacted as a result of a marriage. In this blog we will discuss what happens to pre-marital trusts when the property is accessed by both spouses during the marriage.
First thing first, what is considered marital property in the state of Georgia? In Georgia, marital property is simply property gained during the course of a marriage, as such, marital property becomes subject to equitable division upon a divorce. Georgia considers property acquired before a marriage to be separate and distinct property, which is not subject to division in the event of divorce.
So what happens if that separate property was put into a trust before the marriage, and then is later accessed or used by both spouses during the marriage? In this scenario, the property may be considered marital property and subject to division.
Let's examine the scenario further by reviewing what a trust is and how it functions, in order to see how the trust could be considered marital property.
A trust is a legal arrangement established to manage assets for the benefit of a third party, one person (the grantor) transfers assets to another person (the trustee) under the terms of a trust (the beneficiary). In simpler terms, a trust is a legal agreement where a grantor transfers assets to another to be managed for the benefit of the named beneficiary. The parameters of the trust, such as how the assets will be handled, how they will be transferred to the beneficiary, and when the trust will end can be specified by the grantor. Trusts can be established for a number of purposes such as charitable giving, asset protection, and estate planning.
In Georgia, trusts established prior to marriage are generally considered separate property, which means that they are not subject to division in a divorce. However, there are exceptions to this rule, one being when the trust property is commingled with marital property. "Commingling" occurs when separate property is mixed with marital property in such a way that it becomes difficult or impossible to distinguish the separate property from the marital property.
Now, let’s consider a scenario where the husband receives a trust fund from his parents before he gets married. The trust fund is in his name, and he uses it to purchase a house. After he gets married, he and his wife use joint funds to make improvements to the house and pay the mortgage. They also use the house as their primary residence and make other changes to it that are consistent with treating it as a marital asset. In this case, the trust property has been "commingled" with marital property, and it could be considered marital property in a divorce.
In the above example, if the husband wishes to ensure that property remains separate property and does not become marital property, he could keep separate records for any and all transactions involving the trust property. Husband could avoid commingling by avoiding funds to pay for expenses related to the trust property. Husband should also treat the property as separate, ensuring all taxes, insurance, and bills are solely in his name. Finally husband could consider a pre- or post-nuptial agreement.
Let's now imagine that a Wife sets up a trust before getting married and transfers certain assets to it. Wife is the trust's grantor, while a third party (such a bank or financial institution) serves as the trust's trustee and Wife is the beneficiary and her children from a previous marriage are her successor beneficiaries. According to the trust agreement Wife is to use the trust's assets for her advantage while she is still alive, and any assets that are still in the trust after her death will belong to her children from a previous marriage. If the Wife later gets married and both spouses access or use the property in the trust during the marriage, it is possible that the property could be considered marital property.
In the example above, if Wife wishes to ensure that property remains separate property and does not become marital property she should avoid commingling. Wife should keep the property separate. Wife should also ensure that she follows the terms of the trust agreement, this is extremely important because property remaining in the trust after her death will belong to her children from her previous marriage and not her current spouse. Finally, Wife should consider a pre-nuptial agreement.
Now let’s recap, Here are some reason ways separate trust property could become marital property in Georgia:
1. Commingling: Mixing the property from the trust with other marital assets (such as joint bank accounts or jointly-owned property).
2. Transmutation: Even if the property is kept separate, the spouse’s actions during the marriage could change the character of the property from separate to marital. This can happen when a spouse treats the property as if it is marital property, such as using it to pay for marital expenses or jointly titling the property with his/her spouse. In Georgia, if a spouse transmutes separate property into marital property, it will be subject to division in a divorce.
3. Active appreciation: If the property in the trust increases in value during the marriage, the increase in value may be considered marital property.
In conclusion, assets held in a trust prior to marriage may convert into marital property, in Georgia, if they are commingled with marital assets, converted into marital assets, or actively appreciated as a result of shared contribution towards managing the property, market conditions or other external factors. It's crucial to understand the challenges one could face as a result of shared access to separate assets and it is imperative that individuals maintain the property separately in order to preserve the property's distinct character and optimize asset protection.
It's imperative to understand that the court ultimately decides whether property in a divorce is regarded as separate or marital. The spouse may want to speak with an attorney who may assist him/her in developing a strategy to retain the distinct character of the property if he/she wishes to keep the assets in the trust separate and protect them from partition in a divorce. If you or a loved one need assistance in developing a strategy to retain the separate and distinct character of pre-marital assets, schedule an appointment with the Law Office of L.M. Otey today.