Are Trusts Included As Marital Property In Connecticut And How Are They Treated?

Connecticut law generally does not distinguish marital property from separate property like many other states. Similarly, inheritances and gifts are typically subject to property division. Contingent interests and many expectancies may not rise to the level of a current property interest subject to division. Judges divide property in divorce under the principle of “equitable distribution.” Individuals often create trusts in an effort to shield property in the event of divorce or to protect assets from creditors. Generally, Connecticut courts do not invade trusts in dividing property in divorce. However, these complex fiduciary instruments are not necessarily exempt from consideration in limited circumstances.

A properly funded trust may have two types of financial components – the corpus of the trust and any potential income for the beneficiary. Evaluating whether either component, or both, and the extent to which they may be considered as property interests for the purpose of composing financial orders in divorce involves an analysis of any historical practices that may indicate an actual and current property interest.

 In reviewing the trust documentation and historical practices, your lawyer must obtain an accurate reading of the beneficiary’s rights. This includes:

• Evaluating the scope of discretion given to the trustee in distributing or reinvesting trust assets.
• Determining whether the trustee has discretion in favor of a current beneficiary to distribute assets or a duty to protect remainderments for future generations.
• Ascertaining whether the trust grants the beneficiary a power of appointment, which facilitates a beneficiary’s ability to transfer assets to his or her own children.
• Reviewing whether the trustee has made any historical distributions at the request of the beneficiary.

Trust documents also often seek to limit the use of trust assets through an ascertainable standard. The standard may seek to limit distributions to the amount of money needed to serve the beneficiary’s need for housing, lifestyle, education, health or other specified needs.

In limited situations, Connecticut courts may consider the extent to which the trustee and beneficiary have discretion in controlling trust assets. Control over trust assets, or the stream of income from a trust, may equate to vested property interests that may be considered in creating financial orders related to property division in the divorce process. Despite the common belief that trusts are impenetrable in divorce, a full analysis of the circumstances can help to illuminate whether the stream of income from a trust, part or all of the corpus, or a combination of the income and trust assets may be considered as property interests in divorce.