The Pitfalls of Transferring Assets Into Trust Prior to Divorce

Transferring assets into trust for the benefit of children or others is a common estate planning tool. The party making the transfer into a trust gives up any right to control the property or its distribution.  This also has the effect of removing the property from the marital estate and can significantly lower the amount of money and/or property subject to equitable distribution in the event of a divorce. This becomes problematic when it was done without the knowledge and consent of both parties, and if it was done for a nefarious purpose, such as to deny one spouse their right to share in certain marital assets.

Pennsylvania law provides two main statutory bases to challenge a transfer of property to a trust.  First, Section 3505(e) of the Pennsylvania Divorce Code explains that where a transfer of marital property is made to a third person who paid wholly inadequate consideration for the property, a Court may find that the transfer was fraudulent and declare it to be void.  Transfers to trusts usually do not involve any consideration.  This in itself, can make the transfer within the scope of an attack under Section 3505(e), but the Court is likely to require additional facts suggesting that the transfer was fraudulently made.

The second Pennsylvania statute that allows for a challenge to a transfer of property to a trust is Pennsylvania’s Uniform Voidable Transactions Act, which is based on the Uniform Fraudulent Transfer Act, a model law that has been adopted in some form by numerous states throughout the country.  This statute provides two ways to seek to void a transfer.  First, Section 5104(a)(1) of Pennsylvania’s Uniform Voidable Transactions Act provides that a transfer is voidable if it was made with the actual intent to hinder, delay, or defraud any creditor.  Second, Section 5104(a)(2) of the Act allows a transfer to be voided if no reasonably equivalent value was received in exchange for the transfer, and the party making the transfer believed or should have believed that he or she would incur debts beyond his or her ability to pay as they became due.  Both avenues require the party challenging the transfer to provide sufficient facts to show that it should be voided.

In Pennsylvania, careful consideration should be given to the potential consequences of a transfer of property to a trust during the pendency of the marriage.  Spouses engaged in legitimate estate planning or a legitimate desire to transfer assets to a third party should be aware of the potential for future attacks on the validity of the transfer, and spouses who believe a transfer has wrongfully removed assets from the marital estate should be aware of the potential recourses available under Pennsylvania law.

 

About The Author

Michael Melusky joined Cozen O'Connor in 2013 as an associate in the firm's Litigation Section. Michael graduated from Villanova University School of Law, summa cum laude, and Susquehanna University with a Bachelor of Arts in political science. Michael was honored with a Dean’s Merit Scholarship and participated in Villanova Law Review

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One comment on “The Pitfalls of Transferring Assets Into Trust Prior to Divorce
  1. lisa thomson says:

    This is really good to know during divorce. property ownership can be really confusing let alone having them in Trusts. Thanks for sharing!

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The Family Law Focus blog provides highlights, updates and insights on complex family disputes including divorce, division of property, and alimony; child and spousal support; child custody; domestic violence; pre- and post-nuptial agreements; name changes; and adoption or termination of parental rights.
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Jennifer A. Brandt, of Cozen O'Connor's Family Law practice, has represented a wide variety of clients in hundreds of family law cases throughout her career. Jennifer is a regular legal commentator on national and local television outlets such as CNN, Fox New Network, HLN, MSNBC, Fox29, ABC News, NBC and CBS and frequently writes and contributes to articles in numerous publications, including the Huffington Post, Fox Business.com, The PhiIly Post, Avvo.com, Allparenting.com, The Philadelphia Inquirer, The Philadelphia Business Journal, the National Law Journal, and Main Line Today magazine.
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