Posted on July 24, 2022

Trusts And Marital Assets In An Illinois Divorce

I recently saw an advertisement on Facebook that said “Protect your assets in a divorce with a trust.”

Hmm. I am a divorce lawyer who is obsessed with divorce law and strategy. Why had I not heard that a pending divorce could be resolved by simply transferring all of one’s property into a trust?

What sounds too good to be true…usually is.

Upon further research, I discovered that you can remove marital assets from the marital estate rendering the assets untouched by a later divorce by putting those marital assets in a trust…but only if you have NO ill will in your heart (explained later).

What Is A Trust In Illinois

“”Trust” means…a trust created by will, deed, agreement, declaration, or other written instrument” 760 ILCS 3/103(37)

“A trust may be created by:

  1. transfer of property to another person as trustee during the settlor’s lifetime or by will or other disposition taking effect upon the settlor’s death;
  2. declaration by the owner of property that the owner holds identifiable property as trustee” 760 ILCS 3/401(1,2)

Property transferred to a trust is now the property of the trust not the property of the person who transferred the property to the trust (until the trust is revoked). Therefore, that property cannot be divided in an Illinois divorce because the person no longer owns the property. The trust owns the formerly marital property after the transfer.  

Division Of Assets In An Illinois Divorce

Illinois divorce courts “shall divide the marital property without regard to marital misconduct in just proportions” 750 ILCS 5/503(d)

“‘[M]arital property’ means all property, including debts and other obligations, acquired by either spouse subsequent to the marriage” 750 ILCS 5/503(a)

“For purposes of distribution of property, all property acquired by either spouse after the marriage and before a judgment of dissolution of marriage or declaration of invalidity of marriage is presumed marital property.” 750 ILCS 5/503(b)

Before there is any question as to whether property is marital and thus, divisible in an Illinois divorce, the question is whether the property is even subject to the divorce.

Property Held By A Trust Is Not Marital Property

“The issue is…whether the assets in [a]…trusts is before the court in the first instance and therefore subject to distribution.” LaRocque v. LaRocque (In re Marriage of LaRocque), 107 N.E.3d 349, 366 (Ill. App. Ct. 2018)

Non-marital property “property acquired by gift, legacy or descent or property acquired in exchange for such property” 750 ILCS 5/503(a)(1)

“Section 503(a)(1) may apply where a spouse receives property as his or her share of a trust.” In re Marriage of Asta and Pappas, 56 NE 3d 1088 – Ill: Appellate Court, 2nd Dist. 2016

It is clear that assets and proceeds of a trust whose source is a third party is non-marital property but assets of a trust whose depositor is one of the spouses is, initially, non-marital property as well.

Just as if a spouse had spent marital money or given away assets, the property no longer belongs to them and that property can no longer be divisided in an Illinois divorce. Assets given to a trust is no longer the property of the married couple.

“In Illinois, however, and by the weight of authority in other jurisdictions, the owner of property has an absolute right to dispose of his property during his lifetime in any manner he sees fit, and he may do so even though the transfer is for the precise purpose of minimizing or defeating the statutory marital interests of the spouse in the property conveyed…Such a gift or transfer is not vulnerable or subject to attack by the surviving spouse unless the transaction is a sham and is “colorable” or “illusory” and is tantamount to a fraud. ” Johnson v. La Grange State Bank, 73 Ill. 2d 342, 358 (Ill. 1978)

Trusts Whose Purpose Is To Hide Money From A Marriage

Trusts can protect assets from a divorce in Illinois, but only if the trust is not an overt or secret transfer back to one member of the marriage.

“[A]n illusory transfer is one which takes back all that it gives” Johnson v. La Grange State Bank, 73 Ill. 2d 342, 359 (Ill. 1978)

If one party to the marriage is the beneficiary in word or in fact of the trust, that’s an illusory transfer.

Few people who are trying to hide their assets from their spouse in case of divorce or going to be so obvious as to transfer money to a trust that benefits one particular spouse. Instead, for example, a spouse will appoint their dear nephew who will subsequently transfer the assets back to his favorite uncle in secret. That is a “colorable transfer”

“[A] colorable transfer is one which appears absolute on its face but due to some secret or tacit understanding between the transferor and the transferee the transfer is, in fact, not a transfer because the parties intended that ownership be retained by the transferor.” Johnson v. La Grange State Bank, 73 Ill. 2d 342, 359 (Ill. 1978)

Whether the transfer to a trust is “illusory” or “colorable” really depends on the intent to defraud of one of the spouses.

“In other words, although a spouse’s marital rights can be defeated by an actual transfer, a purported transfer whereby the owner does not intend to convey a present interest, but intends to retain ownership, is evidence of an intent to defraud.” In re Romano, 360 Ill. Dec. 36, 67 (Ill. App. Ct. 2012)

“Whether the conveyance at issue was fraudulent depends upon all the circumstances surrounding the transfer….A fraud must be proven by clear and convincing evidence. ” In re Marriage of Frederick, 218 Ill. App. 3d 533, 536 (Ill. App. Ct. 1991)

Unless the transfer is to an irrevocable third-party charity, the transfer is going to look fishy.  It is better to examine whether a transfer is not fraudulent per se.

A revocable trust is “[a] trust in which the settlor reserves the right to terminate the trust and recover the trust property and any undistributed income” Black’s Law Dictionary (11th ed. 2019)

A transfer to a revocable trust that you can just transfer back to you at any time looks fraudulent…but it’s not.

A revocable trust is not per se fraudulent. “The fact cannot be denied that as trustee of a revocable trust [a spouse can] retain[] a significant degree of control over the trust assets. However, the form of control which the donor retains over the trust does not make it invalid. In addition, it is well established that the retention by the settlor of the power to revoke, even when coupled with the reservation of a life interest in the trust property, does not render the trust inoperative.” Johnson v. La Grange State Bank, 73 Ill. 2d 342, 363-64 (Ill. 1978)(citations omitted)

Fraud hinges on facts. If donative intent can be proven, fraud is impossible.

“Where present donative intent exists, the transfer is valid and effective to defeat the marital interest.” In re Estate of Mocny 257 Ill.App.3d 291, 296 (1993).”

It can be argued that “the power to revoke, terminate, amend or modify the trust at anytime and had use of the property as long as he wanted to show the illusory nature of the transfer. However, these features do not necessarily render the trust inoperative. The facts surrounding the transfer show that the trust, while ostensibly valid, is in actuality a sham transaction to defraud respondent’s marital rights.” In re Marriage of Frederick, 578 NE 2d 612 – Ill: Appellate Court, 2nd Dist. 1991 (citations omitted)

Most Illinois trusts are made for the purposes of estate planning. Transferring assets into an estate plan is for the purposes of estate planning not divorce planning.

A spouse can “den[y] engaging in divorce planning, and [instead say] that his various financial transactions were part of an ongoing estate plan” LaRocque v. LaRocque (In re Marriage of LaRocque), 107 N.E.3d 349, 358 (Ill. App. Ct. 2018)

An irrevocable trust is “[a] trust that cannot be terminated by the settlor [person who deposited the asset] once it is created” Black’s Law Dictionary (11th ed. 2019)

You can never get the money back with an irrevocable trust. Therefore, it is really hard to prove that fraudulent intent existed if the trust is irrevocable

“The trusts were irrevocable, so [a spouse] certainly could not transfer assets out of the trusts at will. That fact alone ma[kes] it an uphill battle for [the other spouse] to argue that the transfers to the trusts were “illusory” or “colorable.”” LaRocque v. LaRocque (In re Marriage of LaRocque), 107 N.E.3d 349, 363 (Ill. App. Ct. 2018)

Finally, in almost all transfers of marital property both spouses have to agree to transfer the property to the trust. Once a spouse has agreed to transfer the marital property to a trust, it is very difficult to claim fraudulent intent…even if the other spouse says, “I may divorce you later,” right before signing.

“A person may not enter into a transaction with their eyes closed to available information and then charge he has been deceived by another.” Seefeldt v. Milikin National Bank of Decatur, 154 Ill.App.3d 715, 719 (1987)

Even if a spouse has signed onto a trust, a trust can still be dissolved by a court if there is sufficient cumulative evidence to show fraud.

For example in In re Marriage of Frederick, 578 NE 2d 612 – Ill: Appellate Court, 2nd Dist. 1991, the Illinois appeals court found that “[t]he facts of this case show an intent to defraud respondent. The circumstances surrounding the trust and the trust provisions when viewed together show that the transfer was illusory and created to defeat respondent’s marital rights to the property in a dissolution proceeding. Although she signed the agreement after it had been in her possession awhile, there was no consideration for the agreement. Petitioner misrepresented the nature of the letter. Respondent was unaware of petitioner’s consultation with a divorce attorney. She had no attorney. The…[t]rust is set aside, and the matter is remanded in order that the…property [that was in the trust] be apportioned between the parties as the trial court deems proper in its discretion.”

Trusts Where A Spouse Is A Beneficiary In An Illinois Divorce

Some trusts in Illinois terminate upon divorce and some trusts can live beyond the entry of the Judgment For Dissolution of Marriage.

“The general rule is that a divorce does not terminate the property rights of a husband and wife which exist independently of the marriage” Leahy v. Schuett, 211 Ill. App. 3d 394, 397-98 (Ill. App. Ct. 1991)

Trusts “exist independently of the marriage.” The expectancy interest of a beneficiary of a trust must be waived in the Marital Settlement Agreement or it remains outside of the settlement.

“[T]he general rule that a spouse named as a beneficiary…has an expectancy interest which may be defeated in a dissolution agreement but that the dissolution agreement must be a clear expression of the spouse’s surrender of that interest.” In re Marriage of Myers, 257 Ill. App. 3d 560, 564 (Ill. App. Ct. 1993)

An irrevocable trust would require the beneficiary to agree to waive that benefit in order for the benefit to be waived.

“[J]udicial termination of marriage of the settlor of a trust revokes every provision that is revocable by the settlor pertaining to the settlor’s former spouse in a trust instrument or amendment executed by the settlor before the entry of the judgment of judicial termination of marriage of the settlor” 760 ILCS 3/605(b) (emphasis mine)

If a spouse “did not specifically waive [their] contingent beneficial interest in [a] trust [in[ the judgment of the dissolution [the expectancy interest of the spouse remains viable]” Leahy v. Leahy-Schuett, 570 NE 2d 407 – Ill: Appellate Court, 1st Dist., 3rd Div. 1991

Few trusts between spouses are irrevocable, however. While people usually set up trusts to protect the ones they love, like a spouse. If, however, they no longer love their spouse, a revocable trust automatically terminates upon divorce in Illinois as to the ex-spouse.

“Unless the trust instrument or the judgment of judicial termination of marriage expressly provides otherwise, judicial termination of marriage of the settlor of a trust revokes every provision that is revocable by the settlor pertaining to the settlor’s former spouse in a trust instrument or amendment executed by the settlor before the entry of the judgment of judicial termination of marriage of the settlor” 760 ILCS 3/605(b)

Beneficiaries of revocable trusts can expect to be removed as a beneficiary well before the divorce is final. Assets held by a revocable trust are not deemed “marital” if they can be revoked at any time.

“[I]n order to be property within the ambit of the [Illinois Marriage and Dissolution of Marriage Act, the [property in question] must be in the nature of a present property interest, rather than a mere expectancy interest. An expectancy interest is the interest of a person who merely foresees that he might receive a future beneficence, such as the interest of an heir apparent or of a beneficiary designated by a living insured who has a right to change the beneficiary….a revocable trust in the nature of a will substitute which provides that [an] estate will pour over into [a] trust upon…death…[means a[ right to a beneficial interest in [the] trust was but a mere expectancy. While [a] change in beneficiary may be a relevant factor in determining an equitable distribution of property, it cannot be characterized as a vested property interest within the ambit of the [Illinois Marriage and Dissolution of Marriage Act.” In re Marriage of Centioli, 781 NE 2d 611 – Ill: Appellate Court, 1st Dist., 4th Div. 2002

When One Spouse Is A Trustee And The Other Spouse Is The Beneficiary

Very often, trusts for the benefit of a spouse are managed by the other spouse. Who better to put your trust in than your spouse…until you get divorced.

“A trustee owes a fiduciary duty to the beneficiaries and is obligated to carry out the trust according to its terms and to act with the highest degree of fidelity and utmost good faith. A trustee is under a duty to serve the interest of the beneficiaries with complete loyalty, excluding all self-interest, and is prohibited from dealing with the trust property for his individual benefit.” Dick v. Peoples Mid-Illinois Corp., 242 Ill. App. 3d 297, 303-4 (Ill. App. Ct. 1993)

A soon-to-be-ex-spouse cannot abuse their power as the trustee against their soon-to-be-ex-spouse, unless they themselves created the trust (very common) and subsequently change the rules of the trust.

“The creator of the trust can waive the rule of undivided loyalty by expressly conferring upon the trustee the power to act in a dual capacity, or he can waive the rule by implication where he knowingly places the trustee in a position which might conflict with the interest of the beneficiaries.Dick v. Peoples Mid-Illinois Corp., 242 Ill. App. 3d 297, 303-4 (Ill. App. Ct. 1993)

Once the rules are changed, the trustee can do whatever they want with the trust so long as the trustee-spouse is honest about their actions and not overtly abusive.

Where a conflict of interest is approved or created by the testator, the fiduciary will not be held liable for his conduct unless the fiduciary has acted dishonestly or in bad faith, or has abused his discretion.” Dick v. Peoples Mid-Illinois Corp., 242 Ill. App. 3d 297, 303-4 (Ill. App. Ct. 1993)

This is a pretty high standard for liability even when a soon-to-be-ex-spouse is the trustee. For example, a soon-to-be-ex-spouse could drain the trust by awarding themselves fees for managing the trust.

“If the trust instrument does not specify the trustee’s compensation, a trustee is entitled to compensation that is reasonable under the circumstances” 760 ILCS 3/708(a)

Spouses can’t win even if they’re the beneficiary of a trust in Illinois. Maybe that Facebook advertisement was right, after all.

People who put money into trusts are sophisticated planners with an eye on the future. Those same people will want a sophisticated lawyer to handle their divorce. Contact my Chicago, Illinois family law firm to discuss your Illinois divorce and your (or your spouse’s) trust.

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Russell Knight

Russell D. Knight has been practicing family law as a Chicago divorce lawyer since 2006. Russell D. Knight amicably resolves tough cases while remaining a strong advocate for his client’s interests.

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