Quite often in a divorce settlement, a lump sum payment is made to one spouse rather than establishing monthly spousal support payments. While this may effectively meet the needs of both spouses, it opens the door for problems when trying to obtain mortgage financing for the receiving spouse. Why? There is no future established income.

Utilizing the lump sum payment and establishing a Trust may be an answer to this problem.

Alimony Trust Planning

Alimony trusts are generally utilized in situations where there is sufficient wealth to obtain economic and tax benefits that outweigh the cost of administering the trust. The adversarial relationships associated with divorce can be overcome through the use of a trust vehicle. In essence, using a trust for divorce purposes can provide economic protection; achieve income and estate tax planning goals, and set aside assets for children.

An alimony trust may be utilized in circumstances where either spouse is concerned about the handling of lump-sum settlements particularly if the funds are squandered causing either spouse to be exposed to continual requests for support. Also, the recipient spouse may be concerned with the paying spouse’s ability to meet his or her financial obligations.

Other uses for Alimony Trusts:

• To hold illiquid assets
  
• To obtain beneficial income tax results
  
• To minimize estate taxes
  

Living Trusts

Revocable Trust

The revocable trust is by far the most common type of living trust. So much so that people refer to it simply as “a living trust,” or “a living revocable trust.” Just as the name hints, a revocable trust can be changed or revoked (canceled) by the grantor at any time. Doing this is not a quick job, but it can be done, which makes it a flexible option.

Irrevocable Trust

The irrevocable trust is active and cannot be change, even by the grantor. It would take a judge to decide whether a change can be made, and even then, the circumstances would have to be pretty special. This naturally makes the revocable trust a more popular option. In fact, some people might start off with a revocable trust but then convert it to an irrevocable trust later (when they’re more certain of things.)

The other thing to know about both types of living trusts is that when the grantor has died, their revocable trust automatically converts to an irrevocable one anyway (because the only person who could have change it has passed on.)

How does income from a trust help when a divorcing spouse receives a lump sum payment?
In order to be considered as “Qualifying Income” certain requirements of each income source must meet both a Continuance Test as well as a Stability Test.

• Trust income must be confirmed by obtaining a copy of the trust agreement or the trustee’s statement confirming the amount, frequency, and duration of payments.
  
• Income from trusts may be used if constant payments will continue for at least the first three years of the mortgage term as evidenced by trust income documentation.
  

Converting lump sum payments from the divorce settlement into the funding of either an alimony trust or a revocable living trust may be the answer to providing qualifying income for mortgage financing.

Contact me today to discuss the advantages of using trust income
for divorcing homeowners!

This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only, and are subject to market changes. This is not a commitment to lend. Rates change daily - call for current quotations.  The information contained in this newsletter has been prepared by, or purchased from, an independent third party and is distributed for consumer education purposes.

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