When getting a divorce, asset division is often a big component of the negotiation process. It may be straightforward to divide savings accounts down the middle, but when it comes to retirement assets, the process is far more complex. A Callahan Trust is a tool used to protect retirement assets from being depleted prematurely.
When you work with our New Jersey divorce and family lawyers at Jersey Coast Family Law, you gain insight into what types of legal strategies may be best suited for your specific needs and objectives. Reach out to us for a personalized consultation to discuss the use of this or other legal tools to protect your future.
What Is a Callahan Trust?
A Callahan Trust is a legal tool used to protect retirement assets. It is not an actual trust in the way other types of financial planning tools are structured. Also known as a constructive trust, it is a legal device used to prevent fraud or unjust enrichment by one party at the expense of the other spouse. It helps ensure equitable division of assets among all parties.
Though not commonly used, there are some situations in which a Callahan Trust is an important component of a New Jersey divorce. It is often very important when pension benefits need to be divided to ensure that the spouse who is not the employee receives their fair share without triggering immediate tax consequences or other penalties.
Under IRS laws, withdrawing funds from retirement accounts prior to reaching legal retirement age could result in significant penalties (often 10% of those funds). A Callahan Trust could help reduce that risk.
In the case of a pension, a Callahan Trust could create a structured way to manage and distribute the assets within the pension post-divorce. It eliminates the IRS penalties while still enabling the funds to grow in value over time as originally planned.
Other Ways a Callahan Trust Could Be Beneficial
There are other situations where the use of a Callahan Trust could be deemed necessary. For example, in some situations of restricted stock units that are non-vested, the spouse that is the employee may buy out the other spouse from their share of those stocks. To do this, they could value the assets at today’s current market value and then reduce it by any taxes.
Alternatively, they could hold those assets in a Callahan Trust instead. In this way, some of the risk and perception of unfairness is reduced. There is less risk of potential loss, and there is less reliance on what is often the speculative value of those stocks. The spouse issued the stocks or other assets will need to cash in those assets, but the trust dictates when to distribute them, how to do so, and how to cover taxation.
Another instance in which this type of trust may be helpful in New Jersey divorce is child support determinations in situations where there are stock options. The use of a Callahan Trust for the stock options allows for the options to be divided between the parties based on the child support formula.
In short, this method offers a better solution because it makes it more efficient and fair. It also enables the court to maintain the best interest of the child. The trust holds the stock options that are granted to the child and is managed only with the goal of what is best for the child.
What Is Unjust Enrichment?
One of the core reasons for utilizing this type of trust is to prevent unjust enrichment. To be clear, this can happen intentionally or unintentionally, depending on the situation. Unjust enrichment refers to one person benefiting from deception or a mistake made related to retirement plans or other equally owned assets that may not be divided evenly during a divorce.
One example of when this could apply is when a couple fails to divide a pension plan during the divorce process. If no plan is in place, the employee’s spouse may benefit unfairly. The court may put in place a constructive trust in the pension to ensure that there is no fraudulent activity taking place, whether intentional or not.
Another potential example is asset protection. Consider what may happen to a house if the spouse who oversees the marital finances decides to remove the spouse’s name from the title of that property. They may do this, for example, by forging the other spouse’s signature.
During a divorce, the court may put in place a Callahan Trust on the title of the family home. This way, even if a forgery like this occurs, the court can take action by showing that unjust enrichment took place.
Should You Have a Callahan Trust Put In Place?
When it comes to retirement assets, pension benefits or any other type of asset protection, there are numerous instances in which the use of a Callahan Trust could be seen as beneficial. It is not the most common move, and as a result, it helps to discuss your legal options closely with a New Jersey family lawyer to be sure both parties are on the same page. This way, you minimize the risk of financial loss due to the actions of the other party.
How We Can Help You
At Jersey Coast Family Law, we provide our clients with insight into all of the legal strategies available to them that could offer protection or benefits in their New Jersey divorce. If you have concerns when it comes to pension division or asset protection, let our experienced legal team offer solutions that could offer you the support you need.
As a New Jersey family lawyer, Abigale Stolfe and the team at Jersey Coast Family Law are here to help you in these difficult situations. Our offices in Toms River and Red Bank serve clients throughout New Jersey. Call our office today at 732-361-4718 to discuss how we can help you navigate the legal options.
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