Trusts and Divorces: What You Need to Know

Divorce can have significant impacts on your estate plan, especially if trusts are involved. While many people assume their assets in a trust are shielded from divorce, the reality is more complex. In this blog, we’ll explore how divorce affects trusts, estate plans, and what steps you should take to protect your assets.

Typical Trusts and Divorce: Are Your Assets Safe?

A common misconception is that placing assets in a trust will fully protect them from divorce settlements. However, revocable trusts—which allow the grantor to modify or revoke the trust during their lifetime—do not shield assets from divorce proceedings.

• • Revocable Trust Assets: Since the grantor retains control over the assets, they are generally considered marital property in a divorce. This means that they can be subject to division, just like other marital assets.

• • Irrevocable Trust Assets: In contrast, assets in an irrevocable trust are often protected from divorce because the grantor no longer has control over them. However, the structure and timing of the trust play critical roles in determining its effectiveness. Further, irrevocable trusts are often a last resort in asset protection due to the lack of control and undesirable tax consequences.

Protecting Trust Assets from Divorce

To effectively shield assets, individuals may need to take additional protective measures. Here are some options to consider:

1. 1. Pre-Nuptial and Post-Nuptial Agreements:
      • • A pre-nup (signed before marriage) or post-nup (signed after marriage) can outline how assets, including trust assets, will be divided in the event of a divorce.
      • • These agreements can prevent your spouse from claiming certain assets that would otherwise be divided.

1. 1. Irrevocable Trust with a Third-Party Trustee:
      • • Placing assets into an irrevocable trust with an independent third-party trustee can create stronger protection from divorce claims.
      • • This structure limits your control over the assets, which in turn shields them from being considered marital property.
      • • Irrevocable trusts may come with adverse tax consequences of undesirability due to the lack of control associated with irrevocable trusts.

The Role of Prenups and Postnups in Estate Planning

When planning for your estate, it’s crucial to consider whether a pre-nup or post-nup was signed. The timing of these agreements can influence your estate plan in key ways:

• • Was the Estate Plan Made Before or After the Pre/Post-Nup?
    • • If the estate plan was drafted before a pre-nup or post-nup, you may need to revisit it to ensure consistency with the agreement.
    • • On the other hand, if the estate plan came after, it should already take the terms of the pre-nup or post-nup into account.

• • Conflicting Provisions:

• • If the terms of your estate plan and your pre-nup/post-nup differ, conflicts can arise during a divorce. For example, your estate plan might direct assets to your spouse, but your pre-nup/post-nup could limit their claim. The expense associated with litigating conflicting provisions should be avoided by updating your estate plan following any changes to the legal structure of marital property.

Legal Document Conflicts in Divorce

Document	Purpose	Potential Conflicts
Pre-Nuptial Agreement	Outlines division of assets before marriage	May conflict with outdated estate plans
Post-Nuptial Agreement	Outlines division of assets after marriage	Must be integrated into future estate plans
Revocable Trust	Allows modification of assets	Assets are still subject to divorce if created during marriage
Irrevocable Trust	Removes control from grantor	Stronger protection from divorce claims

 

Modifying Your Estate Plan After Divorce

After a divorce, it’s essential to update your estate plan to reflect your new financial and personal situation. Here are key steps to consider:

1. 1. Re-Configure Value and Gifts:
      • • Reassess who will inherit your assets. You may want to remove your ex-spouse from your will or trust and update beneficiaries to reflect your current wishes.
      • • Adjust the distribution amounts to ensure fairness among beneficiaries (e.g., including or disinheriting children).

1. 1. Update Key Documents:
      • • Will: Change your executor and beneficiaries, if needed.
      • • Trusts: If your trust names your ex-spouse as a trustee or beneficiary, you’ll need to update this to avoid unintended asset distribution.

Powers of Attorney and Health Directives: Ensure that your ex-spouse no longer has

Protecting Assets from Divorce

If you’re concerned about protecting your assets from divorce, there are several strategies to safeguard them:

• • Pre-Nuptial or Post-Nuptial Agreements: Clearly outline which assets remain separate property, including assets in a trust.

• • Irrevocable Trusts: As mentioned earlier, an irrevocable trust can be a highly effective tool for asset protection, especially if established before marriage. However, irrevocable trusts are often not a desirable solution in this context due to the lack of control with irrevocable trusts and the adverse tax consequences.

• Third-Party Trustee: Naming an independent trustee helps ensure that the assets remain protected and outside your control, making it harder for them to be considered marital property.

Benefits & Considerations of Asset Protection in Divorce

Protection Strategy	Benefits	Considerations
Pre-Nup/Post-Nup	Clear division of assets	Must be agreed upon by both parties and their attorneys
Irrevocable Trust	Potentially protects assets from divorce & creditors	Cannot be easily changed once created, lack of control, adverse tax consequences
Third-Party Trustee	Adds an additional layer of protection	Relinquishes control of assets

Conclusion

Divorce doesn’t just affect your personal life—it can have profound effects on your estate plan. Whether you’re using a revocable trust or irrevocable trust, it’s essential to ensure that your assets are properly protected from potential claims during a divorce. Prenups, postnups, and strategic trust planning are all tools that can help secure your assets.

Next Steps

• • Concerned about protecting your assets in the event of a divorce? Contact us today for a consultation to discuss trusts, pre-nups, and other asset protection strategies.

• • Recently divorced? Make sure your estate plan reflects your current wishes by updating your will, trust, and beneficiaries.