How a careful and intentional trust will help ensure your intentions are upheld.
Smart estate planning doesn’t just take into account what you’ll pass down to your heirs, but how you’ll do it. There are numerous ways to make the transfer, and some offer more protection than others. If one of your heirs gets divorced down the line, you don’t want to risk your wealth ending up in unintended hands.
One of the simplest ways to transfer your wealth to your family is by naming beneficiaries on your accounts. But even assets solely in your child or grandchild’s name might be up for debate in a divorce proceeding. At the very least, the asset can be used in consideration when determining alimony or child support.
Here are some ways you can help protect your estate from an heir’s divorce.
First, enlist an estate planning attorney to advise you on the correct wording when it comes to trust documents. Be sure to express your concern about assets becoming vulnerable in the case of an heir’s divorce. The attorney should include language that helps protect your beneficiaries from an ex-spouse claiming entitlement to any of the inheritance.
Be painfully clear in trust documents by explicitly stating that nonbeneficiaries are not entitled to receive any assets from the trust even if they’re married to a beneficiary. Make your intentions specific to reduce the possibility they come into question during a divorce proceeding.
While trusts often use language that specifies absolute requirements for payments – in other words, conditions for the distribution of assets – they can become a conflict point in a divorce. If a court determines the distribution of assets was guaranteed, the court may consider dividing assets between the couple.
You may also want to think about indirect distribution of assets. You can allow the trust to make payments to third parties instead of distributing them directly to your beneficiary. Examples include declaring the trust will pay college tuition or fees, or for repaying your beneficiaries’ loans.
Some states are better for protecting assets in a divorce than others. Alaska, Nevada, South Dakota and Tennessee currently allow courts to shield assets in a trust from divorce claims, including alimony and child support. You should know the laws that govern your trust, which will depend on where it originated.
As the trust grantor, you have the power to decide what a trustee can do. It’s possible to expand the trustee’s powers to allow for specific changes to the trust if it becomes compromised by an heir’s divorce. This might include authorizing your trustee or successor trustees to remove a beneficiary completely if there’s an impending divorce, or move assets into a completely new trust for the divorcing beneficiary.
If you know exactly what you want to pass on to an heir who you’re concerned may get divorced, you can create an irrevocable trust for that express purpose. Unlike revocable trusts, the terms of an irrevocable trust cannot be changed. Once the trust is funded and the assets are transferred to the control of the trustee, it’s permanent. You could create a second trust that’s revocable for the purpose of transferring your other assets to other family members.
Most importantly, speak to your advisor about your heirs’ inheritance in the case of divorce. Consulting an estate attorney and even a divorce attorney in some instances may be helpful when creating or revisiting your estate planning documents. There are provisions that can be put in place to help ensure your wealth, family and intentions are protected.
Sources: blg.com; smartasset.com; schwab.com
Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
Raymond James Trust, N.A. is a subsidiary of Raymond James Financial, Inc. Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. are affiliated with Raymond James Trust.
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