Protecting assets from future possibility of a divorce is very commonly overlooked by estate planners.
Divorce is an unpleasant but realistic possibility for every married couple. As an estate planning attorney, protection from divorce is often a key goal or factor in designing a client’s asset protection and estate plan. This article outlines some of the steps that can be taken to protect assets from the claims of a divorcing spouse. A related concern is protecting the client’s children and future generations from any divorces that may arise downstream.
1. The Premarital Agreement. A Premarital Agreement is often the first line of defense. This agreement establishes the financial rules and guidelines for the marital relationship in the event of divorce. A Premarital Agreement is particularly important for those that have children from a prior relationship, couples with significant assets prior to marriage, persons who are public figures or persons who are otherwise seeking to keep such matters private. Some key considerations for the Premarital Agreement are discussed below:
– Utilize a Confidentiality Agreement in conjunction with the Premarital Agreement to establish a greater expectation of privacy.
– Identify assets owned prior to marriage that are to remain separate property after marriage.
– Define in the Premarital Agreement whether earnings from separate property assets are to remain separate property.
– Define in the Premarital Agreement whether wages or earnings from work or services performed during the marriage are to be community property or separate property.
An often overlooked alternative or objective for a Premarital Agreement is to protect the assets from one spouse from the debts or liabilities of his or her partner. If one partner is in a risky profession, this can provide substantial protection for his or her partner.
Often, one spouse or partner holds or owns substantially more assets than the other. If so, consider providing for certain assets to go to the less wealthy spouse over time so that the other partner is not left with insufficient assets after a long-term marriage. This provision may also enhance the enforceability of the overall agreement with greater protection overall for the wealthy spouse.
2. A Domestic Asset Protection Trust (“DAPT”). A DAPT or other asset protection trust should be paired with the Premarital Agreement. Ideally, the DAPT is created and funded prior to a Premarital Agreement to provide a second layer of protection. A DAPT is a self-settled spendthrift trust. Seventeen (17) states currently have laws which permit DAPTs; Nevada, South Dakota and Wyoming are included in this group. Each state has unique laws in this area and care should be taken in selecting the appropriate jurisdiction with an experienced asset protection attorney.
3. A Discretionary Trust Distribution Standard. A Discretionary Trust Distribution Standard should be utilized. Many attorneys utilize HEMS (health, education, maintenance and support) standard when designing trust distributions. This is based upon the standard commonly used with an estate tax focus. However, a discretionary trust with distributions to be made for the best interests of the beneficiary in the sole discretion of the trustee. You should also consider utilizing a separate distribution trustee to authorize distributions to the beneficiary and who is not related or subordinate to that beneficiary.
4. A “Floating Spouse” Provision. Consider a floating spouse provision in your trust. A floating spouse for this purpose is the spouse with whom you may be married to from time to time. A floating spouse may be used to receive distributions which may be protected from claims against you. This provides greater protection from a divorce as an ex-spouse does not have any rights without any revision to the trust instrument. This provision may also help protect you from your creditors if you are not authorized to receive such distributions directly.
5. A Power of Appointment. Your trust should include a power of appointment should be provided to your child which allows your child to revise a gift in an otherwise irrevocable trust to disinherit a soon to be ex-spouse in the event of divorce. The power of appointment is typically exercised by the child in his or her will by specifically referring to the power of appointment and identifying the new recipients.
6. Trust Protectors. Trust protectors should be used when appropriate. Asset protection trusts are by their very terms irrevocable. A trust protector is a temporary position that can be appointed or filled on an as needed basis to affect the changes that may be desired as a result of future circumstances in an otherwise irrevocable trust. Trust protectors may enable a great deal of flexibility to adjust for future circumstances or changes in an irrevocable trust.
7. Decant an Existing Trust. If you need to change the beneficiaries or the trustees in an irrevocable trust, such as to remove the rights of a future ex-spouse, that change may be possible through a process called “decanting”. Most of us consider decanting as only being appropriate to wine. Decanting wine is essentially pouring wine from one bottle to another and leaving the sediment and impurities behind. (For wine, we also want it to breathe, but that’s another topic). To decant a trust, we pour or transfer assets from one trust to another to leave behind unwanted provisions. We can include new provisions that may be desired. Only twenty-three (23) states currently have laws which permit decanting. To be clear, decanting in California does not have the certainty of a Court Order. The trust must be situated or based upon the laws of one of those states or moved to one of these jurisdictions. One way of accomplishing that is through a trust protector as described above.
Protecting assets from future possibility of a divorce is very commonly overlooked by estate planners. Careful planning may enable the family to maintain “bloodline protection” within the estate plan and substantially enhance overall creditor protection for yourself and future generations.
DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation in writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.