How Does Divorce Affect Estate Planning?
Divorce can impact every area of your life. Not surprisingly, those effects extend to any trust and estate planning that was established prior to, or during the marriage. Regardless of whether a revocable or irrevocable trust was established as part of a comprehensive estate plan, what will happen to your existing trust(s) and the assets held in within them should be part of the agreement between the divorcing couple
Generally, most typical estate plans utilize a revocable trust as the primary planning tool to efficiently hold title to assets during your life. A revocable trust allows the owners of the trust to maintain control over assets placed within it. At any time, you can legally “revoke” the trust; hence the name. If there is a revocable trust in place at the time of divorce, how to deal with the trust and the assets held by the same should become part of the divorce agreement, just as with any other asset. The divorcing couple can opt to revoke the trust, or possibly modify it in some way to provide a way to manage jointly held post-divorce assets. These issues will require negotiation, and the final agreement between the divorcing parties should address how the parties will deal with the estate planning.
If the trust was inherited from another party, division of the asset during divorce will generally depend upon whom was listed as a beneficiary. If both spouses are named beneficiaries, then trust assets must be divided pursuant to the terms of the trust document. If only one spouse is a named beneficiary of the trust, then it will likely be awarded to that individual as his or her own personal asset.
As for irrevocable trusts, we often say, “what’s gone is gone.” This is because, generally, when you form and fund an irrevocable trust you are irrevocably giving your assets away to the trust. For example, most trust terms and named beneficiaries cannot be changed. Further, the assets held in an irrevocable trust can only be transferred, sold or otherwise disposed of pursuant to the trust terms.
In most cases, an irrevocable trust established by a married couple is intended for the benefit of children, either as an irrevocable life insurance trust (sometimes referred to as a “ILIT”), or as a vehicle to provide for children, grandchildren or special needs beneficiaries. As long as neither party has access to the trust, this should be a non-issue in a divorce. This is why it is often recommended that a third party trustee be appointed to manage irrevocable trust assets. If there is a third party trustee in place at the time of divorce, the parties can generally rest assured that children, grandchildren or special needs beneficiaries will still inherit the assets as originally intended.
Divorce and estate planning can become complicated issues. Since each situation is unique, we recommend that you consult with an estate planning attorney, along with your family law attorney and a CPA or tax attorney if you have questions about the effect of divorce on your estate planning. With the proper team of estate, family and tax law professionals, you will receive valuable guidance on what to expect should a divorce occur. They can help guide you through the emotional and often complex process.