Inherited Trusts and Divorce

Rebecca G. Doane

Randell C. Doane

If an inheritance is left in trust for a child or other beneficiary, rather than being left outright, it will be much better protected from lawsuits, bankruptcies, divorces, and similar misfortunes. However, in some cases, the protection afforded by a trust is not absolute, and inherited trust assets could be reachable by an ex-spouse of the beneficiary in some circumstances. The degree of protection will depend on a number of factors, including the terms of the trust and the applicable law.

In the divorce arena, the law is evolving and in some recent cases, the ex-spouse of a trust beneficiary has succeeded in directly or indirectly obtaining a benefit from the trust, contrary to its wording and contrary to the intention of the person who established the trust. Fortunately, there are steps that can be taken to strengthen a trust against possible attacks by an ex-spouse of the beneficiary.

In the absence of a prenuptial agreement, an inheritance, even if held by a protective trust, may be directly or indirectly at risk when a divorce court judge considers these issues:

• Alimony – There have been cases where the divorce court judge has awarded greater alimony because an inheritance (even if held in trust) had provided a higher accustomed standard of living to the couple during the marriage and enhanced the trust beneficiary’s ability to pay alimony to the ex-spouse to maintain that standard of living after the divorce.

• Property settlement – There have been reported cases in some states where a greater share of marital property which had been accumulated by the spouses during their marriage was allocated to the trust beneficiary’s ex-spouse because the divorce court judge believed that was an “equitable” result since the trust provided additional economic security to the trust beneficiary.

• Loss of trust assets – Only in an unusual case would a divorce court award a portion of trust assets to the beneficiary’s ex-spouse, but that has happened in a few cases where the beneficiary had an extraordinary level of control over trust distributions.

Some steps that can be taken to strengthen trust in order to better protect the inheritance in the event of the divorce of the beneficiary are as follows:

• Grantor’s intent –  Language can be added clarifying that it was the intention of the grantor who established the trust that it be considered the separate and individual property of the beneficiary and not subject to any interest of the spouse of the beneficiary. This adds only minimal additional protection, but could be helpful in some cases.

• Independent Trustee – Significantly greater protection will occur where the beneficiary is not a trustee or the sole trustee.

• Fully discretionary –  A fully discretionary trust allows the trustee to make distributions in its sole discretion without a standard such as health, education, maintenance or support. In some states, fully discretionary trusts have been afforded greater protection from invasion to satisfy a marital claim. This is less of a problem under Florida law, but the applicable law may be where the divorce occurs and not necessarily Florida.

• Multiple Beneficiaries –  If distributions may be made not only to the beneficiary but also to the children of the beneficiary or to other individuals, then it will be more difficult for a judge to factor in the primary beneficiary’s interest in the trust.

• Trust protector –  A trusted individual could be appointed as a trust protector and could be given the authority to direct trust distributions to other family members in the event of a divorce by the beneficiary.

• Domestic Asset Protection Trust (“DAPT”)   – There are 15 states which grant greater protection in the event of a divorce. The most notable is Nevada. The efficacy of the Nevada rules is not certain where the divorce occurs outside of that state. It would be necessary to utilize a corporate trustee in the DAPT state.

• Distributions conditioned on pre/postnuptial   – The trust can provide that no distributions are to be made to a married beneficiary unless he or she has a valid prenuptial or postnuptial agreement which includes certain specified provisions.

An inheritance received outright may be vulnerable to attack from the beneficiary’s ex-spouse. An inheritance received in trust will be much better protected regardless of the circumstances. However, in light of the new cases, If divorce protection is a concern, existing estate plan documents should be reviewed to assure that they will provide the most effective protection available.

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