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By Steven J. Oshins Esq., AEP (Distinguished)

Divorce can be ugly. But it’s a realistic possibility for anybody who is married. Therefore, estate planners must plan for it when designing their clients’ estate and asset protection plans. This article will highlight six concepts that can protect assets from a divorcing spouse and, in some cases, enhance or keep together the marital relationship — at least until the day of reckoning.

The planning concepts described herein are listed in no particular order of importance.

1. The “Floating Spouse Provision” – When designing a trust, unless there is a compelling reason to do otherwise, it generally makes sense to use a so-called “floating spouse provision”. A floating spouse provision defines a “spouse” as the person you’re married to from time to time. This becomes important if there’s a divorce and the spouse otherwise would have had a vested beneficial interest in a trust. Depending upon the definition in the trust agreement, you might use a triggering event such as the filing of a divorce action or simply the couple living apart or some other similar definition to put this provision into action.

2. The Discretionary Trust – For creditor protection purposes, a discretionary trust set up by someone other than one of the beneficiaries is protected from all creditors of the beneficiaries irrespective of whether it contains a spendthrift provision. The only exception is under Florida law where its Uniform Trust Code and the Berlinger v. Casselberry case say otherwise and allow a writ of attachment to apply for certain marital-related creditor purposes. The alternative type of trust, called a support trust (such as a trust for the health, education, maintenance and support of the beneficiaries), is generally protected from divorce if it includes a spendthrift provision, except that a reasonably large number of states say otherwise either by statute or by case law. Therefore, the discretionary trust is the far superior divorce protection tool.

3. The Power of Appointment – What do you do if an irrevocable trust was established for the benefit of the child (who is about to get divorced) and at that child’s death is for the benefit of the child’s spouse (but without a “floating spouse provision” defining “spouse”)? The trust should give the child a power of appointment allowing the child to cut the spouse out of the trust. The child generally exercises the power of appointment in his or her will or codicil by specifically referring to the power of appointment provision and specifying the new chosen recipients of the trust property over which the power of appointment was given.

4. The Prenuptial Agreement – People will often enter into a prenuptial agreement to define their marital agreement in contractual form. It’s not the most romantic conversation to have with your future spouse, but it is often very helpful, especially where the two parties have significantly different net worths and incomes. As negative as it may sound, putting the arrangement on paper and cementing both parties’ expectations can often have a positive effect on the marriage and make the divorce less of a battle because the arrangement was already defined on paper.

5. The Hybrid Domestic Asset Protection Trust – Fifteen domestic jurisdictions have statutes allowing a person to establish an irrevocable trust that is protected from the creditors of the person establishing the trust. There is nearly zero case law interpreting these trusts for settlors who aren’t residents of the situs of the trust, almost certainly because of the fear factor involved in challenging these trusts. Even the minimal case law in existence hasn’t confirmed whether these will ultimately hold up if a creditor gets a judgment or settlement and then attempts to collect in the DAPT jurisdiction. To significantly reduce any inherent risk in being the unlucky first test case, it is generally prudent to use a Hybrid DAPT which is a trust set up by the settlor generally for his or her “floating spouse” and descendants, but not including the settlor as a beneficiary. Instead, a provision allowing a trust protector to be named gives the trust protector the power to add and remove beneficiaries, including the ability to add the settlor. Although this advanced version isn’t necessary (especially given the strong success of regular DAPTs so far), it is by far the more protective approach. And with a divorce, it is much easier to convince a judge that the assets aren’t part of the marital estate if you aren’t a beneficiary of the trust!

6. Decanting a Trust – If you need to cut a beneficiary out of a trust or change any other right, such as modifying successor trustees or the power to fire and hire trustees, consider decanting the trust by having the trustee distribute the trust assets into a new or different irrevocable trust for one or more of the same beneficiaries. In the case of a potential future ex-spouse, the decanting would remove all beneficial rights and potential controls of the potential future ex-spouse. Note that only 23 jurisdictions have statutory decanting laws, so the trust must be sitused in one of those jurisdictions or first moved to that jurisdiction using a change of situs provision, if the trust has one, and then decanted.

Conclusion

As estate planners, we have to be aware of the importance of protecting family assets from potential future ex-spouses. This includes protecting our clients’ assets from both their own future ex-spouses and the future ex-spouses of the intended beneficiaries of their wealth.

This planning is overlooked by estate planners more than many people might think. If these concepts are utilized properly, the client and client’s family will have a significant advantage over their future ex-spouses. So-called “lawyering up” is not limited to hiring a good litigation lawyer. It also includes hiring a good estate and asset protection lawyer in order to take advantage of some of these opportunities to protect assets.

ABOUT THE AUTHOR

Steven J. Oshins, Esq., AEP (Distinguished) is an attorney at the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada, with clients throughout the United States. He is listed in The Best Lawyers in America®. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011 and was named one of the 24 Elite Estate Planning Attorneys in America by the Trust Advisor. He has authored many of the most valuable estate planning and asset protection laws that have been enacted in Nevada. He can be reached at 702-341-6000, ext. 2, at soshins@oshins.com or at his firm’s website, www.oshins.com.

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