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The Benefits of a Living Trust, Part 2: Protection from a Bad Marriage

During a recent estate planning consultation, a concerned parent posed this question: “My son is in a bad marriage. What happens if, after we die, he gets divorced? Will his ex-wife gets some of our estate?” This is not an uncommon question; fortunately, it has a simple answer. The concerns expressed by our client can be solved by sharing one of the major (and often overlooked) benefits of using a living trust: asset protection for the beneficiaries.

“Traditional” Living Trust Planning. As we discuss in greater detail in part one of this series (see link above), the most common benefit of the living trust is to avoid the time delay and reduce the legal fees of after-death probate proceedings. The time and dollar savings are significant – enough to justify, for most people with even modest assets, the creation of a trust.

Unfortunately for many well-intentioned people, this is where most of the “off the shelf” estate plans (i.e., canned products that you can download from the Internet or buy at an office supply store) come to a premature halt. A generic estate plan may effectively avoid probate (assuming that ownership of one’s assets are properly conveyed into the trust), but because those on-screen documents can’t properly assess what is going on in your family and in your life, they deprive you of the kind of personalized planning and problem avoidance that can only be achieved in a meeting with a flesh-and-blood estate planning attorney.

Protection from a Bad Marriage. Ensuring that your assets won’t end up being owned by an adult child’s ex-spouse is an often overlooked benefit of a living trust. If drafted properly, a living trust can provide divorce protection to the after-death beneficiaries.

In our case, Mom and Dad were worried that their child is in a bad marriage, and they don’t want assets that took a lifetime to build to go to his future ex-wife. Their son is trying to make it work, but it looks rocky. Mom and Dad are losing sleep. What can they do? We recommended structuring their living trust so that, when they die, their assets stay in their trust, and, as both the trustee and the beneficiary, their son will have control of the assets. Thus, he enjoys the benefit of his inheritance without actually taking ownership of it. He can receive the income and, if necessary, the principal, but if he gets divorced, his ex-wife can’t put a claim on his inheritance.

The “After-Death Pre-Nuptial.” This concept is pretty powerful. The ability to not only transfer wealth but do so in a manner that protects assets for the next generation is a strategy that most families should strongly explore in their planning. The use of the living trust in this example allows Mom and Dad to sleep better at night. They can provide their son with his inheritance and know that their living trust is providing the legal effectiveness of a pre-nuptial in that rocky marriage.

You might be asking, “All of our kids have great marriages. Is this strategy still relevant?” Yes: Relationships change; they can quickly go from good to bad, and you can feel secure in knowing that you have helped protect your children and your assets.