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Trusts and Divorce

By ALM Staff | Law Journal Newsletters |

Wealthy taxpayers have commonly used trusts to achieve a variety of tax, estate, asset and divorce protection, and other goals. What might loosely be called “traditional” trusts, typically done by a parent or other benefactor for a child to safeguard funds for college, and the insurance trust, which is nearly ubiquitous in estate planning, have been the most common types of trusts. These trusts present a number of issues to matrimonial practitioners. More recently, grantor trusts, and variations of them such as self-settled domestic asset protection trusts (“DAPTS”) or dynasty trusts targeted to plan for the generation-skipping transfer (“GST”) tax, have become more common. These present more complex and thorny issues in a divorce context. Matrimonial practitioners need to have some understanding of common long-standing trust techniques and some of the new ones in order to advise clients through a divorce involving such trusts.

The following two-part discussion begins with the simplest of trusts and progresses through more sophisticated trust techniques, highlighting the issues that may arise at each phase. The simplicity of the progression below might be more understandable framework for non-estate planners forced to address these matters. Trusts can be assembled, like an erector set, in myriad ways, each with its own nuances. To simplify the discussion, assume that you, the reader, represent the husband (“Husband”), and that the wife is involved with the particular trust in question as beneficiary, grantor, etc. (“Wife”). The purpose of this article is to raise practical ideas and considerations for matrimonial practitioners to consider and not to provide an analysis of current matrimonial case law on these matters.

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