We typically post about general issues involving estate planning, but as we all know, clients have specific problems with which require individualized solutions. One good example of this are concerns regarding adult children potential issues related to their marriage.
A common client concern, because of trends in divorce, is the worry that an adult child who receives an immediate distribution from a trust will lose some or all of those assets to an ex-spouse following a divorce. Obviously the clients would much rather have all of the assets owned by their child and eventually used for the benefit of their grandchildren. To alleviate this concern we are now modifying Trusts to change distribution provisions so that there is no longer an immediate distribution of assets to some or all of the children. Instead, the Trust distributes income and principal over time, protecting the bulk of the distribution from loss in the event of a divorce.
Clients have a wide variety of options for the limitations they place on these distributions, ranging from automatic distribution of income annually to distributions of income only within the total discretion of the Trustee. In addition to limiting distributions of income, the Trust normally provides that distributions of principal also be within the discretion of the Trustee. By using this type of language, the Trust assets being held for the child are not considered "marital assets" subject to a division upon divorce. The Trust can even provide for distributions of assets held for the benefit of children to grandchildren to help defray the costs of education or other expenses of maintaining their accustomed standard of living.
Frequently when clients choose to include such limitations on distributions the Trust will also include a provision that the Trustee, in its complete discretion, can distribute the entire share of the child at any time. This is beneficial because if there is a troubled marriage, the assets can be held, but after a divorce, or if there is comfort that there are no longer marital issues, the Trustee can distribute all Trust assets the child and the child can then control their own destiny.
Regardless of the provisions used, the child in question should not be the sole Trustee of his or her own sub-trust, or a spouse in a divorce may be able to argue successfully that the child has sufficient authority for an automatic distribution and thus the assets should be considered marital property. In these types of situations, there should be an independent Trustee, or at least a sibling who is both understanding of the situation and sympathetic to the child.
In reviewing existing documents for clients with concerns regarding their children's marriages, close attention should be paid to the following concerns:
- Does the Trust provide for an immediate distribution of assets?
- If the Trust holds assets for the benefit of a child, using distributions that specified ages or anniversaries of the parents' deaths, will this provision require distribution over a shorter time than would be needed to protect against marital issues?
- Are protections in place for grandchildren as well as children?
- Is the child in question a Trustee of his or her sub-trust, which might create an ability of a divorcing spouse to reach assets of the Trust?
- Is the Trustee of the Trust for the child on good terms with the child so that the child can be comfortable that he or she will be treated favorably, or is the Trustee one who is not on good terms with the child or is not sympathetic to the child's situation? Siblings who are fighting or on bad terms with the child may not be the most appropriate Trustee for the child's sub-trust.