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Common client questions: Divorce and asset protection trusts

August 16, 2016

This article in our Common Client Questions Series focuses on an unpopular subject, but one that affects 2.4 million Americans each year: divorce.

Divorce attorneys dislike asset protection planning. Unlike other litigation where the plaintiff’s attorney often works on a contingency fee basis, in a divorce proceeding both attorneys have a financial interest in prolonging the process. When both sides are paid by the hour, neither side is motivated to settle. The introduction of an effective asset protection structure into a divorce proceeding will almost always force a settlement. We therefore recommend that an asset protection attorney be the first stop when contemplating marriage or divorce.

Asset protection trusts can play three distinct roles in a divorce proceeding. First, they can be used as a form of premarital planning in addition to, or in lieu of, an antenuptial agreement. Second, depending upon the circumstances, a trust can be used as a form of postnuptial planning. Finally, such trusts have an effect on the proceeding when a married couple with a jointly settled offshore trust files for divorce.

Pre-Marital Planning Using Offshore Trusts

Although underutilized for this purpose, offshore trusts are the most effective form of prenuptial planning available. The law of prenuptial agreements varies by state, but in every state the efficacy of the agreement decays with time. Further, many states allow for the possibility of invalidating all or part of the agreement due to circumstances surrounding the execution of the document, lack of disclosures prior to the marriage, bad acts during the marriage, or overriding state law.

Offshore trusts are established by mid or high net worth individuals contemplating marriage. While many clients in this position still choose to enter into prenuptial agreements, they become unnecessary in many circumstances where an offshore trust has been properly implemented. Typically, the individuals who establish premarital offshore trusts have an established portfolio or nest egg, income producing assets, or a family inheritance, all of which could be reachable during a divorce. The establishment of an asset protection trust prior to marriage guarantees the separation of those assets from the marital estate. Even if a court were to look past a prenuptial agreement, the protected assets would not be reachable.

Post-Marital Planning Possibilities

Some states leave open the possibility of post-nuptial planning with non-marital or marital assets when a spouse anticipates divorce. This type of planning is typically sought by an individual contemplating divorce who fears he or she would be treated unfairly in a divorce proceeding. The availability of post-nuptial planning varies by state law pertaining to marital assets and the fact pattern. We recommend contacting us before you speak to a divorce attorney if your situation may benefit from this kind of planning.

Divorcing Clients With an Offshore Trust

If you are at all familiar with the mechanics of the offshore trust, you are aware that its primary asset protection mechanism is that the trust places assets beyond the reach of the U.S. judicial system. This can pose a problem when a trust is settled by two married clients who then file for divorce. The divorce court is unable to obtain jurisdiction over the trust and therefore cannot order the trustee to divide the assets as part of a divorce decree. Improperly drafted trusts can result in unnecessary legal fees and difficulties in the event of a settlor divorce.

Unlike trusts drafted for the purpose of premarital planning (where the assets are protected from the divorce proceeding), trusts we draft when both the husband and wife are the settlors contain language providing that the trustee is bound by any U.S. divorce decree. Once the decree is entered by a U.S. court and transmitted to the trustee, the trustee permanently separates the husband and wife sub-trusts, dividing the assets per the divorce decree, and then continues to administer the separate trusts on behalf of the now-separate clients. The beauty of this arrangement is that the assets never leave the trust, so even if the divorcing parties are facing other creditor threats, they can conclude their divorce proceedings and divide their assets while leaving them protected.

If you have more questions on how offshore asset protection planning can be utilized for effective planning in anticipation of, or after, a divorce, contact attorneys Howard Rosen and Patricia Donlevy-Rosen.