Even in the best cases, divorce is still fraught with complexity. Your clients may not be aware of all the ways a divorce could derail family wealth. Even those who are not divorcing or contemplating divorce—and come your way instead for prenuptial planning—could benefit from knowing what is at stake in the event of a divorce, be it their own or that of a business partner, parent, sibling, or descendant.
The good news is that with some foresight and planning, these risks can be mitigated, if not sidestepped entirely.
Risk 1: Unsheltered generational wealth could be lost
When clients set up generational wealth to pass directly to their heirs, and those assets are commingled with spousal assets or used to buy marital property, they may become fair game in divorce proceedings of such heirs.
Help clients explore: Dynasty trusts
Families do not have to rely on prenuptial agreements to protect assets. A less emotionally charged way to shelter generational wealth is to plan its transfer using a dynasty trust with a corporate fiduciary. This way, assets intended for multigenerational use are not lost in a divorce. A dynasty trust is a long-term trust created to pass wealth from generation to generation without incurring wealth transfer taxes.
Corporate fiduciaries often serve as objective and experienced trustees to help protect trust assets for the benefit of successive generations.
A collaborative team of seasoned experts can help your clients make enduring action plans. These plans can help protect family wealth and make sure its transfer does not rely on the success of any current or future marriage.
Risk 2: Unintended beneficiaries could gain control
Failing to update fiduciary appointments, beneficiary designations, and guardianship arrangements for the care of minors, either during or in preparation for divorce, can be catastrophic.
Help clients explore: Beneficiary and fiduciary mapping
As divorce proceedings move forward, each spouse should review and update fiduciary appointments and beneficiary designations under their wills, trusts, living wills, medical directives, and powers of attorney, as well as any insurance policy, annuity contract, or retirement accounts.
In cases where a remarriage is on the horizon, blended families should revisit planning documents and beneficiary designations to make sure they align with the clients’ collective intentions. With expert help, these families can be made aware of how estate plans can be structured so that both individually and jointly owned assets benefit a surviving spouse and successive generations. This planning vigilance is most important when there are children from prior marriages on both sides.
Risk 3: An ex-spouse’s death could destabilize a family
The death of an ex-spouse can leave a devastating gap in child support, alimony, higher education costs, or other obligations that may have been negotiated in a settlement agreement or hard fought and won in a divorce proceeding.
Help clients explore: Using life insurance to secure the obligations of an ex-spouse
Life insurance can provide funds necessary to meet an individual’s post-marriage financial obligations to his or her ex-spouse in the event of such individual’s untimely death. Securing sufficient life insurance can be made a part of the divorce settlement process.
An irrevocable life insurance trust, or ILIT, is designed to hold life insurance proceeds and then distribute them as directed by the trust’s creator, or donor. While they are often designed to provide a legacy for children or grandchildren in a tax-efficient manner, ILITs, in combination with other estate-planning vehicles, can also be helpful in blended family situations where there are children from prior marriages and continuing financial obligations on the part of one or both divorced spouses.
Risk Four: Divorce can mean the death of a family business
If one or both spouses are business owners, an inadequate buy-sell agreement or lack of liquidity could crush a business if an owner gets divorced.
Help clients explore: Comprehensive business succession planning with divorce provisions
The best prevention is to make sure your client’s business has a sound succession plan in place that includes provisions in the event of divorce.
Business partners are wise to structure business agreements to protect against the claims of an ex-spouse of one of the business partners.
If liquidity is an issue during the course of a divorce proceeding (due to a disproportionately high percentage of business or real estate holdings), access to personal credit can help satisfy the terms of a divorce settlement in a way that will not jeopardize business operations.
A multidisciplinary team of tax, legal, estate and wealth advisors can help clients position themselves against the many risks inherent in the case of a divorce. This guidance is especially critical when considerable assets are at stake.
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This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service. It is not designed or intended to provide financial, tax, legal, investment, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.