Four Divorce Risks Your Clients May Not Know Exist

• Divorce can impact family wealth, estate plans, and business continuity
• Proactive planning may help mitigate risks across generations and relationships
• Coordinated guidance from tax, legal, and wealth advisors may strengthen protection strategies

Even in the best cases, divorce is still fraught with complexity, and you may not  be aware of all the ways a divorce could derail family wealth. The good news is  that with some foresight and planning, these risks can be mitigated, if not sidestepped entirely. 

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.

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 professionals can help you create and manage an enduring action plan to help protect family wealth without having to  rely on the success of any current or future marriage.

Failing to update fiduciary appointments, wealth distribution plans, beneficiary  designations, and guardianship arrangements for the care of minors, either during  or in preparation for divorce, can lead to unintended and sometimes catastrophic consequences.

As divorce proceedings move forward, each spouse should review and update fiduciary appointments and wealth distribution plans under their wills, trusts,  living wills, medical directives, and powers of attorney, as well as the beneficiary designations of any insurance policies, annuity contracts, and retirement accounts.

Where remarriage is on the horizon, blended families should revisit planning  documents and beneficiary designations to make sure they align with your  collective intentions. With expert help, these families can make the necessary  adjustments to their estate plan to ensure protection and financial support of  both surviving spouse and successive generations.

The death of an ex-spouse can leave a devastating gap in child support, alimony,  responsibility for higher education costs, or other obligations that may have been  negotiated in a settlement agreement or achieved through a divorce proceeding.

Life insurance can provide funds necessary to meet an individual’s post-marriage financial obligations to the ex-spouse in the event of such individual’s untimely  death. Securing and maintaining sufficient life insurance can be incorporate into  the divorce settlement provisions.

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.

If one or both spouses are business owners, an inadequate buy-sell agreement or lack of liquidity could decimate a business if an owner gets divorced.

Typically, the best prevention is to make sure your 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 may help satisfy the terms of a divorce settlement in a way that  will not jeopardize business operations.

A multidisciplinary team of tax, legal, 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.

Explore divorce and matrimonial insights that may help protect family wealth and long-term financial outcomes. 

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.