Most people think of estate planning as something that, once done and in place, never has to be thought about again. That is far from the truth. Estate plans should be modified to reflect changes in financial and familial circumstances, for example when clients receive an inheritance, have children, or get married or divorced. Estate plans should also be analyzed in light of property interests created for the intended and unintended beneficiaries.
The intersection of estate planning and divorce is often misunderstood leading to a lot of unexpected events and pain. This is particularly true when it comes to trusts and whether they are or will be considered separate or marital property for the intended beneficiary. While individuals preparing their estate plans would likely be uncomfortable discussing the potential problems their existing trust(s) or anticipated inheritances may have in the event of a divorce (or in the event of a beneficiary’s divorce), they should nonetheless be aware of potential issues. There are serious issues associated with divorce and existing estate plans where trusts can unintentionally be “up for grabs” during the allocation of property as part of the divorce process. It is crucial that even happily married couples revisit their existing estate plans so that the intentions for their family are fulfilled regardless of what events happen in their life in the future.
It is important to recognize how interests in trusts are treated for division of property purposes in a divorce. Family law courts must determine whether a spouse’s interest in a trust constitutes property, and if so, whether the interest is marital property, subject to division by the court. Incidental to property distribution, individuals should also ensure that they have changed their beneficiary designations for life insurance policies and retirement plans when they have finalized their divorce.
Individuals should carefully review with their estate planning attorney all trust documents to determine the type of trust interests implicated, how the trust provisions are written, and how the trust is administered with respect to a beneficiary spouse to determine how the interest is likely to be characterized by the court.