This is a written version of the episode for accessibility and reference. The full audio is available on the podcast platforms linked above.
Here is something that almost nobody warns affluent couples about, even when they are spending tens of thousands of dollars a year on sophisticated estate planning.
The more carefully you have structured your wealth to protect it from estate taxes, the more vulnerable you may be in a divorce. The trusts, the family limited partnerships, the GRATs and the SLATs and the QPRTs, all of those elegant tax planning vehicles you set up over the years, they were designed to protect your family's wealth from the IRS. They were not designed to be unwound under the time pressure of a divorce, and unwinding them often comes with consequences nobody anticipated when the plan was being built.
A high net worth divorce attorney recently described top end estate planning as estate planning 2.0 or 3.0. Sophisticated, layered, multi entity, designed to last for generations. When divorce hits, the question becomes how do we separate them. What are the tax consequences as a result of separating, or blowing apart, that estate plan. That phrase, blowing apart, is the right one.
By the time a family has accumulated ten or twenty or fifty million dollars in net worth, the financial structure they are sitting on usually includes a layered set of vehicles designed to do three things. Reduce estate taxes. Protect assets from creditors and lawsuits. Transfer wealth to children and grandchildren in a controlled, tax efficient way.
These vehicles have names that sound like alphabet soup. Revocable living trusts. Irrevocable life insurance trusts, or ILITs. Grantor retained annuity trusts, or GRATs. Spousal lifetime access trusts, or SLATs. Qualified personal residence trusts, or QPRTs. Dynasty trusts. Family limited partnerships. Family limited liability companies.
Each was almost certainly built without divorce as the primary concern. Estate planners are paid to think about death, taxes, and asset protection from third parties. They are not paid to think about what happens when the two people at the center of the plan stop being a couple.
Most affluent couples have a revocable living trust as the foundation of their estate plan. In a divorce, a revocable living trust gets dissolved or restructured. The assets inside it are still subject to division according to whether they are marital or separate property. The trust itself does not really protect anything from the divorce. The mechanics of unwinding the trust are usually manageable.
An irrevocable trust, by design, cannot be revoked or modified by the person who created it. In a divorce, this creates a question that is much harder to answer cleanly. If the trust assets are no longer owned by the grantor in any meaningful sense, are they marital property. If the trust was created during the marriage and funded with marital assets, can the non grantor spouse claim a share.
The honest answer is, it depends, and the analysis is intricate. Different states have come to different conclusions. A family law attorney experienced in your state's case law on trusts is essential here. So is the estate attorney who built the structure in the first place.
The spousal lifetime access trust, or SLAT, has caused more divorce friction in recent years than almost any other vehicle. A SLAT is an irrevocable trust that one spouse creates for the benefit of the other. The grantor spouse transfers assets into the trust. The beneficiary spouse can receive distributions during their lifetime.
The problem with SLATs in divorce is straightforward. The grantor spouse irrevocably gave the assets to a trust for the benefit of the other spouse. The grantor cannot get those assets back. The beneficiary spouse, who is now the soon to be former spouse, is the one entitled to distributions for the rest of their life.
An ILIT is a trust that owns a life insurance policy on the grantor. In a divorce, the ILIT becomes a curious question. The policy is still in force. The premiums continue to be due. The former spouse may still be a beneficiary. The asset is a policy, but the policy is held by an irrevocable trust, so it cannot simply be cashed out and divided.
If you find yourself unwinding sophisticated estate planning in a divorce, the team matters, the timing matters, the documentation matters, and honesty about what is recoverable matters. A good team will tell you which structures can be repositioned, which can be worked around, and which were genuinely designed not to be undone.
For the full discussion, listen to the episode using the podcast links above.
To request an initial conversation about your situation, visit marriagefinancial.com/contact.
A SLAT, or spousal lifetime access trust, is an irrevocable trust that one spouse creates for the benefit of the other. The grantor spouse cannot get the assets back, and the beneficiary spouse, who may now be a former spouse, remains entitled to distributions. Outcomes vary by state, trust language, and how the trust was funded. A family law attorney and the original estate attorney both need to be involved.
It depends. Different states have come to different conclusions. There are cases where irrevocable trusts have been protected entirely from divorce claims, cases where courts have effectively unwound them, and cases in between where the trust's existence was considered when allocating other assets. The analysis is intricate and case specific.
Yes. A high net worth divorce with sophisticated estate structures requires more than a family law attorney. You typically need the estate attorney who designed the structure, a CPA specializing in trust and estate taxation, a forensic accountant or business valuation expert if business interests are involved, and a Certified Divorce Financial Analyst to tie the financial picture together.
Sometimes. A well structured postnuptial agreement, done with full disclosure and independent counsel for both spouses, can sometimes resolve contentious estate planning interactions before they become contested in litigation. Whether it works depends on the state, the timing, and the specifics, which is a conversation for a family law attorney.
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