Many clients are concerned about protecting their child’s inheritance if the child later divorces.  While prenuptial and postnuptial agreements may effectively waive rights to a spouse’s inheritance, conversations surrounding these agreements are often avoided out of discomfort and the necessary extensive asset disclosure.

In the event there is no prenuptial or postnuptial agreement, lifetime discretionary trusts can be employed in an estate plan and can shield inherited assets from a divorcing spouse (and may even provide tax benefits).  

A discretionary distribution standard provides the trustee with the authority to distribute assets in its sole and absolute discretion without any fixed standards (such as support or health).  The beneficiary is not entitled to receive periodic distributions and cannot demand a distribution.  To effectively employ a discretionary distribution standard, an independent trustee (someone who is not an eligible beneficiary) must be appointed.  Often a professional trustee such as a bank, trust company, attorney, or accountant will serve in this role.

Broadening the class of beneficiaries so that a child and the child’s children are eligible beneficiaries can also help provide asset protection.  This further evidences a child’s lack of ownership over the trust assets because the trustee can vary distributions among multiple beneficiaries.

Creating a trust with these terms may seem inflexible or unnecessary given the circumstances of a child.  Some of these concerns can be alleviated with the appointment of a trust protector who oversees the trust and acts in the best interests of the trust and its beneficiaries.  A trust protector often holds the power to remove and replace a trustee and terminate a trust.

Even though a trust may be protected from division of assets during a divorce, it is important to recognize that Connecticut is an equitable division state.  Courts, therefore, may consider the history of trust distributions actually made and award a greater share of non-trust marital assets and enhanced alimony to the other spouse.  However, use of the discretionary lifetime trust can preclude a direct award of the trust assets to the beneficiary’s spouse.  Depending on a family’s situation, incorporating a discretionary lifetime trust into an estate plan may be a good choice.  For more information, please contact Peter T. Mott (pmott@brodywilk.com), Lauren Cimbol (lcimbol@brodywilk.com) or another BW attorney.