By Alex Krasnomowitz and Rory Gannon | Smolin Advisory, AAML NJ Gold Sponsor

Divorce is often a stressful and time-consuming process. For family law attorneys, you may find that estate planning is the last thing on your clients' minds during their divorce proceedings. Still, it's vitally important that they update their estate plans to reflect their new situation.

Here are a few estate planning strategies you can use to help your clients protect and control their assets after a divorce.

Using Trusts to Control Assets

It's unlikely that an ex-spouse will directly inherit a client's property since divorce usually extinguishes an ex-spouse's rights under a will or other trusts. However, it's still possible that an ex-spouse could have more control over their wealth than they'd prefer, especially if they have minor children.

When a minor inherits property, that property is generally held by a custodian until the child reaches the age of majority, which may be either eighteen or 21, depending on the state. A surviving parent (including an ex-spouse) may act as the custodian in some cases—and this could allow them to make decisions about how inherited assets are spent or invested until the minor child comes of age. 

Creating a trust (or several trusts) for the benefit of your client's children is an excellent way to avoid this situation. Trusts allow the grantor to appoint a trustee with authority to manage the trust's assets and make distributions. Since the grantor can choose this trustee, your client will ensure that assets within the trust won't be controlled by their ex-spouse.

Different Types of Trusts to Consider

The following types of trusts may play a valuable role in the estate planning process for recently divorced individuals.

Revocable Living Trusts

This type of trust allows grantors to arrange for the transfer of specific assets to designated beneficiaries. Revocable living trusts are commonly used to complement a will, as they allow the assets they contain to bypass the probate process. 

Irrevocable Life Insurance Trusts (ILIT)

These trusts allow the grantor to remove the proceeds of their life insurance policies from their taxable estate by transferring the policies to the trust. An ILIT also allows the grantor's family to pay estate costs using the life insurance proceeds from the trust.

Credit Shelter Trusts

Credit shelter trusts can allow the grantor to maximize the benefits of the estate tax exemption and are particularly useful in cases where the grantor has children from a previous marriage and intends to ensure a new spouse's financial security. 

Qualified Terminable Interest Property (QTIP) Trusts

These trusts may be helpful for clients that have divorced and then remarried. The surviving spouse will receive income from the QTIP trust until their death—after which the beneficiaries are entitled to the remainder.

Making the Right Estate Plan Revisions

The above strategies may allow your clients to exercise greater control over their estates following a divorce. If you have further questions about any of these strategies and how they may help your clients, contact our experienced accountants at any time.