Spouses who are facing a marital break-up must exercise caution in preserving their inheritance and trusts in divorce. While advance planning may be the best protection, there are some steps that can be taken when divorce is imminent. It is important to understand the nature of trusts and inheritance, and their role in an individual’s wealth management strategy. In my book, Frumkes & Vertz on Divorce Taxation, we provide a detailed analysis of inheritance and trusts in divorce.
No one intends to forfeit their trusts and inheritance in divorce court. Perhaps that’s why, in most states, the law provides some automatic protection. For instance, in Pennsylvania, only the increase in value can be divided. The increase is measured from the time of the inheritance until the date of separation. In the case of a trust, the increase in value only includes trust growth and income that is actually available for withdrawal. In other words, the initial value of the trust or inheritance is preserved from equitable distribution, and will not be divided between spouses unless it is retitled in joint names or commingled with marital property.
To add further protection, many spouses wisely enter into prenuptial agreements that protect the increase in value of trusts and inheritance in divorce. In fact, for high net worth families, a prenuptial agreement is a common part of a wealth succession and estate plan. Divorce and taxes are two of the main obstacles when high net worth families plan to transfer wealth to future generations, so it makes sense to deal with both issues together.