When planning their estates, most parents want to ensure that their child’s inheritance is protected from claims by a divorcing spouse. The same is true for many individuals who have accumulated (or expect to accumulate) significant wealth through their own efforts or from family. With the divorce rate at approximately 50 percent, this is a wise concern. The New Jersey Supreme Court and Appellate Division decisions in Tannen v. Tannen serve as a strong reminder why individuals must keep asset protection in mind when doing their estate planning and not just focus on tax minimization. Without proper planning, a divorce can have devastating financial consequences. Premarital and postmarital estate planning, such as trusts, family limited partnerships and prenuptial agreements, can be essential to avoiding such consequences. This article addresses estate planning vehicles that can help protect assets in the event of a divorce.
Discretionary Trusts
The lessons to be learned from Tannen are many, including that, under current New Jersey law, an appropriately drafted and administered irrevocable discretionary trust can provide the following protections: (a) assets held by the trust will not be considered as belonging to the beneficiary; (b) for purposes of calculating alimony, trust income (if not distributed) will not be imputed to the beneficiary; and (c) a court cannot compel a trustee to make distributions to the beneficiary. Perhaps most importantly, Tannen reinforced that the terms of a trust really do matter. In determining that the trust income was not available for purposes of determining alimony, the Appellate Division looked carefully at the trust language and determined that the beneficiary did not have "the ability to tap the income source" and compel distributions from the trust.
