Divorce and Estate Planning: Key Considerations Before the Divorce Is Final

“Divorce and Estate Planning: Key Considerations Before the Divorce Is Final,” that’s the subject of today’s ACTEC Trust and Estate Talk.

I’m ACTEC Fellow Stacy Singer from Chicago. Divorce can raise complex estate planning questions, from dividing property and determining whether trust assets are protected to navigating tax consequences and differences in state law. Careful planning before a divorce is final can help identify potential risks and opportunities and avoid unintended consequences.

ACTEC Fellow Sharon Klein of New York City has shared her expertise on important estate planning considerations when clients are going through a divorce. Welcome, Sharon.

Sharon Klein:  Thanks very much, Stacy. Yes, we’re going to talk about the impact of planning that’s done in happier times after a couple decides to split.

Update Estate Planning Documents During a Divorce

First of all, in the event of separation and or divorce, it’s key to review all financial and planning documents. And, from my perspective as a financial advisor, to also run financial analytics so that clients have a clear picture of their finances – of their cash flow – from an advisor who could model and help evaluate different lifestyle scenarios to give people a sustainable financial plan.

In terms of the financial and planning documents, the bottom line is that they should all be updated. Some might need to wait until the divorce is final, others can and should be changed immediately because most people don’t want their ex-spouse as a beneficiary or, at least, they want to leave as little as possible to their soon-to-be ex-spouse.

And the first document that comes to mind to review is a Will or a revocable trust. And people should examine those documents both for how property passes and also as to their executor and trustee choices. In most jurisdictions, a Will can and should be changed as soon as possible. You do not need to wait until the divorce is final, subject to state rights and prior agreement. Typically, unless a spouse has waived marital rights in an agreement, an individual can’t disinherit their spouse. However, it should be possible to modify a Will to leave a soon-to-be ex-spouse the minimum required under state law or a marital agreement.

And, for a celebrity case in point, remember the famous singer, Barry White. He died in 2003 with an estimated estate worth over $20 million. But when he died, he was separated, although not yet divorced from his second wife. And it was reported that since White hadn’t updated his estate planning documents, his estranged spouse inherited everything because they were still married – the divorce wasn’t final. Well, his long-term girlfriend and nine children received nothing.

And, as I mentioned, it’s not just the disposition of property that needs to be checked in Wills and revocable trusts. Clients should also be checking whether the people or institutions they’ve named to serve as executor, to serve as trustee, are the best choices for their family in light of the changed circumstances. These are very important roles for administering a person’s property, for making sure that their wishes are effectuated, and matters can quickly go awry if the right fiduciaries are not in place. In these types of situations, a corporate executor or trustee is often a good choice, because corporate fiduciaries are neutral, they’re independent, and they could diffuse much of the acrimony that might attach to friends or family members who are acting in that role.

As well as Wills and revocable trusts, it’s important to carefully review powers of attorney, which allow a designated person to conduct financial transactions on someone’s behalf, to look at healthcare directives also, which allow a designated person to make important healthcare and potentially end-of-life decisions, to ensure that an estranged spouse is removed from those roles, which is what is typically desired. And best practice is to proactively change documents as soon as possible to ensure they reflect intent.

Always love to give a celebrity example, so who remembers Gary Coleman from the famous sitcom Different Strokes? He finalized his divorce with his ex-spouse, Shannon Price, in 2008. And then, in 2010, he sustained a head injury and was put on life support. He had not updated his healthcare proxy and his ex-wife made critical end-of-life decisions for him. Was that what he would have wanted? Maybe not.

Review Asset Titling and Beneficiary Designations

Also very important to ensure you have proper titling of assets. And this one, unfortunately, often gets missed because clients may have updated their will, but certain assets pass outside a will. For example, a transfer-on-death account or a jointly held property. So it’s very important that accounts are titled consistently with the new plan. And, for that same reason, it’s important to confirm beneficiary designations. For assets like retirement accounts and life insurance, the question is: do clients have the right beneficiaries named so that it dovetails with their broader plan?

Designations on assets like life insurance and retirement accounts – typically have to wait to be changed until the divorce is final. But the point is, again, that you should change whatever you can as soon as you can, and then be poised to change the rest as soon as you’re able to do so.

Are Trust Assets Protected in Divorce?

Next, let’s turn to trust planning, since many, if not most, high net worth divorces involve trusts on the marital balance sheet. And, the question is, when a marriage dissolves, are those assets reachable or are they off limits? And to determine whether trust assets are accessible in divorce, the key question, the fundamental question, is generally whether the interest of the beneficiary spouse is a property interest that can be considered an asset under the relevant state law. And the bottom line is that the less chance a beneficiary spouse will receive a trust distribution and the less control over trust assets the beneficiary has, the less likely that their trust interest will be reachable in divorce.

Seven Questions When Evaluating Trust Assets in Divorce

As you review the trust document, I’ve devised what I think are the seven key questions you need to ask to determine if you can access trust assets in divorce.

• And the first question is: who created the trust? Courts are less likely to consider a trust created by a third party as part of the marital estate. For example, a trust created by a parent or grandparent, because that’s more likely to have been done as legitimate estate planning.
• Question number two: who are the beneficiaries? If the trust includes a class of beneficiaries, especially if the class includes multiple people over several generations, it will just be less likely that the beneficiary spouse will receive a trust distribution; so less likely that the trust will be vulnerable, as opposed to, for example, if the beneficiary spouse was the sole beneficiary.
• Question number three: on what basis can trustees make distributions? This one is really key to determining if there is a property interest. If a trustee is given broad authority to make distributions within its sole discretion, the timing — the amount of the distributions — is uncertain. And it’s just less likely that a court will find that type of discretionary interest reachable in divorce than, for example, if the trustee is required to pay income or required to pay a portion of the principal to the beneficiary.
• Question number four: is there a spendthrift provision? A spendthrift clause is commonly inserted in trust documents as a form of creditor protection. It essentially provides that a beneficiary’s interest is not subject to that person’s debts or liabilities. The bottom line is that a creditor — and, in our scenario, the ex-spouse is the quintessential creditor — the creditor has to wait until a distribution is made to a beneficiary in order to assert any claims against those assets that are protected while the assets are in the trust.
• Question number five: does a beneficiary have control powers? The cases show that the greater the powers of a beneficiary to exert control over a trust, the greater the likelihood that a court is going to consider that beneficiary’s interest in a divorce proceeding. What control features am I talking about? They may include the beneficiary acting as a trustee, including being able to make distributions to themselves pursuant to a narrow standard; having the power to remove and replace trustees or other advisors; having a so-called power of appointment that allows the beneficiary to redirect the disposition of the trust assets. And the bottom line is that the more control, the more likely the trust will be included in the marital balance sheet. And when I talk about a case that has captured the attention nationally of trusts and estates and matrimonial attorneys, you’ll see how important that control feature is.
• Question number six: is the settlor’s intent clear? Under common law principles, under the Uniform Trust Code, it is axiomatic that the settlor’s intent, as evidenced in the trust document, is paramount.
• Question number seven: who is the trustee? If you have an independent neutral trustee acting, particularly if it’s a corporate trustee, that usually removes even the appearance of impropriety and can help circumvent the suspicion that a family member or friend acting as trustee is manipulating trust distributions for the benefit of a trust beneficiary.

Consider the History of Trust Distributions

Once you’ve reviewed the trust document, congratulations; that’s great and that’s very important, but that’s only half the picture. The other half of the picture is to look at what actually happened. And a court can consider the history of trust distributions to identify any patterns and consider where the couples have used trust funds to support their lifestyle. If so, the trust is more likely to be reachable in divorce – if the distributions have been irregular and uneven, less likely.

So that is the analysis, the trust document, what actually happened. But big caveat, all that having been said – it’s very important to remember that family courts are courts of equity, which means they’re trying to come to a fair and equitable result, and the trial court’s assessment of the credibility of the parties is often key. And if the court feels that one party has acted egregiously, that often seems to factor into the final determination.

C.S. v. R.H.: Can Irrevocable Trust Assets Be Reached in Divorce?

So, let’s get to the case in point. The case I mentioned that’s captivated the attention nationally of lawyers, which is a case coming out of New York: the C.S. v. R.H. case, that tackled head on the question of whether irrevocable trust assets are reachable in divorce.

The case involved an acrimonious divorce with significant irrevocable trusts that were created by the spouses 15 years before the divorce for the benefit of the couple’s descendants. And the question presented was whether a court, without disturbing those irrevocable trusts themselves, could consider the value of the marital assets placed in those trusts for equitable distribution purposes.

The New York Supreme Court did determine to include the value of the trusts in dividing the marital estate. The case has been appealed, but however the appeal comes out, there are very important lessons to learn from this case which I’m now going to share with you.

What happened in this case is that the couple acquired great wealth. When Goldman Sachs purchased the business in which the husband was a partner, they enjoyed an opulent lifestyle post-buyout. They had extravagant homes, luxury travel around the world, et cetera, et cetera. They placed much of their wealth into irrevocable trusts for the benefit of their daughters and future descendants. Neither spouse was a beneficiary of the trusts, that’s important. Although they resided in homes owned by the trusts through rental agreements at below-market rents.

In terms of the husband’s roles, he was the grantor or creator of the trusts, which were was so-called “grantor trusts.” He was the investment advisor to LLCs owned by the trusts, and he had the power to remove and replace trustees. After the wife filed for divorce, the husband reportedly took unilateral actions to systematically cut her out of any involvement in the trusts, unilaterally removing her from LLC roles, executing mid-trial decantings — which are amendments to the trusts that expanded his investment advisor powers — evicting her from trust-owned homes while securing favorable leases for himself, bulldozing the wife’s prized vegetable garden in the Hamptons mansion-that was the wife’s pride and joy. Not a good look.

The court found that these actions evidenced ongoing control and egregious economic fault. The court determined the husband was arrogant, evasive, argumentative, acted in bad faith, and lacked credibility; a trifecta, or however many numbers you want to put in there. On the other hand, the court found that the wife was sincere, intelligent, warm, and testified credibly that she did not understand the planning and her husband assured her in places like the ski lift (where else) that the trusts were just tax shelters. And she also did not have separate counsel.

The bottom line is that the court focused on the husband’s control — remember, that’s one of the most important features that you need to focus on. And, although the trust powers held by the husband are common powers that are routinely included in trust agreements – so the trust being a grantor trust as to the husband, the fact that the husband controlled the investments as the investment advisor, the fact that the husband had the ability to remove and replace trustees. They are common powers routinely included in trust agreements. However, where a party has acted egregiously, family law courts have frequently seized upon the control inherent in those powers as evidence that the trusts are the alter ego of the power holder. And, in fact, the court found here that the individual trustee was actually a straw man who just rubber stamped the husband’s decisions.

So, despite the courts holding that the trusts were valid with legitimate estate planning purposes that should not be disturbed, the court included the full value of the trusts — which was over $110 million — in the total marital estate of $180 million. They divided the $180 million in two and awarded the wife 50% — or $90 million — which included all of the marital assets outside of the trusts. Additionally, the husband was ordered to pay the wife another $35 million over 10 years.

Lessons for Protecting Trust Assets in Divorce

Clearly, in this case, the effective control the husband exercised over the trusts and his perceived egregious conduct weighed heavily on the court. The lesson in the divorce setting is that strategy and behavior have to be evaluated not just for its technical validity, but also for its timing, for its optics, and litigation sensitivity. If there’s a strategy or behavior that’s perceived by the court as an attempt to shift control or to alter beneficial interests, or to place assets beyond the reach of an equitable distribution analysis, it may become a very contentious point in the divorce.

And the bottom line, in my opinion, is that many have expressed concern that the lower court’s decision, which is currently under appeal, is problematic for planning by essentially disregarding the legal framework of a trust. I think, no matter what the outcome on appeal, the practical takeaway is that legitimate estate planning with the informed consent of both spouses, with independent trustees (particularly a corporate trustee), with true impartial administration should go a long way to shoring up the protection of irrevocable trust assets in the event of a divorce, and a team of seasoned professionals is generally best positioned to assist clients who are navigating through divorce. That means a financial advisor and an estate planning attorney, a matrimonial attorney, an accountant, and other experts can best holistically position clients for a successful future.

Stacy Singer:  Sharon, that was great and really interesting. Thanks so much for helping us understand some of those considerations before the divorce is final. And thank you for listening.

You may also be interested in

• Premarital Planning: What to Know and Do Before ‘Going to the Chapel’ (Aug 2026)
• Mistakes Made in Premarital Agreements by Estate Planning and Family Law Lawyers (Apr 2022)

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