Wedding season is in full swing this June. The wise words, “all is fair in love and war,” may come to mind as one way that marrying couples, particularly those of significant wealth, can potentially mitigate against future conflict in a relationship is to put as much thought into the long-term legal and financial implications that a union entails as they do with their wedding vows, veils, and videographers.
While primarily viewed as a romantic partnership between two people, marriage also involves myriad important fiduciary implications that can greatly impact ultra-high-net-worth individuals (UHNWIs) and their families alike.
Midyear is an opportune time to revisit some key themes from our report detailing the implications of marriage and divorce on UHNWIs. Geller’s Chief Client Officer Scott Bush assembled a prominent legal panel that included Christen K. Douglas, Private Client Partner at McDermott Will & Emery LLP. Recognized as a Rising Star by Super Lawyers in 2022, she has extensive experience advising affluent clients on all aspects of their complex legal needs.
For UHNWIs aiming to successfully shield and protect their family trusts from divorces, Douglas emphasizes a framework she coined called “The Three Pillars of Trust Protection.” Trusts can play a pivotal role in protecting family wealth during divorce. In an optimal scenario, their contents should be firmly established prior to the wedding, contain solely premarital property, and involve open communication with any affected children.
As can be seen in the accompanying video, there are a trio of important aspects that Douglas encourages people to focus on as follows:
1) Understanding the Underlying Provision of the Trust Agreement Itself
If protecting trust assets from potential spouses looms large as a future concern for the family, Douglas will often ask clients if they want to include terminology that expressly instructs the trustee to take this into account when drafting the document. An example may be language which states, in the event a beneficiary does not have a prenuptial agreement in place, that the trustee should exercise additional caution in making distributions to that beneficiary. The specific wording can be customized to whatever the family feels comfortable with, incorporating verbiage that best matches their values.
Douglas adds it is important to bear in mind that the trustee is invariably the only person who has the legal authority to manage and dispose of assets of the trust. For their part, trustees must never lose sight of the fact that their fiduciary duties run to the beneficiaries of the trust itself, irrespective of how close a relationship they may have with the grantor of the trust or spouse of the beneficiary.
Once the legal team has established the trust structure, reputable wealth advisors will then play a crucial role in overall trust administration. This includes properly managing the trust on a day-to-day basis, and proactively ensuring that there is never any transmuting of funds between the trust itself and a couple’s personal property.
2) Putting a Prenuptial Agreement in Place
As Douglas points out, “The most practical advice I’ve ever seen a client follow is not to set your wedding date until you’ve finalized your prenup.” As such, she will generally work in tandem with matrimonial attorneys to make certain these agreements properly consider the role played by trusts.
In order to ‘ring fence’ and protect hard-earned family assets, Douglas favors what she calls a “belt and suspenders” approach. Beyond simply holding assets in trust for children, a prenup is also helpful in expressly agreeing that the family trusts will be respected as separate property (to the extent trust assets could even be characterized as property of the beneficiary spouse). The couple should unambiguously acknowledge this will be the case, even if the spouse they are marrying may participate in managing the trust assets or rely on distributions from the trust.
As ever, it is crucial to consult experienced wealth experts who are familiar with the trust’s contents.
3) Being Mindful of how the Couple is Using the trust During their Marriage
In the words of the old Cold War adage, ‘Trust, but verify.’ Once the trust has been established, ensuring ongoing compliance with what is a living, breathing document is of paramount importance. Both parties should be cognizant of their conduct during their marriage, and its impact upon the trust. Above all, couples must monitor the way they are interacting with the trust to make certain that the boundaries between it and each beneficiary’s individual assets are clearly delineated and respected.
Key client conversations here often revolve around basic good housekeeping rules of how to best manage the trust assets, which may include property. Should a decision be made to take distributions, for example, these can be deposited into a separate bank account. Doing so mitigates against the risk of comingling funds, which can ultimately come back to haunt the parties and cause considerable later complications when a high-end divorce ensues.
Maintaining a strict separation of inherited family assets from an individual spouse’s assets should be a guiding principle when formulating an effective Trust & Estate plan. Doing so lessens the risk of collateral financial (and reputational) damage to ancillary family members.
If you have questions about any aspect of this article or how we can support you as you look to plan your nuptials, do not hesitate to contact us. We would be glad to have a discussion.
This presentation is being provided for informational purposes only and does not constitute legal, tax, or investment advice. Recipients should consult their professional advisors prior to acting on any information set forth herein.
