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There are four main reasons for using trusts in a
divorce context, if your clients are wealthy enough and can
overcome the mistrust that usually accompanies divorce:
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Economic protection
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To achieve income tax goals
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To achieve estate tax goals
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Dealing with S Corporation
shares
Economic Protection
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If the spouse funding the
trust is concerned that the other spouse does not have the level of
sophistication or knowledge to handle a large lump sum payment, or
if the other spouse is a spendthrift, gambler or chemically
dependent and there is a concern that the wealth might dissipate
rapidly and result in further claims for support.
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The non funding spouse may be
concerned that the funding spouse is not reliable or involved in a
risky business venture and will be unable or unwilling to fulfill
future obligations. A funded trust would be a way to provide the
level of security that the receiving spouse seeks.
Income Taxes
A properly drafted and funded alimony trust can assist in
achieving the tax and economic goals of the parties by changing the
character of payments from child support or property settlements to a
tax treatment that more closely resembles alimony. Additionally,
payments from a trust are not exposed to alimony recapture and can
continue beyond the death of the receiving spouse. (see IRC Section 682)
Estate Tax Goals
A trust under IRC Section 682 can often result in marital property being
excluded from the transferring spouse’s gross estate at a very low gift
tax cost. Additionally, the trust can be drafted to exclude the property
from the receiving spouse’s estate, thereby passing property to the
children with no estate tax.
S Corporation Stock
Where S Corporation stock represents a significant marital asset and a
significant source of future income, a trust may be used to hold stock
for the benefit of the receiving spouse. The trust can keep the
receiving spouse from exercising shareholder rights. This can result in
the receiving spouse receiving income, and the possibility of the corpus
being passed to the couple’s children at a very low gift tax cost.
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