“Until Divorce Do Us Part” – Wisconsin Divorce Trust For Heirs

By Attorney Amanda N. Sacks, Attorney Laura E. O’Gorman  & Attorney James A. Spella, Schloemer Law Firm, S.C.

Under Wisconsin law, there are steps that parents can take to help their children protect an inheritance in the event of a divorce.  Parents may wish to consider establishing a “divorce trust” or “asset protection” trust for their heirs.

Specifically, under Wisconsin law an inheritance is at least considered individual property as opposed to marital property, but unfortunately this is a complex area of the law, and a spouse can make claims against an inheritance under Wisconsin marital property law.  Fortunately, with the help of a Wisconsin estate planning and family law attorney, there are steps that can be taken to provide safeguards in the event of divorce.

“Love” and “Forever”, unfortunately, in many relationships has become transcendent.  Here today, gone tomorrow.  As children find their future with another individual, parents have several emotions and observations, from being overjoyed for their children to worrying about their future and protection of any inheritance.  Parents want to provide for their children, but they also want that hard-earned inheritance to be for the benefit of that child, especially if they have concerns about the financial stability of their child’s future spouse.  An additional consideration is to ensure an inheritance will remain for the benefit of grandchildren rather than a son-in-law or daughter-in-law.

What should parents do who are seriously concerned that their bequest to a child be available for the child, but protected from unintended ownership, expenditures, and divorce?

Wisconsin Family Law: Inheritances & Divorce

An inheritance, itself, is considered individual property in Wisconsin.

However, income from an inheritance is marital property (unless certain exceptions apply).

In addition, the “mixing” of marital property with individual property can result in the individual property becoming marital property, unless the component of marital property which is not marital property can be “traced”.

In other words, if individual property becomes commingled with marital property in such a way that you cannot identify the individual property any longer, the individual property becomes marital property.

Prenuptial Marital Property Agreements in Wisconsin

One option is to urge your child to obtain a “prenup”, or a “Marital Property Agreement”.  If a child wants to protect an inheritance in Wisconsin, their best line of protection is to obtain a Prenuptial or Postnuptial Marital Property Agreement, i.e., a “Prenup”. Prenuptial Agreements or prenups are typically referred to as “Marital Property Agreements” under Wisconsin’s laws.

Wisconsin has a marital property law system.  A Marital Property Agreement can alter the default rules that apply to property owned by spouses, including provisions for division of assets on divorce or death and provisions for maintenance.  Specifically, prenuptial agreements generally outline who keeps what assets in the event of divorce or death, provide protection of assets, and protect against a spouse’s debts.

A Marital Property Agreement can be used to confirm that an inheritance is individual property, regardless of any mixing or whether marital assets are used to maintain or improve the inheritance,  and to classify any income from the inheritance as individual property.

However, a Marital Property Agreement may not be enough.  A spouse could attack its enforceability under certain circumstances, or a child could tear up the Agreement at any time after it is signed (and later regret it).

“Divorce Trust”: Wisconsin Asset Protection Trusts for Divorce

It is often a touchy subject to bring up the idea of a “Prenuptial Agreement”.  If there is a business, substantial assets, or second marriage involved, it may be more understandable, but a child may be hesitant to discuss with their fiancé.  Understandably, the topic can cast an immediate ‘shadow’ on the intended marriage.

An alternative that parents may consider is to establish a “Divorce Trust” or “Asset Protection Trust” in their estate planning documents.  Instead of distributing the child’s inheritance directly to the child, it is placed in trust for the benefit of the child.  Such a trust can be irrevocable or revocable.   Such a trust can also be mandatory or an option for the child.

Wisconsin Irrevocable Divorce Trust

The intention of this Trust is that under Wisconsin’s Marital Property Law, the Divorce Trust and its assets would not be viewed as owned by the child.  Accordingly, this trust may provide protection for an inheritance, so that the inheritance would not be subject to division upon the termination of the marriage (though the court could consider the Divorce Trust assets when approving property division if the court would view property division to be otherwise inequitable.)

Irrevocable Divorce Trust would include the following:

  • Irrevocable. The Trust is irrevocable after the death of the parent (when the Divorce Trust is created and funded). The Divorce Trust would be a separate tax entity with its own tax returns.
  • Trust Beneficiary. The child is the beneficiary.
  • Trustee. An independent Trustee would be designated. The child would not be in control of the management of their inheritance.
  • Distributions. Generally, the independent Trustee would be given discretion to distribute income and/or principal to the child. Distributions could also be limited, for example income only, or distributions only for health, education, maintenance, and support (HEMS).
  • Termination. The trust would designate either a termination date based on the child’s age for outright distribution to the child, or at the child’s death with provisions for ultimate distribution, typically to their children.

The main problem with an Irrevocable Divorce Trust is just that – it is irrevocable. This removes control of an inheritance from the child, and it does not allow them the flexibility to manage the inheritance as they would wish.  In addition, they cannot make changes due to unforeseen circumstances.

Wisconsin Revocable Divorce Trust

Under Wisconsin’s Marital Property Law, the trust and its asset appreciation would be the child’s individual property.  Under Wisconsin’s Marital Property Law, the income of the trust would be viewed as marital property.

  • The trust and its assets would be deemed ‘owned’ by the child, but because of the segregation of the inheritance, would be the child’s individual property not divisible at divorce unless the court viewed property division inequitable.

A Revocable Divorce Trust would include the following:

  • Trust Beneficiary. The child is the beneficiary.
  • Trustee. The child is the Trustee and manages the Trust and their inheritance.
  • Distributions. As Trustee, the child is given discretion to distribute income and principal to himself/herself.  Because of broad distribution discretion, the child as Trustee could distribute all trust assets to himself/herself.  Accordingly, the child could self-destruct the planning.
  • Termination. The trust would terminate at the child’s death with provisions for ultimate distribution, typically to their children. The trust may also allow for a “power of appointment” to allow the trustee to direct distribution of the trust upon their death.

The main problem with the ‘Revocable Divorce Trust’ is that the child maintains control and could terminate the trust, i.e., undo the parents’ planning for asset protection from a divorce.

Next Steps

If you have any questions about this article, please contact Attorney Amanda N. Sacks (for estate planning) or Attorney Laura O’Gorman (for family & divorce law) or our office at 262-334-3471 or [email protected].

We frequently represent individuals and families in their legal matters, focusing primarily on providing business, estate planning, and family law legal services in Wisconsin including Washington, Ozaukee, Dodge, and Fond du Lac Counties and the communities of West Bend, Jackson, Slinger, Hartford, Kewaskum, Cedarburg, Grafton, Menomonee Falls and other surrounding communities.

Originally published: June 6, 2023.

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Disclaimer: The information contained in this post is for general informational purposes only and is not legal advice. Due to the rapidly changing nature of law, Schloemer Law Firm makes no warranty or guarantee concerning the accuracy or completeness of this content. You should consult with an attorney to review the current status of the law and how it applies to your unique circumstances before deciding to take—or refrain from taking—any action.  If you need legal guidance, please contact us at 262-334-3471 or [email protected].