Unwinding Multinational Estate Plans in Divorce

Joan Crain

Despite having established clever estate planning structures that work well when all family members live in the same country, affluent families may find that those same structures present unique and unexpected challenges when a member of the family lives abroad and gets divorced.

While affluent families historically have focused their planning on estate and inheritance taxes, divorce is becoming an equal, if not greater, threat to family wealth preservation.

It's critical that affluent families fully understand the typical problems that arise from the mismatch between common cross-border estate plans. Here are five challenges they might encounter:

Challenge 1: Asset Titling and Ownership

The different treatment of forms of ownership from one country to another can yield some surprising results. It is critical to thoroughly explore even seemingly straightforward financial details during the divorce process, and is especially important to involve foreign counsel with expertise in tax and estate planning if there are non-U.S. assets or other foreign connections.

Challenge 2: Cross-Border Assets

Some of the most dramatic surprises in divorces occur when one or both spouses have trusts and/or other structures that were established in a different country than the one they're living in at the time of the divorce. Although courts in one country can enforce the legal norms of another country, there must be sufficient nexus and the result can't be contrary to public policy.

Challenge 3: Third-Party Trusts

One of the most controversial issues in divorce is how to treat assets in trusts that have been set up by third parties to benefit one or both spouses. In decisions about both property settlements and maintenance, outcomes vary from complete inclusion in the marital pot to no inclusion whatsoever.

Challenge 4: Trustee Participation

When the divorce proceedings are taking place in a country other than where the trust is based, should the trustee participate, and if so, to what extent? Does participating mean submitting to the jurisdiction of a foreign court? There are both dangers and advantages to being involved.

Challenge 5: Family Companies

In a divorce, the treatment of privately held companies is no more certain than that of trusts. The legal separation created by tiered corporate structures is not always respected when a divorce enters the picture.

There Is No Easy, One-Size-Fits-All Solution
Choose the Right Jurisdiction

The laws and practices of a country — and sometimes even a province or state within a country — can have a major effect on the outcome of a divorce. In many cases, spouses race to start divorce proceedings in the country of their choice rather than allow the other spouse to select the jurisdiction that suits their purposes.

Avoid "Nuptializing" Assets

Limiting control by a trust beneficiary or limited partner is an important first step to limiting the risk that the divorcing family member's interest will be considered "property."

Integrate Business Structures With Estate Planning

Care must also be taken to reduce the opportunity for family law courts to find ways to access assets in fully discretionary family trusts and family companies with independent trustees and directors.

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