Parties in a divorce often want to reach a settlement quickly. In the rush to resolve disputes, however, spouses may agree to divide assets or enter long-term payment obligations without fully considering tax basis, capital gains, estate inclusion, or future enforcement of those agreements. Incorporating estate planning strategies into divorce negotiations can help align cash flow, control, and tax outcomes while reducing post-divorce conflict.
A trust is a legal arrangement in which a third-party trustee holds and manages property for the benefit of another person. Trusts allow parties to separate control of assets from beneficial enjoyment and embed clear, enforceable terms that might otherwise require ongoing court oversight. When structuring a property settlement, a trust can replace a fragile “pay-or-pursue” arrangement with predictable administration by an independent fiduciary.
A trust may be used to:
- Provide a reliable income to a former spouse without relying on the payor’s ongoing cooperation
- Direct remaining assets to children or other beneficiaries
- Manage capital gains and estate tax exposure
- Address future contingencies such as remarriage, inheritances, or changes in earnings
The optimal structure depends on each party’s priorities, including income certainty, flexibility to terminate benefits, estate tax efficiency, and control over ultimate beneficiaries.
Trust Structures That May Support Divorce Settlements
Lifetime QTIP Trust
When the primary goal is to provide a guaranteed income to a former spouse, a qualified terminable interest property (QTIP) trust can require all trust income to be paid to the former spouse as beneficiary. A neutral trustee administers the trust while the settlor, or payor, retains control over who receives the remaining assets after the beneficiary’s death.
Since the trust assets are included in the income beneficiary’s estate at death, they typically receive a date of death basis adjustment, which may benefit the remainder beneficiaries. This approach favors predictability and security over flexibility and must be implemented before the divorce is finalized, while the marital deduction remains available.
Bypass or Credit Shelter Trust
If the parties want support or other payments to end upon specific future events, a bypass trust can condition or terminate income or access based on triggers such as remarriage, income thresholds, receipt of inheritances, or the passage of time. Tradeoffs may include using a lifetime gift and estate tax exemption and losing a basis adjustment at the beneficiary’s death. Certain reversionary features can restore control to the payor but may increase estate inclusion risk.
Charitable Remainder Trust
If the divorce involves the sale of an asset that has significantly appreciated, such as stock, a charitable remainder trust may offer tax advantages. The trust can sell low-basis assets without immediate capital gains tax. It then pays income to the former spouse for a defined term and distributes the remainder to a charitable organization. The contributing party may receive a charitable deduction at the time of funding. This structure can combine tax efficiency with enforceable behavioral terms.
Irrevocable Life Insurance Trust
When support obligations are secured with life insurance, an irrevocable life insurance trust (ILIT) can keep death benefits outside the insured’s taxable estate while incorporating conditions tied to remarriage and other events. An ILIT often avoids complications associated with direct policy ownership and can provide liquidity for estate planning if needed.
Alimony Trust
When a divorce involves a business that is difficult to value or divide, an alimony trust can hold the business interest, distribute its income subject to negotiated conditions, and name children as remainder beneficiaries. This structure can reduce valuation disputes, improve governance, and create greater certainty around tax and cash flow outcomes.
The Bottom Line
Thoughtful collaboration between divorce counsel and estate planners can transform fragile settlement promises into enforceable, tax-aware structures that reduce risk for both parties. For assistance, contact a member of Varnum’s family law or estate planning practice teams.
