Divorces Involving IDIGITs

In an attempt to protect a child or other heir’s assets from his or her potential future divorce, many parents create an Intentionally Defective Irrevocable Grantor Trust, better known as IDIGIT. Though IDIGITS can provide both asset protection and tax benefits, they may not be as off limits to future divorcing spouses as beneficiaries would like to believe. Five potential weakness in IDIGTs are below.

1. If the beneficiary has broad trustee powers, a future divorcing party may have access to the trust funds.
2. A court may force the trust to fund divorce obligations if the beneficiary has the right to distribute to herself to maintain her lifestyle.
3. Courts may take into consideration what distributions the trust actually made, even if the distributions were not authorized under the trust instrument.
4. A future Ex may have access to trust assets if the trust involves a faulty operating agreement for a LLC.
5. If the LLC’s financial data and tax returns indicate that the beneficiary received compensation from the LLC, a court may consider that compensation amount when determining alimony and child support amounts.

For more information on IDIGITs, see Martin M. Shenkman, I DIG IT Divorce, Wealth Strategies Journal, Jul. 5, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.