One of the main tools used in this situation is a prenuptial agreement but sometimes, even when all the necessary steps and precautions are taken to set-up a marital agreement, courts will overturn your contract and reward a portion of your assets to your spouse.
There was recent one case, where a husband had signed a pre-nuptial with his bride. Twenty-five years into their marriage, the wife suffered from alcoholism and needed treatment. After a series of events, they ended up divorcing and the wife made claim against her ex-spouse’s assets.
The court determined that she couldn’t have known, when she signed the pre-nuptial, that she would become ill and so, they rewarded her with a proportion of the sheltered assets. More specifically they awarded her a portion of his family’s land and because land is not in cash, the family had to sell a large portion to cover the settlement as well as the lax liability that resulted from the influx in income. Had the family had a trust in place, for the inheritance, this would not have happened.
You see, a trust is a vehicle which separates ownership of an asset from the ability to benefit from the asset. Essentially, you are taking something of value and placing it into a trust so that it’s not legally yours. It is a separate legal entity that is safe from probate, increased tax liability and the risks associated with you becoming divorced or being sued.
The trust will be in the name of a trustee, it will be managed and controlled by the trustee but it is there for the beneficiaries use. You can benefit from it. Your children or grandchildren can benefit from it. Even a charity can benefit from it – so long as they are beneficiaries. The key is that the asset is not legally your property so in the event of a creditor claim (a divorcing spouse being a creditor in the case of a divorce), the asset is protected from that lawsuit.
In the event of a divorce you would have the trust to rely on because, it is not your asset, it is owned by a trust. It is certainly there for your benefit but it also benefits your children and grandchildren. Possibly even your parents or other parties involved so it can not be a matrimonial asset and it will not be subject to division.
Now the critical element is that the trust must be established before rights are accrued. You cannot create a trust simply for the purpose of defeating a known claim. There was a case decided in Alberta, where the use of a trust was challenged in the matrimonial setting and the court essentially said - you can’t use a trust simply to defeat a matrimonial claim. Therefore, the best time to create a trust, particularly around matrimonial planning, is sooner rather than later.
As a result, it is generally recommended that a person of affluence plan in the moment. If they have not become common law, or been married yet, the ideal time is to structure their estate in a trust knowing that they may move forward into a new relationship. That way when they meet their new partner, they are already protecting their assets. They can still layer it with the pre-nuptial arrangement if they want to, but they don’t have to get an agreement because their estate is already protected through the trust.