For wealthy individuals and multi-generational families, divorce can destabilize succession planning. Divorce introduces dynamics that can complicate the division of marital assets, the transfer of business ownership, trust-based protection, and estate planning strategies.
An appreciation of how divorce intersects with succession plans and proactive structuring around that possibility is essential.
How Divorce Impacts Trusts, Estates, & Generational Wealth
Divorce exerts a ripple effect on trust and estate structures when they are designed under the assumption of a stable marital relationship and predictable generational transfer.
In many jurisdictions, divorce automatically revokes bequests to an ex-spouse under a will or certain trusts. In New York, divorce can automatically revoke provisions in wills, trusts, and beneficiary designations that benefit an ex-spouse, treating them as if they are predeceased. The rule applies to gifts, appointments, and fiduciary roles, including those of executor or trustee. It can also revoke the power of attorney and the health care proxy.
However, such automatic rules usually don’t extend to all vehicles. For example, beneficiary designations on life insurance or retirement accounts typically remain unchanged unless they are affirmatively updated.
During divorce, it is crucial to update your estate plan to name new beneficiaries and fiduciaries, and to address any tax implications. Trusts created during marriage that name a spouse as trustee, successor trustee, or beneficiary may be at risk. For instance, a revocable living trust could continue to permit the ex-spouse to act in critical roles unless formally amended.
Divorce can also impact generational wealth for children and heirs. Families that intend a business or estate to pass to children or grandchildren may not anticipate the impact of divorce on interim generations (for example, children’s spouses or ex-spouses). Always consider the possibility that one or more beneficiaries will get divorced when drafting trusts.
If inherited or gifted assets are commingled with marital assets of a descendant, they may lose their protection from that descendant’s divorce. Inherited or gifted funds that remain separate (not mingled) are more defensible against a spouse’s claim. Dynasty trusts or other generation-skipping trusts could also help isolate assets from marital claims.
Regarding taxes and estate planning, remember that divorce changes filing status, available exemptions, deduction opportunities, and the tax treatment of transfers between spouses. Any planning that assumes married-filing status, spousal credits, or joint trusts may no longer be optimal post-divorce.
Additionally, the timing of trust alterations or asset transfers in relation to separation or divorce can be critical. For example, transferring assets into or out of a trust immediately before or during a divorce may trigger unintended tax consequences.
Effects of Divorce on Business Ownership & Control
When you own a business or business interests are part of the generational wealth plan, divorce can compromise both ownership structure and continuity of control.
In many jurisdictions, business interests acquired during marriage or that increase in value during marriage are considered marital property, subject to division upon divorce. This can implicate the business asset base, value, control, or voting rights.
If a spouse is not yet a co-owner or partner but acquires an interest via divorce settlement or decree, any governance or family-business succession dynamics can be disrupted.
An ex-spouse may assert rights over business value and share assignments or membership interests that were not previously contemplated, thereby putting control, decision-making, and continuity at risk.
Additionally, buy-sell agreements among family owners may fail to anticipate a spouse or ex-spouse as an owner or claim holder. Business succession plans should explicitly incorporate spousal/ex-spousal scenarios.
When transferring business ownership to children or next-generation executives, it’s essential to consider the potential impact of their marriages and potential divorces. A child’s spouse or ex-spouse may gain interest or challenge the distribution, potentially diverting the intended legacy flow.
Note that introducing a spouse or ex-spouse into shareholder or ownership roles could create a conflict of interest and dilute intended successor rights or governance structures.
Go-To Solutions & Strategies
A solid succession plan anticipates divorce as a possible triggering event and will incorporate mechanisms to protect the family legacy, business continuity, and control. Parties going through a divorce should familiarize themselves with the following key strategies and solutions.
-
Trust-based structures with control provisions
- Employ irrevocable trusts or asset-protection trusts that remove ownership from the personal estate and place assets beyond the reach of a divorcing spouse. For certain jurisdictions, domestic asset protection trusts (DAPTs) may offer additional protection for business interests.
- In trust documents, be sure to include triggering provisions that (upon separation or divorce of a beneficiary or their spouse) automatically terminate that individual’s rights as trustee/beneficiary or prevent the spouse-in-law from gaining rights. For example: “the rights of the settlor’s former spouse, including powers of appointment or co-trustee status, terminate upon legal separation or divorce.”
- Utilize spend-thrift provisions to restrict beneficiaries’ ability to assign or transfer their interest and reduce exposure to spouse claims.
-
Business succession planning with spouse/ex-spouse contingencies
- Draft buy-sell agreements that explicitly exclude spouses or ex-spouses of owners as permitted owners, or provide for the immediate purchase of their interest at fair value in the event of divorce.
- Structure ownership so that voting rights and management control remain insulated from the divorcing spouse of an heir or owner. For example, class share designations, non-voting shares, or trusts that hold non-voting economic interest for the spouse, while preserving control in the next-generation family entity.
- Evaluate entity form (LLC, corporation, partnership) and the impact of a spouse’s interest, or asset division, on business valuation and control. For example, in a sole proprietorship, the business may be treated as personal marital property and exposed in divorce.
-
Estate-plan modernization post-divorce trigger
- Immediately upon separation or divorce, conduct a full review of wills, trusts, powers of attorney, healthcare directives, and beneficiary designations. Ensure the ex-spouse is removed (if intended) from fiduciary roles, trustee roles, beneficiary positions, and decision-making capacities.
- Separate and retitle assets that were held jointly or as estate/trust property with a spouse. Joint tenancy or beneficiary designations in favor of the ex-spouse must be updated to reflect the current situation.
- Update tax and gifting strategies. Since divorce changes tax filing status, marital deduction availability, and estate tax exemptions, the wealth transfer plan may need some recalibration.
-
Pre-emptive planning and scenario modelling
- Before divorce, as part of ongoing wealth preservation, consider modeling the impact of a divorce event on ownership, succession, and estate distribution. Consider drafting documents that contemplate divorce as a “triggering event” for key provisions.
- For family members marrying or entering long-term relationships, encourage the use of prenuptial or post-nuptial agreements that preserve ownership interests, exclude business interests from marital property, or clarify the division of assets in the event of divorce.
- Maintain regularly scheduled reviews of succession planning documents (trusts, shareholder agreements, buy-sell agreements, wills) with the expectation that marriages, divorces, and generational transfers will require adjustments.
Do not assume automatic protection. Many trust or business ownership arrangements assume marital stability and may contain no provisions for divorce. Without explicit drafting, an ex-spouse may gain rights.
Consider jurisdiction-specific rules. Divorce laws, community property regimes, and estate provisions vary by state. A plan that works in one jurisdiction may not in another. For example, some states automatically void a will provision that favors the ex-spouse; while others do not.
Treat succession planning as dynamic. A plan created once and forgotten is vulnerable. Life events, such as divorce, remarriage, splitting business interests, and the arrival of grandchildren, require review. Your estate plan is a living document that evolves with you.
Coordinate business and trust counsel. Business owners often benefit from synchronized estate planning, trust structuring, and corporate governance counsel so that ownership controls, trust distributions, and fiduciary powers align.
Educate next-generation leaders. Heirs and family business participants must understand the requirements and trigger mechanisms. If children marry, they should understand how divorce risk may affect their interests and the controls in place.
Document official records clearly. After divorce, update real-property titles, share ownership records, trustee appointments, beneficiary designations, and business-entity records promptly. Delays invite dispute and liability.
The intersection of divorce and succession planning poses a tangible risk that can disrupt ownership continuity, compromise estate flows, erode control, and undermine the family legacy. By embedding protective strategies, such as triggering clauses in trusts, business-succession governance aligned with divorce scenarios, and post-divorce estate plan reviews. Families can preserve the architecture of their legacy even when personal relationships change.
If you are facing divorce or just planning for the possibility, we can help. Contact a family law attorney with Bikel Rosenthal & Schanfield LLP today for a confidential consultation. Call 212.682.6222 or Connect Online.