Estate Planning for Your Children after They’ve Married
Parents developing an estate plan to financially provide for their children
need to consider effective means to protect their children's inheritance
in the event of their children's divorce.
Generally, depending on state law, inheritance is treated differently than
property otherwise acquired during a marriage. But the separate designation
provided for inheritance does not provide complete protection, as a court
typically has authority over all property for distribution in a divorce.
Further complicating matters, legal issues arise when a child with inheritance
commingles the inheritance with the parties' other assets. For example,
a child deposits cash inheritance into a joint bank account. If proper
accounting is not maintained, the child increases the risk a court will
distribute the funds, or property purchased with the funds, as if they
were a product of the marriage. As a general rule, a good family attorney
will advise your children to maintain all inheritance funds in separate
accounts and maintain sole ownership of all inheritance assets.
There are various legal tools available to provide protection for your
children's inheritance, including use of a trust and a prenuptial
How Can a Trust to Protect My Children's Inheritance from Their Spouses?
When used to protect your children's inheritance from their spouses,
the trust owns the assets held within the trust until transferred to your
children. When the assets are owned by a trust, your children, and by
extension their spouses, have no access to the assets. Thus, your children's
spouses cannot pursue the assets in the event of a divorce.
A trust involves three parties:
- The person creating the trust, or settlor
- The person or entity holding the trust property for the benefit of the
beneficiary, or trustee
- The person (or persons) the settlor intends to benefit from the trust
It is important to choose a trustee who is independent to eliminate any
argument that a beneficiary has more control to receive assets than is
actually provided by the trust.
What Are the Forms of Trust Instruments?
There are various forms of trust instruments. The following are a few of
the standard trust instruments:
pure discretionary trust provides the trustee complete control of the distributions to the beneficiaries.
The beneficiaries have no control of the distributions. The assets not
distributed per the instructions of the trustee are protected from creditors,
including a spouse, in a divorce.
support trust provides the trustee power to make distributions based on the health,
education, support, or maintenance of the beneficiaries. The beneficiaries
have a right to the distributions in a support trust. There is no protection
for assets to be distributed per the terms of the trust.
A trust can be established to
distribute assets on a staggered basis. For example, a transfer of assets could occur at your child's twentieth
birthday, twenty-fifth birthday, and thirtieth birthday. This trust protects
the assets while held by the trust, but once distributed, they become
A trust can be created with your
child as a co-trustee with another independent co-trustee. This allows your child to be involved in the management of the trust
assets, yet provides protection of the assets while they remain in the
trust. The independent co-trustee must authorize any distributions.
When considering a trust as means to protect your children's inheritance
from their spouses, you should consider the tax implications and consult
with an experienced estate planning attorney regarding this issue. Finally,
you should ensure your children understand the importance of maintaining
the trust assets under the trust's ownership to the fullest extent
possible for purposes of protection.
How Can a Prenuptial Agreement Protect My Children's Inheritance from
In addition to the use of a trust to protect your children's inheritance
from their spouse, your children can use a
prenuptial agreement as a form of asset protection. A prenuptial agreement permits your child
and his or her spouse to agree upon the characterization of assets owned
at the time of marriage, and those assets earned subsequent to marriage.
Moreover, a prenuptial agreement provides your child and his or her spouse
the ability to agree upon the division of their assets in the event of divorce.
Enforceability of prenuptial agreements varies from state to state. Thus,
prior to drafting and signing a prenuptial agreement, it is important
to seek legal advice from a family attorney to ensure no enforceability
issues arise in the event of divorce.
For more information, contact an
estate planning attorney at McKinley Irvin.