Can I Protect My Children's Inheritance from Their Spouses?
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 agreement.
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:
- A 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.
- A 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 unprotected.
- 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 Their Spouses?
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.