An often-unspoken issue in estate planning is how to handle a potential divorce for your children. Since divorce is unfortunately a reality in almost half of marriages, it is wise to consider how to keep your child's future spouse from inheriting what you intend to leave your child.
Typical Scenarios
Why would you need to consider protection for your child's inheritance in case of a divorce?
The reasons vary greatly, including:
- Disapproval and/or distrust in your in-law
- Concerns about your child and their choices (such as a previous divorce)
- Your child has current marital problems
- Your children are newly married couples and/or young adults
- Awareness of the high divorce rate
- Assuring that your child has enough assets to survive and thrive
- If your child dies in the short-term, your in-law may remarry and use your assets (especially a concern if there aren't grandchildren)
- Your child doesn't have an estate plan
Don't feel bad or embarrassed about it - you're trying to do what is best for your child and your hard-earned assets.
Initial Steps to Consider
There are a few steps that you can do which don't guarantee protection but are generally helpful, such as:
- Make certain that your will and trust are up-to-date and reflect your desires. This would include providing written instructions on how to use the money and assets.
- Discuss your wishes in advance at a family meeting.
- Recommend a pre-nuptial agreement for your child.
- Advise your child to keep inherited funds in a separate account, not to be used for family support or any comingling (note: in practice, this is difficult to achieve).
- If your kid dies prematurely, the trust assets may, by default, be inherited by their spouse - unless you have planned for this possibility. Help your child to set-up an estate plan, so that your assets will be distributed properly in the event of your child's death. Also, consider choosing a contingent beneficiary (such as another child/sibling, grandchild, charity, etc.) if your child hasn't fully received their inheritance at the time of their demise.
Trust Management
So, what can you do to best protect your child's inheritance against potential divorce? In general, it is preferable to establish a trust, which will specify your wishes.
Below are some options (note: there are limitations and pros/cons to each structure, so seek legal counsel for your particular circumstances):
- Name your child as both the beneficiary and trustee of the trust. While this may seem optimal, there are definite concerns and limitations; improper management can lead to negating the trust in the court's view.
- Select a co-trustee for your child. This must be handled very carefully, so as to avoid comingling of spousal assets and other management errors. There are several types of trustee responsibilities and obligations to consider, such as investment trustee and handling distributions to your child. A benefit is that in the event of a divorce or creditor issues, your child can resign as trustee, leaving the other trustee with sole discretion.
- Naming a third-party trustee. A professional trustee, vs. a family friend, is often recommended because of the importance of complying with laws that protect the trust and avoid making it subject to division. While there is typically a trust management fee, this structure should result in proper distribution of trust assets. If the third-party trustee is carefully selected and does his/her job, this sole discretion over trust fund distributions affords maximum protection against asset commingling (although it obviously means limited flexibility over how children can spend their inheritance).
Specialized Estate Planning Expertise
This is a complex area of law, so it is important to consult an experienced estate planning attorney in order to ensure that even if your child's marriage does not last, your assets will be protected and your wishes will be honored. Further, this is another reason to periodically review your existing estate plan to modify it as necessary, as your family's circumstances change.
Mortensen & Reinheimer, PC understands and can help you. If you need legal expertise in addressing your specific estate planning needs, please contact Mortensen & Reinheimer, PC at (714) 384-6053 to make an appointment, or use our online contact form. Our website is http://www.ocestateplanning.net.
About the author:
Tamsen R. Reinheimer, Attorney, is a Certified Specialist in Estate Planning, Trust & Probate Law (The State Bar of California Board of Legal Specialization). She has significant experience in all aspects of estate planning, trust administration, and probate. Contact Tamsen at tamsen@ocestateplanning.net.