As a parent, you never stop worrying about the health and happiness of your children - even after they become adults, move away, and get married. But how do you make sure your hard-earned wealth is passed down to your children and not to their soon-to-be ex-spouses? A trust can be the solution.
I think trusts are oftentimes oversold by estate planning attorneys. For the vast majority of regular folks, like the ones I serve, a Will-based estate plan is perfectly sufficient. Privacy and tax issues are not as problematic as some would have you believe. But there is at least one scenario that does warrant considering using a Trust - protecting your child's inheritance if they get divorced.
When is Marital Property Not Marital Property?
To understand this, we have to delve into family law a little bit. When a married couple divorces, they have to split up their property - including their financial assets. The general rule is that all property acquired during the marriage, regardless of how it is titled, is marital property subject to division at the time of a divorce. One of the exceptions to this general rule is assets that were acquired by inheritance are NOT considered marital property; and therefore, they are not subject to division. Cool, right? But in order to qualify for that exemption, those inherited assets have to be kept separate. If your child takes their inheritance and puts it into an account with other marital funds, they become “commingled” and lose their exemption status and become part of what is divided up upon a divorce. I can not tell you how many times I have seen clients commingle inherited funds only to then sadly discover how these rules work.
Setting Up a Trust
The best way to resolve this problem is to set up a Trust for your child as part of your estate plan. There are a number of different ways to set up a Trust to cover this situation. Perhaps the easiest is to include a “testamentary trust” provision in your Will. A testamentary trust is created when you die by your Will - your last testament - with direction for your child's inheritance to be placed in the Trust and administered in accordance with your written instructions. These instructions can be as broad or as limiting as you desire. You also identify a trustee to manage the trust for the benefit of your child. The adult child can even be the trustee of their own Trust or you can choose a third party or company to manage the Trust.
Use a Trust to Preserve the Inheritance
Now that your child's inheritance is safely sheltered in a Trust, it is not subject to the division of marital property. It gives them something to fall back upon should the marriage dissolve. Moreover, you can be assured that the child is not going to squander their entire inheritance all at one time. Your child can still use funds from the trust to purchase other assets, such as a house, in their own name even during the marriage. It will be protected in a divorce because the acquisition of that property can be traced to inherited assets that were not commingled.
Trusts can be relatively easy to set up independently or as part of your overall estate plan. It would be our honor at The Tyra Law Firm to assist you.