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How to Protect Your Child’s Inheritance from a Future Untrustworthy Spouse

Asset Protection, Estate Planning Blog

Kids Protection 91024A big reason parents develop an estate plan is to provide for their children financially. It’s not the only reason. And if you’ve heard me talk about “legacy” you know I don’t think it’s the most important reason. But it is important! Most of us want to make sure hard-earned assets, family heirlooms, or closely held businesses stay within the family. Within that context I’m often asked how to protect children’s inheritance from a future spouse in the event of untrustworthiness or divorce. It’s a thoughtful and significant question. And thankfully, there are many ways to structure your child’s inheritance to help ensure it will remain in the family for future generations. Let’s look at a few of the options.

Create a Trust
A trust involves three parties: (1) the person creating the trust (you might see this written as the “settlor,” “trustor,” or “grantor.”), (2) the person or entity holding the trust property for the benefit of the beneficiary, known as the “trustee”, and (3) the person(s) that benefit from the creation of the trust, known as the “beneficiaries.” Choosing a trustee who is independent can be a great way to eliminate any arguments that one beneficiary has more control to receive assets than what is actually provided in the trust documents than other beneficiaries, a helpful situation when you have an untrustworthy son- or daughter-in-law.

A lifetime trust is a type of trust that – as is evident from its name – lasts for the lifetime of the beneficiary and passes to the next generation of beneficiaries upon his or her death. It is commonly referred to as a “generation-skipping trust” and can also dramatically reduce or eliminate estate taxes. Assets in a lifetime trust are protected against commingling in the marriage and, therefore, cannot be pursued by a spouse. When assets are held by a trust your children – and, by extension, their spouses – cannot access these assets. Therefore, even in the event of a divorce, an ex-spouse cannot pursue them.

Use Prenuptial Agreements
In addition to creating a trust to protect your children’s inheritance from an untrustworthy spouse, your children can use a prenuptial agreement as a tool for asset protection. A prenuptial agreement is a document that details an agreement between your child and his or her spouse about the characterization of assets owned at the time of marriage and those earned after marriage. This legal document also provides the couple to agree upon the division of assets in the event there is a divorce. This may be an uncomfortable suggestion to bring up with your children, but it can be an huge benefit in the event of a later divorce.

Other Planning Ideas
Beyond the actual legal tools, it is important for you to let your wishes be known to the family. One way to do this is to have a family discussion about your estate plan, explaining your intentions and reasons as to why it is set up in this manner. Additionally, using clear language in your estate planning documents that specify the intent or purpose in leaving the inheritance to benefit descendants – and not their spouses – can further solidify your wishes are followed. Finally, choosing a trustee that is independent will keep control over the funds in the trustee’s hands and not your child’s untrustworthy spouse. This will also allow you to manage or overcome any conflict that you may not have been expecting.

Bottom Line: Be Proactive
If you wish to make sure your descendants receive a portion of your estate, discuss these intentions with your children and devise an estate plan that will guarantee this desire is fulfilled after your passing. Whether you have no estate plan, or have one that’s more than a few years old, sit down with a trusted estate planning professional to create or update this plan to suit your goals.

Dedicated to empowering your family, building your wealth and securing your legacy,

Marc Garlett 91024

June 13, 2017/by CaliLaw
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