About 40 to 50 percent of all marriages in the United States end in divorce. Regardless of how you feel about your child’s spouse, you must face the possibility that they could become your child’s ex-spouse. Should that day come, the money you leave to your child could be subject to a division of marital assets. But with careful estate planning, you can in-law proof your legacy, with the help of an Austin life and legacy attorney. That is, you can safely keep your child’s inheritance out of their spouse’s or former spouse’s hands.
During a marriage, the lines between what each partner owns can blur. Generally, whatever couples acquire during the marriage by either partner becomes marital property that is subject to division in the event of a divorce, but there are exceptions. You can take advantage of these to in-law proof your child's inheritance.
One exception is a bank account that your child keeps separate during the marriage. Inheritance money that you leave to your child or monetary gifts that you give to your child during your lifetime can theoretically go into a separate account. However, it can be difficult for spouses to avoid commingling bank accounts. Even something as simple as depositing marital money into the account or using it to pay bills during the marriage could make the account marital property.
A better way to keep your child’s gift or inheritance separate from their spouse’s money is to hold it for them in a trust account. A trust is a flexible and powerful estate planning tool that allows parents of any means to exercise greater control over the money and property that they pass down. It is not just wealthy parents who leave money to their children in a trust.
Holding your child’s inheritance in trust to successfully in-law proof your legacy, involves doing the following:
While it is possible to name your child as both the beneficiary and the trustee of the trust, absent additional restrictions, this structure negates the point of establishing a trust to prevent spousal commingling. Similar to how commingling can occur with a separate bank account, if your child uses money in the trust for marital expenses and then gets divorced, the court could consider the trust funds to be marital property.
This takes control of the trust out of your child’s hands and places it in the hands of a third party who can use their discretion in interpreting the trust’s instructions for how to use the trust funds.
Instead of distributing money from the trust directly to the beneficiary (which raises the possibility of commingling and trust division in a divorce proceeding), the trustee can pay third parties on the beneficiary’s behalf. For example, if the beneficiary needs a new vehicle, the trustee can pay the car dealership directly. Or, for larger purchases such as a home, the trustee could loan the money to the beneficiary. The house would be used as collateral to secure the debt to the trust and protect it from asset division.
Giving a single third-party trustee sole discretion over trust fund distributions affords maximum protection against asset commingling. This is the key to in-law proofing your legacy. Still, it gives your child limited flexibility over how they can spend their inheritance. If you prefer to provide them with more options but still protect the funds you leave to them in the event of a divorce; you can name a third party to serve as co-trustee with your child. However, other restrictions may be appropriate for creditor protection and tax purposes.
When setting up a trust, there are several types of trustees that you can choose from, each with a different set of responsibilities and obligations. For example, you might name your child an investment trustee, giving them the authority to invest money in the trust. In this capacity, your child is acting on behalf of the trust (not in a personal capacity), so the trust money does not commingle with marital assets. At the same time, with suitable investments, they are effectively growing their wealth. You can then have a co-trustee handle distributions for your child’s benefit.
Naming co-trustees has other benefits as well. If a divorce or creditor issues, the child can resign as trustee, leaving the other trustee with sole discretion. You can also set up the trust so an independent co-trustee can distribute to your child for any purpose. Still, your child is limited to distributions for health, education, maintenance, or support (i.e., a HEMS provision or ascertainable standard that is a safe harbor under federal law). While this does not provide the maximum creditor protection (because any distributions made to the child could be susceptible to creditors), amounts remaining in the trust may still be protected. In addition, special consideration must be given to the beneficiary’s ability to remove and replace another co-trustee.
To create a bulletproof trust strategy to keep your child’s inheritance out of their spouse’s hands, you must take an expansive view of everything that could happen. That includes a possibility that you would probably prefer not to think about: your child passing away.
Should your child predecease you or pass away before receiving the full benefit of the trust you establish for them, the trust may, by default, pass to their spouse unless you have planned for this event. You can keep this from happening by naming your child a contingent (backup) beneficiary. This could be your grandchildren, your child’s sibling, a charity, or any other party you specify as next in line as the trust beneficiary.
As the trustmaker, you can limit who the trust property can go to, such as your child’s children or other descendants only. In addition, be careful when giving a testamentary power of appointment to your child. This power would allow your child to direct trust property (or their share of trust property) to another individual upon death, and that person could be their spouse.
Part of being a parent is protecting your children from their lack of foresight. You have the power to in-law proof your legacy! If your child is newly married or in a marriage heading in the wrong direction, you can take steps to keep your hard-earned money out of their spouse’s hands, by creating a trust.
Flexibility is one of the most powerful features of a trust. Your attorney can customize them with any number of provisions to ensure the fulfillment of your final wishes.
Remember that you can and should revisit your estate plan regularly. You can include restrictions in the trust and remove them later as circumstances change. You can also decide to do away with the trust altogether. Whatever plans you have for your money and property, make the most of them by getting help from our team. Contact us to set up an appointment.
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