Seeing your child marry is an incredibly happy day for many parents. And most parents accept their future son-in-law or daughter-in-law with open arms because it increases the size of their family and could lead to grandchildren.
But despite whatever good intentions there are on the wedding day, it’s also wise to remember that nearly half of all marriages end in divorce. While no parent wants to see their child go through a divorce, which can be emotionally, physically, and financially draining, it’s still wise to factor in the potential for divorce when creating an estate plan.
Inheritance, Property Division & Divorce
Before drafting an estate plan, it’s crucial to understand divorce laws in the state where your child or children reside. California is a ‘community property’ state; this means that all property a couple acquires during the marriage becomes joint property. There are exceptions to this, check with your estate planning attorney to get all details. During a divorce, these assets will be split equally. Despite this, inheritance is treated separately, even in California. It is considered the individual’s separate property, not part of the marital assets, even if acquired during the marriage.
However, if the spouse who receives an inheritance were to co-mingle the inheritance funds, it may become joint property. For instance, if your child takes the cash proceeds from the inheritance and deposits it into a joint account, it becomes part of the total marital assets.
Potentially, if they were to sell a property that was part of the inheritance and purchase a different property while married, the purchased property would be considered part of the joint assets. There are exceptions to this is if they put the spouses name on the property or community propery assets were used to improve the property. In contrast, if they were to keep the inherited property separate, the ex-spouse would have no claim to it at all.
Communicating The Importance Of Protecting Inheritance
While it is natural for you to want to find out more about protecting your inheritance for your child, it may be hard or awkward to communicate with them about the topic. Many individuals don’t want to consider that their marriage could end in divorce or make waves in their marriage by keeping an inheritance separate. But protecting wealth is far more than merely safeguarding money. Inheritances can also include family heirlooms or property that has been handed down from generation to generation. Without ensuring that these items remain separate property, there is no way to protect them from potential loss during a divorce. And if any of these items were awarded to the ex-spouse, they likely wouldn’t hold the same emotional value as they would for your child.
Communicating these reasons to protect assets acquired through inheritance to your child is the first step in protecting them from loss in the event of a divorce.
Protecting Inheritance Through Estate Planning
In addition to communicating your wishes related to the inheritance with your child or children, there are other measures you can take to ensure that these assets are afforded more protection. Multiple estate planning tools can protect inherited assets from a divorce.
Trusts are the most common solution. Not all trusts protect from a divorce, so you will want to discuss trust options with an estate planning attorney before determining what type of trust best meets your needs. A revocable trust can be changed or revoked, making it more flexible.
You may name a successor trustee to manage if after your death. Because the trust would own the inheritance, the assets never become part of marital property, and they would not be subject to division during a divorce.
Irrevocable trusts (including domestic asset protection trusts and third-party discretionary trusts) have similar benefits and protections. However, the trust cannot be revoked by you – the grantor – and you cannot reclaim ownership of those assets. The primary benefit is that these assets would be protected during a divorce and from future creditors (whether they are yours or your child’s).
If the inheritance includes a business, you may also want to place the asset in a limited liability company (LLC), which can also offer additional forms of asset protection. Discussing death and inheritance with your children can be exceedingly challenging. Broaching the subject of a potential divorce and how it may relate to inheritance can be even more challenging.
This conversation can help them understand the potential risks they face if they ever have to go through a divorce. If you are unsure how to discuss this topic with your children or how to implement additional asset protection tools for an inheritance, it may be wise to discuss your concerns with a professional estate planning attorney.
