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How to Protect Your Child’s Inheritance from His or Her Untrustworthy Spouse

Posted on: June 13th, 2017
Posted by:  The Life and Legacy Planning Group

Parents who develop an estate plan often do so to provide for their heirs financially. Many want to make sure hard-earned assets, family heirlooms, or closely held businesses stay within the family. Indeed, a common question is what cost-effective options are available to protect a child’s inheritance from his or her spouse in the event of untrustworthiness or divorce. 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 now.
 
Create an Inheritance Protection Trust
A trust involves three parties: (1) the person creating the trust (you might see this written as the “settlor,” “trustmaker,” 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 an independent trustee is a great way to keep an inheritance out of the hands of a divorcing spouse or, for that matter, away from a spendthrift or unreliable spouse, and from the claims of other outside creditors. Your choice of trustee may be one of the most important decisions you make in structuring a trust for a child or grandchild.
 
An inheritance protection trust is a type of trust that - as is evident from its name – protects a child’s inheritance from the claims of, among others, a divorcing spouse. It lasts for the lifetime of the beneficiary and passes to the next generation of beneficiaries upon the child’s death. It is legally referred to as a “generation-skipping trust” and can also dramatically reduce or eliminate estate taxes. Assets in an inheritance protection trust are protected against commingling in the marriage and, therefore, cannot be pursued by a spouse. When assets are held in 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 outlines the characterization of assets owned at the time of marriage and those acquired after marriage. This legal document also lays out the division of assets in the event there is a divorce. Because enforceability of prenuptial agreements varies by state, it is important to seek the advice of a legal professional before drafting and signing the contract. It may be an uncomfortable suggestion to bring up with your children, but it can be an incredible 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. Or, if you would rather have an independent third party explain the structure of your estate plan, ask your estate planning attorney to conduct a Family Meeting. The attorneys in our Life & Legacy Planning Group regularly conduct Family Meetings for our clients for just this purpose. 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 guarantee that your wishes will be 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: Seek Out Estate Planning Help
If you wish to make sure your descendants, rather than their spouses, 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 more than a few years old, sit down with an estate planning professional to create or update this plan to suit your goals. 

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