By: Barry E. Haimo, Esq.
May 19, 2015
How to Protect an Inheritance from a Spouse
HAIMO: One of the benefits of creating a trust is that it protects the interests of the beneficiaries. The interests of the beneficiaries are protected from their creditors, and one of those creditors can be a former spouse.
Additionally, a trust minimizes the dominion and control that the beneficiary has over the trust assets by virtue of the trustee administering the trust. A well-drafted trust can ensure that the beneficiary has limited access to the trust, and therefore the beneficiary’s spouse—or former spouse—likewise has very little control or access to the trust.
One of the more common questions estate planning attorneys are asked is, “How can I protect my child’s inheritance from his or her spouse?” For many clients, it’s important to make sure that their assets stay in the family—especially if they do not trust their child’s spouse.
Most of my clients desire that their assets remain in the family. They do not want their hard-earned assets ending up in the hands of creditors, and especially not a creditor in the form of a former spouse of one of their children. If you believe that your child has married an untrustworthy individual, protecting your child’s inheritance is likely a primary concern for your estate plan. A good estate planning attorney will help you navigate many important issues in asset protection planning.
A trust can help to ease fears and create added protections.
Using a Trust to Protect Your Child’s Inheritance
Many people simply bequeath their child’s inheritance to them outright—either immediately upon death, or at a specific age. When you use this method to pass down estate assets to your child or children, those assets are immediately considered the child’s own property. In other words, they automatically become vulnerable to mismanagement, as well as the claims of their creditors.
“Creditors” can refer to companies your child is indebted to, but it can also include individuals who levy a legal claim against your child—including spouses during a divorce., Click here to read a prior post explaining more about creditors.
As an avenue to protect assets, many clients choose to utilize one or more trusts. Trusts are considered legal entities separate from their beneficiaries. Click here to watch a short video to learn more about trusts. This means that although your child can receive funds from the trust, legally the trust (and the assets therein) are not considered their property.
This is an important distinction to understand. Lawsuits and claims brought against your child can only target the assets that your child legally owns. Consequently, a trust can shield the child’s assets against judgement holders in a lawsuit – such as, potentially, their untrustworthy spouse.
Trusts can also be a good option if you are concerned about how well your child will manage the assets in your estate. If you are worried they will use the money in their trust funds on frivolous things, or if you simply believe they are not yet mature enough to manage the money, you can limit the access they have to trust assets, while appointing someone else to manage them for their benefit.
How a Trust Works
When someone sets up a trust, they are the “creator” of the trust and must designate a trustee and one or more beneficiaries. In this instance, you are the creator (and likely a beneficiary) and your child is a remainder beneficiary. The trustee is a person or organization you choose to manage and administer the trust for the benefit of your beneficiaries. Often, you are the first trustee, which enables you to retain control over your assets during life
Importantly, certain types of trusts can be vulnerable to claims against the creator, but not the beneficiary. Other types of trusts are completely separate from both their creators and beneficiaries.
Since the trustee (not the beneficiary) has dominion and control over the assets in the trust, any claim brought against the beneficiary cannot gain access to the funds in the trust because technically it is not his or her property.
Want to learn about additional tools you can use to protect your child’s inheritance? Contact us today for experienced counsel on estate planning and asset protection.
Barry E. Haimo, Esq.
Strategic Planning With Purpose
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