Parents who develop an estate plan often do so to provide for their heirs financially. They, like you, want to protect your child’s inheritance from an untrustworthy spouse. 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 one’s children’s inheritance from a 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, whether the concern is an untrustworthy spouse, divorce, general creditors, the child’s incapacity, or your child’s lack of financial responsibility. Let’s look at a few of the options now. In this post, we are going to focus on the options available to protect your child’s inheritance from an untrustworthy spouse.
Create a 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 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, except as you have provided in the trust document, or as determined through the exercise of discretion by the Trustee that you name. Even in the event of a divorce, an ex-spouse cannot pursue those trust owned assets. You have the ability as the trustmaker to provide guidance and direction to the trustee to ensure that the assets are used for the benefit of your descendants, rather than being lost in a divorce or wasted by incapacitated or irresponsible beneficiaries.
Use Prenuptial Agreements
In addition to creating a trust to protect your child’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 allows the couple to agree upon the division of assets in the event there is a divorce. It also provides for a spouse to waive rights to family assets or inheritances, and certain statutory rights, if your child should die before their spouse. Because enforceability of prenuptial agreements varies by state (Florida’s statute governing prenuptial agreements is Section 61.079, Florida Statutes), 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 or the premature death of your child.
Properly Structured Legal Entities
The proper structure for limited liability companies (LLCs) and family limited partnerships, can also help protect your child’s inheritance. The operating agreement for an LLC or the partnership agreement for a limited partnership can limit the transferability of ownership interests of businesses, real estate, or other assets owned by the legal entity. Even with a corporation, a properly structured buy-sell agreement can help protect your child’s inheritance of business ownership interests.
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 to protect your child’s inheritance. 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 will allow you to protect your child’s inheritance from an untrustworthy or divorcing 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 protect your child’s inheritance, 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 is more than a few years old, sit down with an experienced estate planning attorney to create or update your estate plan to suit your goals. Only you can take the appropriate action to ensure that you protect your child’s inheritance, from untrustworthy spouses, or others.