Families are constantly changing—sometimes through joyful events like marriages, births, and adoptions, and sometimes less happy ones, like a death or dissolution of a marriage. But too often, people plan for the future as if it will only contain happy events. Even when people do make an estate plan, they tend to ignore the very real possibility of a divorce down the road: either theirs, or their child’s.
Of course, unlike death, divorce isn’t inevitable. Even so, failing to take into account that a divorce could happen could have disastrous outcomes for family wealth. Our firm talks about inheritance and divorce in Ohio, and what you can do to protect your assets for the people you want to inherit them.
As you know, in a divorce, the court divides up the couple’s marital property between them. But unless you have actually gotten divorced, you may not have thought much about what “marital property” is. In essence, “marital property” is any property that either spouse acquires during the marriage, with limited exceptions. In Ohio, one of those exceptions is inherited property and assets. So, in theory, anything you leave to an adult child in your will should be safe from their spouse in a future divorce.
You may have noticed the words “in theory.” That’s because in the real world, assets tend not to stay in separate bubbles. And when separate inherited assets get commingled with marital ones, they become marital. This happens easily, and more often than you would think.
Let’s say you leave your child $50,000 in cash, $100,000 in stocks, and your residence, valued at $500,000. They put the cash in the joint checking account they share with their spouse, transfer the stocks to the investment account they and their spouse own together, and put the house on the market. When it sells, that money goes into their joint savings account. If your child divorces, especially years after your death, the assets you left will probably be considered marital, and subject to division in the divorce.
Now, let’s consider another aspect of inheritance and divorce. What happens to your existing estate plan if you divorce? If you and your spouse have wills that leave all of your assets to each other, and you divorce, what happens if you die before you can make a new will?
The good news is that in Ohio, divorced spouses named in wills are treated as if they predeceased the creator of the will (the testator). The assets they would have received go to the testator’s other heirs. Unfortunately, this does not always play out as one might wish.
For instance, imagine a situation in which the child you share with your ex-spouse is a minor. If the ex-spouse were named in the will and your child actually inherited your assets, it is possible, even likely, that the court would appoint your ex-spouse to manage those assets for your minor child until the child is a legal adult. That may or may not be what you would want. Even if your ex manages the assets perfectly, your child is entitled to all of them the moment they turn eighteen—not an ideal scenario.
If your child is already a legal adult when you die, and the assets you left to an ex-spouse in a will go to your child, they might find themselves in the very scenario discussed above: inherited assets that eventually get commingled with marital assets.
There are a number of ways you can go about protecting assets in the event of a divorce--either your own or the divorce of one of your heirs. A prenuptial agreement, especially prior to a second marriage, can be useful in clarifying expectations about what spouses might inherit or receive in a divorce. It’s also possible to keep inherited assets separate by leaving or placing them in separate accounts.
But the most efficient and effective way to protect an inheritance for your loved ones, keeping it out of the hands of divorcing spouses and other creditors, is to place it in a trust. For maximum asset protection, an Ohio Legacy Trust may be the best choice. However, OLTs are irrevocable, which means they don’t offer the flexibility many people need.
Fortunately, even a straightforward revocable living trust can provide significant protection for those who want to protect their loved ones’ inheritance in a divorce. If you create a living trust, you use and manage its assets during your lifetime just as you would if they were owned in your own name. Upon your death, a successor trustee takes over. Together with your estate planning attorney, you can design the terms of the trust to reduce or eliminate the likelihood that your beneficiary’s spouse will be able to access trust assets in a divorce.
If you are planning to divorce or about to remarry, now is an excellent time to review and update your estate plan. Creating a trust not only helps you ensure that divorce doesn’t negatively affect your estate plan. It also allows you to easily add and change beneficiaries as your family changes.