How to Protect Your Child’s Inheritance From Their Spouse

How to Protect Your Child’s Inheritance From Their Spouse.

We all hope that when our children marry, their spouses will become a part of the family forever. Of course, experience tells us that that is not always the case. Sometimes there is friction between a person’s parents and their new spouse. Sometimes even marriages that seemed promising don’t work out. Many parents, especially those with significant wealth, want to ensure that their child’s inheritance is protected from their spouse.

If you’ve ever thought to yourself about a son- or daughter-in-law, “They’ll get my money over my dead body,” you might actually be right. Let’s talk about child inheritance protection, whether or not your child divorces their spouse.

How Can Your Child’s Spouse Get Their Inheritance?

There are three ways that your child’s spouse might get their hands on your child’s inheritance: during their marriage, in a divorce, or in the unfortunate event of your child’s death. Before talking about how to avoid those outcomes, let’s examine how they might come about.

In Ohio, inherited assets are generally considered the property of the person who inherited them, not of the spouse. That’s the good news: if you leave your child a million dollars, the money doesn’t automatically belong to their spouse.

Now the bad news: inherited property, generally considered “separate” or “non-marital” property can easily become marital property through commingling. If your child takes a distribution from your estate and deposits it in the joint bank account they have with their spouse, presto—the funds are commingled. Not only can your child’s spouse get access to those funds during the marriage, that account is considered marital property subject to division in divorce.

Even if your child places their inheritance in an entirely separate account, in the event of their untimely death, there’s still a good chance that their widowed spouse will inherit it, or be in charge of managing the funds if they are left to the couple’s children.

Fortunately, there’s more good news—with a little careful estate planning, you can keep your child’s inheritance protected from their spouse.

Using a Trust to Protect a Child’s Inheritance

The best way to protect your child’s inheritance from their spouse is to keep the inheritance out of your child’s hands and their control. That doesn’t mean they can’t benefit from it! It’s just that they are not in a position to commingle funds with marital funds, intentionally or otherwise.

Trusts are a great vehicle for maintaining a line of separation between one spouse’s inheritance and their marital assets. There are different types of trusts that can achieve different goals. And while most wealthy individuals have trusts as part of their estate plan, trusts aren’t just for the wealthy. They are estate planning tools that anyone can use to protect their loved ones.

With some types of trusts, the beneficiary (your child) can also be the trustee, making distributions to themselves. With other trusts, the beneficiary has the right to a certain amount or percentage of trust income annually. Any trust income or assets your child can demand or has the right to expect may be subject to their creditors, including a spouse. If you want your child to be able to use and enjoy money or property from a trust without being able to commingle those assets with marital property, it’s best to have a third-party trustee managing the trust. The trust document should provide instructions for the trustee, who then exercises their discretion about whether or not to make a distribution.

Of course, once a distribution is made to your child, they could always share those funds with their spouse. But the bulk of the inheritance would remain safe from the spouse’s reach. In some cases, the trustee may be able to make a distribution on your child’s behalf (such as to pay a bill) rather than placing it directly in their hands.

Options for Protecting Your Child’s Inheritance

You could use a revocable living trust to protect your child’s inheritance. You would use and enjoy the trust assets during your lifetime, then appoint an independent third-party trustee to manage and distribute trust assets after your death. This is the option that offers you the most flexibility during your lifetime, since the funds remain in your control.

You could also create a domestic asset protection trust. This type of trust is irrevocable, giving you less flexibility since you cannot revoke the trust or remove assets from it as you could with a revocable living trust. However, it offers superior protection against future creditors for both you and your child as a remainder beneficiary of the trust. That includes your child’s spouse in the event of divorce or your child’s death.

Creating a third-party discretionary trust for your child is another way to protect your child’s inheritance from their spouse. You fund the trust with your assets, and your child has no right to demand distributions, so their spouse cannot reach trust assets or income (unless distributed to your child) either during the marriage or in a divorce.

If you want to give your child a bit more control over the money they will inherit, you could make your child a co-trustee with limited powers, such as the power to direct investments but not make distributions. Speak with an estate planning attorney about the tax and creditor-protection implications of making your child a co-trustee.

If you own a family business, including a family farm, having the business in an LLC, perhaps also in combination with a trust, can be an effective way of keeping this very important asset out of the hands of your child’s spouse or ex-spouse.

Get Experienced Guidance to Keep Assets Safe

Estate planning has many moving parts, and actions can have unintended consequences if you are not careful. Contact Gudorf Law Group to schedule a consultation to learn how to protect your child’s inheritance from their spouse and other creditors.

Categories: Inheritance