Almost half of all married couples end up divorced in America. Parents hope that their children will not face the financial and emotional toll of divorce, but the chances of it happening are great. If your child goes through divorce in the future, their assets will be subject to division.
You want your legacy to be passed on to your children after you are no longer here, not split in a divorce. Under California law, only community property can be divided in divorce. That means that separate property, or property obtained outside of the marriage, will be safe in divorce. Separate property includes gifts and inheritance. While this may appear straightforward, issues will arise if your child does not handle the funds properly.
Do not intermingle inheritance funds
Inheritance that begins as separate property can be changed into community property if the money is co-mingled into the couple’s finances. For example, your son or daughter might choose to place the funds into a joint bank account. Your child and their spouse may use that account to pay for their mortgage and monthly expenses. Now the funds are jumbled into martial property and dividing that money becomes complex.
Your child can take measures to protect their inheritance in case of divorce through a post-nuptial or pre-nuptial agreement. An agreement will define separate property versus community property. However, a legal agreement is not a surefire way to protect inheritance. A pre-nuptial agreement can still be contested, and your child can mix up their inheritance funds by intermingling them.
Use the correct estate planning tools
An estate plan can protect your legacy and control how it will be transferred to your loved ones. It is possible to shield your child’s inheritance through strategic estate planning methods. The most effective estate planning tool for this purpose is a trust.
A revocable living trust is beneficial because while your child can take money from the trust, they are not technically the owner of it. You can assign a trustee to distribute money to your child without ever having it in your child’s name. This means that the money would be protected from asset division in divorce as long as it remains in the trust.
You may also establish spending guidelines for your loved ones. You may advise how to distribute inheritance funds in order to protect them. Trust fund money spent on community expenses, such as mortgage payments, is considered a gift. Once a spouse makes payments using inheritance towards that mortgage, it becomes community property. In case of divorce, your child would not get the money back. An estate planning attorney can help you put together an effective plan with clear guidelines to best protect your family’s legacy.