Protecting Trust Assets from Child’s Divorce (or Divorces)

Young couple with gift“If you don’t want money you’ve worked hard for to pass down to your son’s or daughter’s ex, then consider a trust.”

The federal estate tax exemption in 2017 is about $5.5 million per person or $11 million for married couples. As a result, creating a trust to save on taxes for your family when you pass away doesn’t have the attraction that it once did.

On the other hand, now more folks are considering a trust. This is because they’re concerned about their adult child losing their inheritance due to a failed marriage. When you establish a trust as part of a will or revocable living trust, you can help protect your child’s inheritance in a divorce settlement.

A recent Kiplinger’s article, “A Trust Can Protect Your Adult Child’s Assets from a Failed Marriage, takes a look at how this works.

It’s not uncommon for a child to get an inheritance and to combine it with assets he or she owns jointly with their spouse, like a bank account, car or house. Depending upon the state in where they reside, the inheritance may become marital property subject to division in the event of a divorce.

If the child’s inheritance stays in a trust account, the inherited wealth can be shielded from a divorce. Some people will leave their children’s inheritance in a trust after a first divorce, because of concerns that their hard-earned dollars might end up in the wrong pockets if he or she remarries. If a child marries again and it doesn’t work, the second ex-spouse will not get those trust assets.

 It is true that creating a trust can be more complicated and more expensive than an outright distribution. However, many people are willing to pay the price to protect their child’s wealth. Consider the following alternatives regarding the parents’ decision to leave assets in trust for their children:

  1. Children under age 18. If your child is under 18, you’re probably not considering his or her marriage or divorce. However, leaving assets in trust for a child may be a good plan. This is because a trustee will oversee the child’s assets and guide them in their decision-making with the funds. The trustee can also deny any financial requests. This is a valuable power, if a child is immature or easily influenced.
  2. A newly married child. After the honeymoon, the journey can get bumpy as life becomes more stressful and complex. They may have to deal with issues such as a job lay-off, health issues, financial worries or the stress of rearing children. Rather than creating a trust soon after your child’s marriage, see how the marriage progresses over the next few years.
  3. Marriage status. As mentioned above, after five years or more, you should determine your comfort level with your child’s relationship and how you feel about your son-or daughter-in-law. If you see acrimony or you just have a “gut feeling” about the union’s future, it may be smart to create a trust for your child’s inheritance.

You should look at estate plans as five-year plans, and review your will, trusts and other documents at least that often. You may not need to change them, but a periodic review can help you carefully evaluate relationships, finances and the emotional dynamics of your family.

Working with an estate planning lawyer, you can change the trust during your life, if family circumstances make it necessary.

Reference: Kiplinger (March 2017) “A Trust Can Protect Your Adult Child’s Assets from a Failed Marriage”

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