By Attorney Bonnie Bowles
Sometimes, however, the choice is not always welcomed and parents become concerned about how to protect assets they plan to leave their children in case of a divorce. Or other times, there simply is concern that a child would leave everything—including an inheritance from parents—to a surviving spouse, who could turn around and leave it to a subsequent spouse, effectively cutting grandchildren out of the inheritance.
Fortunately, there are several estate planning devices that allow parents to shield assets from those who marry, and may divorce, their children.
Revocable living trust. One of the most common ways to pass assets to children, a revocable living trust provides asset protection as long as what a child has inherited remains in trust. While assets are in trust, children benefit from the assets but are not the outright owners of the assets. The Trustee manages the assets for the child’s benefit pursuant to terms the trust-maker has laid out in writing. As long as assets are not held in a child’s name outright, it is not on the table to be divided up between spouses upon divorce.
Irrevocable trust. Like a revocable living trust, an irrevocable trust provides similar asset protection, again as long as trust assets are not mixed with a child’s personal or marital funds. A trust is irrevocable when the trust-maker specifically says so in the trust document. Typically irrevocable trust planning is used to minimize or eliminate estate tax in the right circumstances.
Preservation trust. This type of trust can be used to protect assets from a divorce by having your child place his or her assets into the trust and naming a beneficiary who is someone other than a spouse. This requires specialized planning and in some cases consent by the other spouse.
Post-marital agreement. While many parents are unsuccessful in negotiating a prenuptial agreement before the wedding, they find it easier for children to accept the drafting of a post-nuptial or post-marital agreement later on to protect family assets. In either case, these agreements can establish clear ownership of various assets and who is permitted to inherit those assets or manage those assets in case a spouse becomes incapacitated or disabled. This is especially important in community property states, or if a couple who lives outside a community property estate owns real estate in a community property state.