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Can I Protect My Child's Inheritance From Their Spouse?
Estate Protections Series: Part 11
After years of working, saving, and building an inheritance for your children, you don't want a child losing half of it to a divorcing spouse. “The in-laws” is often a topic of concern for clients in estate planning. The big question, of course, is whether you can protect your child's inheritance, even from divorce. The answer is a resounding YES, but getting to yes requires actual planning.
Divorce And The Division Of Inheritance
EVERY state has a different set of divorce laws, including how to divide inheritance you received from a family member. In some states, 100% of the inheritance is untouchable by a divorcing spouse. In others, a court can access and divide it.
In Colorado, inheritance you leave your child is considered “separate property” in a divorce. But it only remains “separate” if your child keeps it in their sole name and does not put it in their spouse's name too. A single mistake, even if corrected, causes the inheritance to become "marital" and subject to division. A common example is taking inherited money and putting it in a joint bank account with a spouse. Even of those funds are removed to a different account, that deposit created "marital" property. Colorado law further states that even if you keep the inheritance separate, any increase in value of that property is marital. Consider if you inherit a house worth $500,000. If you hold onto that property during the marriage, and it is worth $750,000 at the time of divorce, the first $500,000 is still separate. Unfortunately, the remaining $250,000 is now marital and can be divided by the court. These rules are only Colorado - the state where your child might divorce is who controls. Depending on that state, the rules may be much better or much worse.
How to prevent division of inheritance to in-laws
While a Last Will can direct where your property passes after you die, it does nothing to protect those assets. Similarly, leaving your child inheritance by beneficiary designation gives them no protection. This is because that property becomes your child’s, in their sole name, so it is up for grabs in a divorce.
The best solution available for protection is a Trust. You can find more information in an earlier series installment here. In a Trust, you create an entity that holds your estate, which continues owning, managing, and PROTECTING the property for up to decades. By keeping inheritance out of your child’s direct ownership, your child can never commingle or gift it to their spouse. A trust gives you other options too, including requiring that your child and their spouse sign a marital agreement before receiving any inheritance. You can also install a third party as Trustee to manage the inheritance, restrict how your child can use it, etc.
Most importantly, a Trust can prevent your in-laws from receiving the inheritance instead of grandchildren. In Colorado, if your child receives your inheritance and then dies, some or all of it goes to their spouse first. Only after the spouse’s death might it pass to your grandchildren, but it might not in a blended family. With a strong Trust plan, you are in control. You can take whatever steps you feel necessary to make sure inheritance flows where (and how) you want.
How can an estate attorney help?
Issues involving in-laws and divorce are complicated and require intentional, specific planning. You can and should protect inheritance you're leaving, but only through estate planning. The attorneys at Opfer | Campbell | Beck P.C. specialize in estate planning and family law, so they have the expertise to make your plans work. Contact our offices today for a no-cost, 60-minute consultation!
