Critter Corner: Protecting Our Daughter’s Inheritance If She Gets Divorced

Dear Magic,

Our daughter got married a couple years ago, but she doesn’t seem happy. Her husband goes out a lot, drinks too much, and gambles regularly. He also spends nearly every dollar he brings in. We have a sizable inheritance to leave to our daughter and we want to protect it from him and his ways. We know if we bring the subject up with her, she may get offended and not want to talk to us. Is there a way to protect our daughter’s inheritance from an irresponsible son-in-law?

Thanks for your help!

N. “Hera” Tince

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Dear Hera,

Most parents try their best to make their children happy by welcoming potential sons- and daughters-in-law into their family with open arms, but sometimes things change and people change, and things may not work out as planned, as evidenced by the fact that approximately 50% of all marriages in the United States end in divorce.

That’s why it’s important for almost all parents to protect their children’s inheritances from their spouses. And even if your child’s marriage does not end in divorce, most parents simply do not want to leave in an inheritance to a son-in-law or daughter-in-law who will quite possibly get remarried after the death of your child and leave your money to his or her future spouse and/or future children. Most parents simply want to leave their inheritance so that it stays in the bloodline.

The best method for parents to structure their estate plan to protect their child’s inheritance is via a living trust which, upon the death of the parent(s), splits into an asset protection subtrust for each child’s lifetime (and continues in trust for future generations if there is enough money in each sub trust). Parents can set up these “lifetime asset protection trusts” for each beneficiary to provide for a variety of things such as health, education, maintenance, and support, as well as regular income or even retirement income. A major benefit of these trusts is that they can be very specific and you can create one for practically every potential outcome. For example:

• Trusts can limit distributions made to current or future spouses. They can cover where assets go after the death of their child, to make sure they go specifically to their heirs and the rightful grandchildren.

• If you structure a trust properly, it will not only protect your child’s inheritance if there is a divorce; it will also benefit your child by protecting their inheritance from bankruptcy, lawsuits, medical bills, and even nursing home expenses.

Consider Using a Professional Trustee for the Utmost Protection

You should consider appointing a professional trustee, such as a trust company or a law firm, to manage and distribute the trust funds that your daughter will inherit. This is the absolute best method to ensure that the money you leave for your daughter will only be used for her benefit. However, the downside of using a professional trustee is the expense, as a professional trustees of course charge for their services, which over time could erode the money inside of the trust depending on how well the trustee is doing at investing the money, which of course is largely dependent on the volatility of the market.

Beneficiary-controlled Lifetime Asset Protection Trusts

Most Farr Law Firm clients have complete faith in their children to manage their own funds, and don’t want the added expense of paying a professional trustee, so we typically draft our beneficiary lifetime asset protection trusts so that each beneficiary serves as their own trustee, thereby affording the beneficiary almost unlimited control over their own inheritance. The control is “almost unlimited” because to provide the beneficiary with asset protection, there must be a written limitation on the use of trust assets, which is typically that the trust assets can only be used for beneficiary’s health, education, maintenance, and support (known as the HEMS standard). Health and education are fairly self-explanatory. Maintenance and support are very broad standards allowing “almost unlimited” access. To illustrate how broadly the Courts have interpreted the word “support” in this context, consider this discussion of the word “support” in a legal treatise cited often in court opinions — the Restatement Third, of Trusts §50, Comment d(2)):

A support standard . . . “ordinarily entitles a beneficiary to distributions sufficient for accustomed living expenses, extending to such items as regular mortgage payments, property taxes, suitable health insurance or care, existing programs of life and property insurance, and continuation of accustomed patterns of vacation and of charitable and family giving. Reasonable additional comforts or ‘luxuries’ that a special vacation of a type the beneficiary had never before taken, may be borderline as entitlements but would normally be with the permissible range of the trustee’s judgment . . . . A support standard normally covers not only the beneficiary’s own support but also that of persons for whom provision is customarily made as a part of the beneficiary’s accustomed manner of living. This generally includes . . . costs of suitable education for the beneficiary’s children. . . . the terms ‘support’ and ‘maintenance’ do not . . . authorize distributions to enlarge the beneficiary’s personal estate or to enable the making of extraordinary gifts.”

If Possible, Communicate with your Daughter

It may not be enough to protect your daughter’s inheritance with a trust, especially if you are going to name her as her own trustee. To maximize a trust’s success, it’s equally essential to communicate with your child what you’re doing and why, so there are no surprises. Hopefully she will appreciate that you’re doing this for her protection.

When it comes to trusts, it’s important to hire an experienced estate planning attorney, such as those at the Farr Law Firm, to help you establish a trust, so that you can ensure that a trust covers all potential issues.

Hop this is helpful,

Magic