When leaving an inheritance to your child, you want to ensure that it remains protected-especially if they go through a divorce. Without proper planning, inherited assets can become marital property and be subject to division in divorce proceedings. Fortunately, there are legal strategies that can safeguard your child's inheritance and keep it separate from their spouse. One of the most effective tools for this purpose is a trust.
By using specific types of trusts, you can control how and when your child receives their inheritance while shielding it from divorce settlements, creditors, and financial mismanagement. This article will explore different trusts that protect assets, key considerations for inheritance planning, and how to ensure your child's financial future remains secure.
For assistance in setting up a protective trust, contact us by using the online form or calling 414-253-8500.
Why an Inheritance May Be at Risk in a Divorce
Many parents assume that an inheritance automatically belongs to their child and cannot be touched by their spouse in a divorce. While this is sometimes true, there are circumstances where inherited assets can become marital property and subject to division:
- Commingling of Assets - If your child deposits an inheritance into a joint bank account, uses it to purchase shared property, or otherwise mixes it with marital funds, it may lose its separate status.
- Marital Appreciation - If inherited funds or assets are invested into a jointly owned home or business, any increase in value may be considered marital property.
- Lack of Legal Protection - If no safeguards are in place, a court may view the inheritance as part of the marital estate.
To prevent these risks, establishing a trust is a proactive way to ensure the inheritance remains separate and protected.
Trusts That Keep Inheritances Separate from Spouses
Certain types of trusts are specifically designed to prevent an inheritance from being divided in a divorce. Below are the most effective options:
1. Spendthrift Trust
A spendthrift trust protects inherited assets from both the beneficiary's creditors and divorce proceedings. In this setup:
- The assets remain in the trust, rather than being directly transferred to your child.
- The trustee manages distributions, which can be limited to specific needs, such as education, healthcare, or living expenses.
- Since the child does not have direct control over the inheritance, it is generally shielded from marital division in a divorce.
Learn more about spendthrift trusts here.
2. Discretionary Trust
A discretionary trust gives the trustee full control over distributions, ensuring that assets are never outright owned by the beneficiary. The key benefits include:
- The trustee has the authority to withhold distributions if necessary.
- Since the child does not have a guaranteed right to the trust assets, courts are less likely to consider it as marital property.
- It protects the inheritance not just from divorce, but also from creditors and lawsuits.
3. Irrevocable Trust
An irrevocable trust removes the inheritance from the child's direct ownership, placing it under the management of a trustee. Because the terms cannot be changed or revoked, assets in this trust are more secure.
- The inheritance is legally separate from the child's personal estate.
- Courts typically do not consider it marital property during divorce settlements.
- The child's spouse cannot access or claim the assets within the trust.
For a deeper understanding of irrevocable trusts, visit this page.
4. Beneficiary-Controlled Trust
This type of trust allows the child to act as co-trustee while still keeping the inheritance protected. A third-party trustee, such as a professional or trusted family member, must approve distributions.
- The beneficiary has some control over how funds are used.
- The presence of an independent trustee prevents the inheritance from being treated as marital property.
- If divorce occurs, the spouse cannot claim the assets inside the trust.
Comparison of Trusts for Protecting an Inheritance
| Type of Trust | Protection from Divorce | Control Over Assets | Additional Benefits |
|---|---|---|---|
|
Spendthrift Trust |
High - Beneficiary cannot access full inheritance, preventing marital claims |
Limited - Trustee controls distributions |
Protects from creditors and lawsuits |
|
Discretionary Trust |
High - Trustee has full discretion over distributions, preventing asset division |
None - Trustee makes all decisions |
Can limit access based on financial responsibility |
|
Irrevocable Trust |
Very High - Assets are legally separate from beneficiary's estate |
None - Terms cannot be changed once set |
Offers strong asset protection and tax benefits |
|
Beneficiary-Controlled Trust |
Moderate - Beneficiary has some control, but a co-trustee must approve distributions |
Partial - Beneficiary can manage under co-trustee supervision |
Allows beneficiary flexibility while maintaining legal protection |
Additional Strategies to Protect Your Child's Inheritance
While trusts provide the strongest legal protection, there are additional measures you can take to safeguard your child's inheritance from a divorce.
1. Prenuptial and Postnuptial Agreements
A prenuptial agreement (prenup) is a contract signed before marriage that outlines which assets will remain separate property in the event of a divorce. If your child is already married, a postnuptial agreement can serve the same purpose.
- These agreements should explicitly state that the inheritance remains separate.
- They can specify that income or appreciation from the inheritance also remains separate.
- Both parties must sign voluntarily, and full financial disclosure is required for validity.
Encouraging your child to consider a prenup or postnup, especially if they expect to receive a significant inheritance, adds another layer of protection.
2. Keeping the Inheritance in a Separate Account
If a trust is not an option, the next best strategy is ensuring that the inheritance is never commingled with marital assets. Your child should:
- Open a separate account in their name only.
- Avoid depositing inherited funds into joint accounts or using them for shared expenses.
- Keep detailed records of all transactions related to the inheritance.
Even with these precautions, a trust still offers superior protection against legal challenges during a divorce.
3. Structuring Distributions Over Time
Rather than giving a lump sum inheritance, consider staggered distributions through a trust. This prevents the full amount from being accessible at once, reducing the risk of it becoming marital property. Options include:
- Annual or milestone-based distributions (e.g., at ages 30, 40, and 50).
- Trustee-controlled discretionary distributions based on financial needs.
- Lifetime trusts, where the child receives funds as needed while keeping the principal protected.
A well-structured trust ensures that only what has been distributed could potentially be at risk, while the remainder stays protected.
Key Steps to Protect an Inheritance from Divorce
| Step | Action | Why It's Important |
|---|---|---|
|
1. Establish a Trust |
Create a spendthrift, discretionary, or irrevocable trust for inheritance assets |
Legally separates assets from marital property and prevents court-ordered division |
|
2. Keep Funds in a Separate Account |
Ensure your child does not mix inheritance with joint marital assets |
Prevents the inheritance from being classified as marital property |
|
3. Use a Prenuptial or Postnuptial Agreement |
Have your child sign an agreement specifying that inherited assets remain separate |
Provides legal documentation protecting the inheritance in case of divorce |
|
4. Structure Distributions Over Time |
Avoid giving a lump sum; instead, use a trust to release funds in stages |
Prevents immediate access that could lead to commingling with marital assets |
|
5. Choose a Reliable Trustee |
Appoint a trusted family member or professional to manage the trust |
Ensures the inheritance is handled according to your wishes and remains protected |
The Role of the Trustee in Protecting the Inheritance
Choosing the right trustee is crucial when setting up a trust to protect an inheritance. The trustee:
- Manages and distributes assets according to the trust terms.
- Ensures the inheritance is not misused or exposed to marital claims.
- Can be a trusted family member, financial professional, or corporate trustee.
A professional trustee is often a good choice for maintaining objectivity and financial expertise while avoiding family conflicts.
How to Set Up a Trust for Inheritance Protection
Establishing a trust to protect your child's inheritance requires careful planning and legal guidance. The process typically involves:
- Consulting an Attorney - A knowledgeable estate planning attorney can help select the best trust structure based on your goals.
- Drafting the Trust Document - The trust terms should clearly outline asset distribution, trustee responsibilities, and restrictions.
- Funding the Trust - Assets, such as cash, property, or investments, must be transferred into the trust to be legally protected.
- Ongoing Trust Management - The trustee administers the trust according to the established guidelines, ensuring long-term protection.
If you are considering a trust for inheritance protection, contact our office or call 414-253-8500 to discuss your options.
Contact an Estate Planning Attorney for Inheritance Protection
Ensuring your child's inheritance remains safe-especially in the event of a divorce-requires strategic legal planning. By using trusts and other protective measures, you can keep assets separate, prevent unintended division, and provide long-term financial security.
At Heritage Law Office, we assist families in creating customized estate plans to protect generational wealth. To discuss the best way to safeguard your child's inheritance, call 414-253-8500 or schedule a consultation online.
Frequently Asked Questions (FAQs)
1. Can a spouse claim my child's inheritance in a divorce?
In most cases, an inheritance is considered separate property and is not automatically subject to division in a divorce. However, if the inheritance is commingled with marital assets-such as being deposited into a joint account or used to purchase shared property-it could become marital property and be divided. Setting up a trust can help ensure the inheritance remains protected.
2. What is the best trust to protect an inheritance from divorce?
A spendthrift trust or a discretionary trust is often the best option for protecting an inheritance from a spouse in a divorce. These trusts keep the assets separate from the beneficiary and under the control of a trustee, preventing them from being considered marital property. An irrevocable trust can also provide strong protection by ensuring the inheritance is legally separate from the child's personal assets.
3. How can my child keep an inheritance separate from their spouse?
To keep an inheritance separate, your child should:
- Avoid commingling funds by keeping the inheritance in a separate, individual account.
- Not use inherited assets for joint purchases, such as a marital home.
- Maintain clear records of inheritance deposits and transactions.
- Consider a prenuptial or postnuptial agreement stating that the inheritance remains separate.
4. Can an inheritance be taken in a divorce if it was used for a joint purchase?
Yes, if your child uses inherited funds to purchase a marital asset-such as a home, business, or investment-the inheritance may lose its separate property status. In that case, the appreciation or full value of the asset could become subject to division. A trust can prevent this by keeping assets out of joint ownership.
5. Should I give my child their inheritance outright or through a trust?
A trust is generally a better option for protecting an inheritance, as it:
- Prevents assets from being commingled with marital property.
- Keeps control with a trustee, reducing the risk of loss in a divorce.
- Offers additional protection from creditors and financial mismanagement.
If an outright gift is given, your child must be careful to keep it separate to maintain protection.