If Not So Happily Ever After – How Divorce Affects Inheritance
Frequent questions from clients center on the effect of divorce on inheritance.
The primary questions are either;
1: How do I ensure that an inheritance I receive while I am married will not be lost in the event of my divorce; and
2: How can I make sure that the inheritance I leave to my children will not be taken in my child goes through divorce.
The following are the typical strategies and tools to protect an inheritance you will be receiving.
1 -When you receive the inheritance, retain any documentation which shows the bequest to you was intended for you and you only, not your spouse. If the will says, “I leave $50,000 to my son Tom and his beloved wife, Jane,” you will have a hard time holding onto the fifty thou if you get divorced. Of course, many parents do not want their children inserting themselves into the inheritance process, but if possible, make sure the bequest is to you and not your spouse. (Of course, if you are like me, your parents like your spouse more than you anyway, so there may not be much you can do.) If the inheritance was made as a gift while the parent is alive, the parent may file a gift tax return.If so, and if the gift was to you, be sure the form 709 gift tax return list you and you alone as the beneficiary of the gift.
2 – Before you tie the knot, have a capable attorney represent you, and another capable attorney represent your intended, in drawing up a pre-nuptial agreement. Such an agreement makes it clear that any inheritance should be viewed as your sole and separate property, not marital or community property. If it is too late and you are already married without the pre-nup, see if your spouse will agree to a post-nuptial agreement, i.e. a pre-nuptial signed after the marriage.
The spouse is less likely to sign because there is not inducement to marriage once the marriage has already. Still, it’s worth a shot.
And be sure to get the pre-nuptial to your fiancee’s/fiance’s attorney at least two months before the wedding date, otherwise the pressure to get the pre-nuptial signed before the big day may be seen as coercive and could make the document voidable by the party who was effectively coerced into signing.
3 – Before receiving the inheritance, at a minimum have an account in your name alone set up to receive the inheritance. If receiving real property, set up a separate property trust and have the property distributed directly to the trustee of the trust. To make the trust even more secure, name an independent to serve as trustee of the trust.
4 – Of course, it goes nearly without saying but, if your spouse to be is wealthier than you are, you may want to drag your feet as much as possible when asked to sign a pre-nuptial!
The following are typical strategies to help a relative, let’s say a child, protect their inheritance from divorce.
1 – Require the child to have created their own separate trust prior to receipt of their inheritance. When received, the trustee handling distribution will be directed to transfer the inheritance directly from your trust into your child’s trust. Even if the trust is revocable and is under control of your child as trustee, the mere fact that the bequests go directly to a separate trust my be sufficient to motivate the child to keep their inheritance separate from the marital or community property.
2 – Require that the child enter into a pre-nuptial or post-nuptial agreement before the funds may be distributed to the child.
3 – For larger estates, consider leaving the child’s inheritance for a number of years in an irrevocable trust which is administered by an independent trustee. Not all of the inheritance must be put in such a trust, but if the estate is quite large, retaining a significant amount in trust under the control of a capable trustee until the child reaches an age where their marital choices might be more reasoned may save a lot of grief.
There are many ways to protect what you inherit and protect what you leave to others. Consult with an attorney during the process and it will probably be time and money well spent.