We all love our in-laws, right? (wink, wink) Shielding your hard-earned assets from a child’s spouse in the event of divorce is a critical component of your estate plan. Perhaps you love your son-in-law, but would prefer to pass assets down within your own bloodline. Or, perhaps having been divorced yourself, you realize the possibility of your own child’s divorce, and you worry that your son’s inheritance could end up in the hands of his ex-spouse and their new family down the road. Whatever underlies your concerns, there are ways to prepare an estate plan around these contingencies.
But before meeting with your estate planning attorney, a first step might be having a conversation with your child about a prenuptial agreement. Admittedly, it can be difficult to discuss financial matters with your children, and even more uncomfortable to broach the subject of their potential divorce. Recognize that your child may feel offended and hurt if they sense that you disapprove of their partner or question their judgment (in personal or financial affairs). Keep in mind that you can’t force a prenup on your child, as doing so could invalidate it.
Whether or not a prenuptial agreement is on the table, perhaps the most effective step you can take to protect your assets from your child’s partner in the event of your child’s divorce or death is to utilize a lifetime trust for the benefit of your child. Rather than gifting assets to your child outright, the use of a trust allows you to restrict the permissible beneficiaries to your child and their issue, as well as defining the permissible uses of the trust property, such as the commonly-used “health, education, maintenance, and support in reasonable comfort,” or for certain major expenditures. Alternatively, you could give a trustee uncontrolled discretion as to when and in what amounts to make distributions. You can also choose to give your child access to certain portions of the trust principal at designated times or ages. In addition, clients often prefer to use a trust because it provides asset management for beneficiaries who may not be financially savvy, protection from the beneficiaries’ creditors (not just divorced spouses), and can ensure that assets remain available for and are passed down to grandchildren.
If you choose to establish a lifetime trust for your child, don’t forget about other details that could undermine your planning. For example, if you wish to permit your child to direct who should benefit from any remaining trust property at their death, you could grant your child a power of appointment at death. Be sure to limit the permissible beneficiaries of this power of appointment appropriately (for example, to your child’s issue only). You will also want to review and update who you’ve named to receive any assets having a beneficiary designation. For example, if you name your child as the beneficiary of your life insurance policy, rather than the trust you’ve just created, your carefully-crafted trust provisions will not control the disposition of this asset.
If you have similar concerns about how your assets will be disposed of after your death, speak to an estate planning attorney to assess your unique family concerns, estate planning goals, and asset picture.