Protecting Your Estate from a Child's ex-Spouse

You have worked hard and sacrificed to amass your wealth and savings. These assets are your reward. Your savings provide you security and, at your death, can ensure your children a safety net. With so much accomplished, the last thing you want to see is your wealth lost needlessly to your child's spouse in a divorce. Several tools exist to help shelter your family's wealth.

Prenup Agreements

Once an uncomfortable subject to raise after the engagement, prenuptial agreements have become much more regular. People are waiting longer to marry. Once they decide to take that leap, they are more likely to have careers and amassed assets. Further, both spouses are much more likely to have jobs and be concerned about what happens to their own earned holdings in case of a divorce. (For more, see: Marriage, Divorce and the Dotted Line.)

Once your child has entered a serious relationship, bring up the wisdom of a prenuptial agreement that protects your child's inheritance. Most likely your child has already thought about a prenuptial agreement. You will just be reminding your child that there is also an inheritance to protect. You can be instrumental in introducing your child to a skilled estate planning attorney who can draft a prenuptial agreement as part of an overall asset protection plan.

Dynasty Trusts

If your current estate plan gives assets outright to your child, change your plan. A divorce can absorb any asset in your child's name. Instead, find an estate planning lawyer familiar with dynasty trusts.  A dynasty trust is a protective trust incorporated into your will or revocable living trust which creates a protective wall around your child's inheritance. This barrier helps shelter the inheritance from divorce, creditors and helps keep the assets in the family. 

Some states, such as Pennsylvania and New Jersey, allow these trusts to continue forever while other states do not. But for as long as the trust exists, it helps keep the assets away from your child's spouse. (For more, see: Understand the Rules of Dividing Plan Assets.)

IRA Trusts

Do not name your child as the beneficiary of your 401(k) or IRA. If you do the child is free to select the next recipient, who is likely the spouse rather than your grandchildren. Further, the Supreme Court ruled in 2014 that an inherited IRA directly to a child is not protected from divorce. Instead, Congress has authorized a specific type of trust to hold Inherited IRAs for children. These trusts shelter the IRA from divorce and creditors and allow you to direct that any remaining amounts at your child's death pass to your grandchildren rather than your child's spouse. IRA trusts and asset protection planning go hand-in-hand.

Trustee Selection

A neutral trustee can add an impressive wall of protection between your estate and your child's spouse. This is especially true if you feel your child is subject to manipulation. It is vital to select a trustee that can work with your child and help protect them. 

Further, appointing a trust protector provides an extra check and balance. A trust protector is a person appointed to oversee the trustee. A trust protector can remove and replace the trustee without the use of courts or lawyers. This way, you can have a trusted friend or family member have the power to quickly and inexpensively remove and replace the trustee if they are not protecting your child.

Your own situation and assets will dictate the best plan to protect your family. (For more from this author, see: Will Your Power of Attorney Leave You Penniless?)