How can I protect my estate from becoming considered marital property of my beneficiary?
My son will be the beneficiary of my will or trust and I want to ensure that my property will stay under the ownership of my family. Can I structure a will or trust so that my estate will not be considered marital property if my son gets divorced?
Generally, inheritances are not subject to equitable distribution because, by law, inheritances are not considered marital property. Instead, inheritances are treated as separate property belonging to the person who received the inheritance, and therefore, may not be divided between the parties in a divorce. If you pass on an inheritance to your son and it is cash and he receives the funds and deposit's it into an account held in joint names with his spouse, he will have commingled the inheritance. In community property states where courts divide all marital property 50/50 in a divorce, your sons spouse is now entitled to half of his inheritance.
Laws protect inheritances in all states. This means that if your son receives an inheritance, the law declares that his spouse has no right to it during or after his marriage providing he always keeps the money sole and seperate. However, it is very easy to undo this protection if he does not handle the inheritance properly. Your sons inheritance is his sole and separate property as long as he takes steps to segregate it from his other marital assets. When and if he commingles his inheritance with his marital assets, he will cease to shelter it. Commingling means you’ve put it together with marital money or property. In equitable distribution states, where judges have the right to distribute property in a way they think is fair, your spouse will now receive a portion of his inheritance. Exactly how much would depend on how much a judge feels it is fair to give your sons spouse.
The only time an inheritance must be shared is when a divorce court decides that it was not kept separate from marital property. A spouse who does not wish to share their inheritance may keep it separate by depositing the proceeds into a separate bank or investment account. The accounts should be set up as sole and seperate property and titled that way. If your son then buys property (stocks, real-estate) with the proceeds of his inheritance. He would title that property in the same sole and seperate property name. Your son must deal with all the cash and property (stocks, real-estate) he inherits in the same manor and retitle the property in his name as sole and seperate property.
Your son also needs to make sure that he does not pay any of his joint bills with any of the funds from the sole and seperate property accounts. If he does, that may be deemed commingling and would then put a cloud over the whole sole and seperate accounts intentions. I would recommend consulting your accountant and estate planning attorney for advice as well.
Creating a trust is probably your best option. In the trust, you will be able to document exactly what your wishes are. Seek a good estate lawyer to create the trust.
Great question. Thankfully any inheritences remain classified as seperate property, so if he were to someday get divorce it would be exluded from the assets that would be divided. The only thing that could potentially make this a issue is if both him and his wife were designated as beneficiaries.
That is an excellent question and one that I wish more parents would think of. You should work with an attorney to properly establish the terms of the trust to provide maximum protection to your son. Under most circumstances, the corpus (assets) of a trust are not subject to division, however, there have been some jurisdictions where the income has been subject to division. I think that it was a case in Florida last year, where a judge ruled that discretionary, possible income from the trust had to be considered as mandatory income. While there are some overriding federal rules on trusts, it is still very much a local issue and an attorney's involvement is usually warranted. Hope this helped!
Yes, you can and inheritance is not community or marital property at the Federal level. Now if your son "commingles" the property that can be an issue. And growth or income on the assets inherited during marriage, especially in a community property state can complicate things and your son may need a "spill over" account to transfer the gains/income into annually to keep separate from the inheritance. Another option is to create a Trust or have a codicil in your will that a Trust be set up at your death so that the assets remain separate.
You can also have it so that at your death, the spouse must sign a document acknowledging this is separate property. State laws vary from state to state. The point is there is absolutely a way to handle this but you MUST seek legal counsel from an attorney who is QUALIFIED is estate planning in your state. Do this early in advance to avoid any problems and update occasionally as things change. This is by no means all inclusive but meant to stimulate your thinking and questions to ask the attorney.
Hope this helps and best of luck, Dan Stewart CFA®