As a responsible parent, you want to ensure that the inheritance you leave for your child is protected in the event of a divorce. Given that over 40% of marriages in the United States end in divorce, it is important to consider the potential consequences of marital asset division. With proper estate planning, you can secure your child's inheritance and keep it out of reach from their former spouse.
Separating Inheritance from Marital Assets
During the course of a marriage, it can be difficult to distinguish between separate and marital property. Generally, assets acquired during the marriage are considered marital property and are subject to division in the event of a divorce. However, there are exceptions, such as a separate bank account. Although it is possible to keep inheritance money in a separate account, it can be challenging to avoid commingling with marital funds. To overcome this challenge, holding the inheritance in a trust account is a more effective solution.
Trust Management with a Third-Party Trustee
Establishing a trust involves the following steps:
Placing money and property in a trust
Designating a beneficiary (your child)
Naming a trustee to manage trust distributions
Providing written instructions on how the money and property are to be used (the trust instrument)
While your child can be named as the beneficiary and trustee, this structure negates the purpose of establishing a trust to prevent commingling.
If your child uses trust funds for marital expenses and then gets divorced, the court may consider the trust to be marital property. To avoid this outcome, you can appoint a third-party trustee to manage the trust on behalf of your child.
Instead of distributing funds directly to the beneficiary, the trustee can pay third parties on their behalf, reducing the risk of commingling and trust division in a divorce proceeding.
Child and Third-Party Trustee as Co-Trustees
Giving a single third-party trustee sole discretion over trust fund distributions provides maximum protection against commingling, but it limits your child's flexibility over spending their inheritance. To balance protection and flexibility, you can name a third-party trustee as a co-trustee with your child. There are several types of trustees to choose from, each with varying responsibilities and obligations. For example, you can name your child as the investment trustee and a co-trustee to handle distributions.
Considerations for All Possibilities
In creating a trust strategy to secure your child's inheritance, it is important to take a comprehensive view of all possible scenarios. This includes the unfortunate possibility of your child passing away. To cover all angles, you should consult with a legal professional who can advise you on the best course of action for your specific circumstances.
At Bauhof Legal, our experienced attorney emphasize the importance of regularly revisiting and updating your estate plan. As your circumstances evolve, it may become necessary to modify the restrictions placed on your trust or even to dissolve the trust entirely. Our team is committed to providing the guidance and support needed to help you maximize the potential of your financial and property assets through a comprehensive estate plan.
If you require legal assistance with your will and estate planning in Maryland, you may schedule a complimentary initial consultation with our Bauhof Legal team. Every estate is unique and individual, and this website is not intended to offer legal counsel. Please feel free to reach out to us at brad@bauhoflegal.com or give us a call at +1 (410) 876 4500.
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